(Exelon, Generation, ComEd, PECO and BGE)

Income tax expense (benefit) from continuing operations is comprised of the following components:



For the Year Ended December 31, 2015	Exelon			Generation			ComEd			PECO			BGE
Included in operations:
Federal
Current	$	407		$	546		$	(80	)	$	64		$	25
Deferred	566			16			310			69			126
Investment tax credit amortization	(22		)	(19		)	(2		)	—			(1		)
State
Current	(86		)	(90		)	7			(10		)	—
Deferred	208			49			45			20			39
Total	$	1,073		$	502		$	280		$	143		$	189
For the Year Ended December 31, 2014	Exelon			Generation			ComEd			PECO			BGE
Included in operations:
Federal
Current	$	121		$	360		$	(171	)	$	28		$	24
Deferred	576			(35		)	395			87			90
Investment tax credit amortization	(20		)	(16		)	(2		)	—			(1		)
State
Current	42			35			7			(2		)	—
Deferred	(53		)	(137		)	39			1			27
Total	$	666		$	207		$	268		$	114		$	140
For the Year Ended December 31, 2013	Exelon			Generation			ComEd			PECO			BGE
Included in operations:
Federal
Current	$	744		$	250		$	160		$	126		$	9
Deferred	140			360			(27		)	23			100
Investment tax credit amortization	(15		)	(11		)	(2		)	(1		)	(1		)
State
Current	181			50			50			16			—
Deferred	(6		)	(34		)	(29		)	(2		)	26
Total	$	1,044		$	615		$	152		$	162		$	134

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



For the Year Ended December 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	3.7		1.0		4.9		1.0		5.3
Qualified nuclear decommissioning trust fund loss	(0.4	)	(0.8	)	—		—		—
Domestic production activities deduction	(0.7	)	(1.3	)	—		—		—
Health care reform legislation	—		—		—		—		0.1
Amortization of investment tax credit, including deferred taxes on basis difference	(0.9	)	(1.5	)	(0.3	)	(0.1	)	(0.1	)
Plant basis differences	(1.5	)	—		(0.1	)	(8.7	)	(0.7	)
Production tax credits and other credits	(1.9	)	(3.4	)	—		—		—
Non-controlling interest	0.3		0.5		—		—		—
Statute of limitations expiration	(1.4	)	(2.4	)	—		—		—
Other	—		—		0.2		0.2		—
Effective income tax rate	32.2	%	27.1	%	39.7	%	27.4	%	39.6	%
For the Year Ended December 31, 2014	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	1.3		(1.9	)	4.5		(0.1	)	5.0
Qualified nuclear decommissioning trust fund income	2.4		4.8		—		—		—
Domestic production activities deduction	(2.0	)	(4.1	)	—		—		—
Health care reform legislation	0.1		—		0.2		—		0.2
Amortization of investment tax credit, including deferred taxes on basis difference	(1.1	)	(2.0	)	(0.3	)	(0.1	)	(0.3	)
Plant basis differences	(1.9	)	—		(0.1	)	(10.4	)	0.2
Production tax credits and other credits	(2.4	)	(4.8	)	—		—		—
Non-controlling interest	(1.8	)	(3.7	)
Statute of limitations expiration	(2.6	)	(5.3	)	—		—		—
Other	(0.2	)	(1.1	)	0.3		0.1		(0.2	)
Effective income tax rate	26.8	%	16.9	%	39.6	%	24.5	%	39.9	%
For the Year Ended December 31, 2013	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	4.8		1.8		3.4		1.6		4.9
Qualified nuclear decommissioning trust fund income	3.7		6.1		—		—		—
Domestic production activities deduction	—		—		—		—		—
Health care reform legislation	0.1		—		0.7		—		0.2
Amortization of investment tax credit, including deferred taxes on basis difference	(1.9	)	(3.0	)	(0.6	)	(0.1	)	—
Plant basis differences	(1.6	)	—		(0.8	)	(7.1	)	(0.2	)
Production tax credits and other credits	(2.1	)	(3.4	)	(0.1	)	—		—
Statute of limitations expiration	(0.1	)	(0.2	)	—		—		—
Other	(0.3	)	0.4		0.3		(0.3	)	(0.9	)
Effective income tax rate	37.6	%	36.7	%	37.9	%	29.1	%	39.0	%

The tax effects of temporary differences and carryforwards, which give rise to significant portions of the deferred tax assets (liabilities), as of December 31, 2015 and 2014 are presented below:



For the Year Ended December 31, 2015	Exelon			Generation			ComEd			PECO			BGE
Plant basis differences	$	(13,393	)	$	(4,269	)	$	(4,424	)	$	(2,901	)	$	(1,821	)
Accrual based contracts	(136		)	(136		)	—			—			—
Derivatives and other financial instruments	(203		)	(181		)	(4		)	—			—
Deferred pension and postretirement obligation	1,801			(371		)	(505		)	(9		)	(47		)
Nuclear decommissioning activities	(592		)	(592		)	—			—			—
Deferred debt refinancing costs	133			48			(15		)	(1		)	(4		)
Regulatory assets and liabilities	(1,706		)	—			(219		)	16			(264		)
Tax loss carryforward	103			56			—			—			33
Tax credit carryforward	327			374			—			—			—
Investment in CENG	(595		)	(595		)	—			—			—
Other, net	1,112			425			270			105			27
Deferred income tax liabilities (net)	$	(13,149	)	$	(5,241	)	$	(4,897	)	$	(2,790	)	$	(2,076	)
Unamortized investment tax credits	(622		)	(598		)	(17		)	(2		)	(5		)
Total deferred income tax liabilities (net) and unamortized investment tax credits	$	(13,771	)	$	(5,839	)	$	(4,914	)	$	(2,792	)	$	(2,081	)
For the Year Ended December 31, 2014	Exelon			Generation			ComEd			PECO			BGE
Plant basis differences	$	(12,143	)	$	(3,834	)	$	(3,945	)	$	(2,749	)	$	(1,660	)
Accrual based contracts	(178		)	(178		)	—			—			—
Derivatives and other financial instruments	(46		)	(79		)	(4		)	—			—
Deferred pension and postretirement obligation	1,914			(390		)	(543		)	2			(53		)
Nuclear decommissioning activities	(726		)	(726		)	—			—			—
Deferred debt refinancing costs	112			57			(18		)	(2		)	(4		)
Regulatory assets and liabilities	(1,824		)	—			(286		)	27			(258		)
Tax loss carryforward	111			48			—			11			39
Tax credit carryforward	97			143			—			—			—
Investment in CENG	(563		)	(563		)	—			—			—
Other, net	1,029			346			255			111			30
Deferred income tax liabilities (net)	$	(12,217	)	$	(5,176	)	$	(4,541	)	$	(2,600	)	$	(1,906	)
Unamortized investment tax credits	(555		)	(528		)	(20		)	(2		)	(5		)
Total deferred income tax liabilities (net) and unamortized investment tax credits	$	(12,772	)	$	(5,704	)	$	(4,561	)	$	(2,602	)	$	(1,911	)

The following table provides the Registrants’ carryforwards and any corresponding valuation allowances as of December 31, 2015.



	Exelon		Generation		ComEd	PECO	BGE
Federal
Federal general business credits carryforward	416	^(a)	415		—	—	—
State
State net operating losses and other credit carryforwards	2,086	^(b)	1,259	^(b)	—	—	618	^(c)
Deferred taxes on state tax attributes (net)	117		66		—	—	34
Valuation allowance on state tax attributes	13		11		—	—	1

_____________________


(a)	Exelon’s federal general business credit carryforwards will expire beginning in 2032.


(b)	Exelon’s and Generation's state net operating losses and other carryforwards, which are presented on a post-apportioned basis, will expire beginning in 2016.


(c)	BGE’s state net operating losses will expire beginning in 2026.

Tabular reconciliation of unrecognized tax benefits

The following table provides a reconciliation of the Registrants’ unrecognized tax benefits as of December 31, 2015, 2014 and 2013:



	Exelon			Generation			ComEd			PECO			BGE
Unrecognized tax benefits at January 1, 2015	$	1,829		$	1,357		$	149		$	44		$	—
Increases based on tax positions related to 2015	108			—			—			—			106
Change to positions that only affect timing	(705		)	(659		)	(7		)	(44		)	—
Increases based on tax positions prior to 2015	79			65			—			—			14
Decreases based on tax positions prior to 2015	(116		)	(112		)	—			—			—
Decrease from settlements with taxing authorities	(31		)	(31		)	—			—			—
Decreases from expiration of statute of limitations	(86		)	(86		)	—			—			—
Unrecognized tax benefits at December 31, 2015	$	1,078		$	534		$	142		$	—		$	120
	Exelon			Generation			ComEd			PECO			BGE
Unrecognized tax benefits at January 1, 2014	$	2,175		$	1,415		$	324		$	44		$	—
Increases based on tax positions related to 2014	15			15			—			—			—
Change to positions that only affect timing	(255		)	33			(175		)	—			—
Increases based on tax positions prior to 2014	18			18			—			—			—
Decreases based on tax positions prior to 2014	(1		)	(2		)	—			—			—
Decrease from settlements with taxing authorities	(35		)	(34		)	—			—			—
Decreases from expiration of statute of limitations	(88		)	(88		)	—			—			—
Unrecognized tax benefits at December 31, 2014	$	1,829		$	1,357		$	149		$	44		$	—



	Exelon			Generation			ComEd		PECO		BGE
Unrecognized tax benefits at January 1, 2013	$	1,024		$	876		$	67	$	44	$	—
Increases based on tax positions related to 2013	19			19			—		—		—
Change to positions that only affect timing	649			36			257		—		—
Increases based on tax positions prior to 2013	493			493			—		—		—
Decreases based on tax positions prior to 2013	(6		)	(5		)	—		—		—
Decreases from expiration of statute of limitations	(4		)	(4		)	—		—		—
Unrecognized tax benefits at December 31, 2013	$	2,175		$	1,415		$	324	$	44	$	—

Included in Exelon’s unrecognized tax benefits balance at December 31, 2015 and 2014 are approximately $540 million and $1,129 million, respectively, of tax positions for which the ultimate tax benefit is highly certain, but for which there is uncertainty about the timing of such benefits. The disallowance of such positions would not materially affect the annual effective tax rate but would accelerate the payment of cash to, or defer the receipt of the cash tax benefit from, the taxing authority to an earlier or later period respectively.

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, reduced Generation and PECO's unrecognized tax benefits by a total of $661 million and $43 million, respectively, in the first quarter of 2015. This change in unrecognized tax benefits had no impact on Exelon, Generation, or PECO's effective tax rate.

Unrecognized tax benefits that if recognized would affect the effective tax rate

Exelon and Generation have $538 million and $509 million, respectively, of unrecognized tax benefits at December 31, 2015 that, if recognized, would decrease the effective tax rate. BGE has $120 million of unrecognized tax benefits at December 31, 2015 that, if recognized, may be included in future base rates and that portion would have no impact to the effective tax rate. Exelon and Generation had $701 million and $672 million, respectively, of unrecognized tax benefits at December 31, 2014 that, if recognized, would decrease the effective tax rate. In 2015, the unrecognized tax benefits decreased at Exelon and Generation due to settlements with state tax authorities and the expiration of statues of limitations for certain state jurisdictions.

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

Like-Kind Exchange

As of December 31, 2015, Exelon and ComEd have approximately $397 million and $142 million of unrecognized tax benefits that could significantly decrease within the 12 months after the reporting date as a result of a decision in the like-kind exchange litigation described below. Exelon and ComEd have unrecognized tax benefits that, if recognized, would decrease Exelon's effective tax rate by $69 million and increase ComEd's effective tax rate by $11 million.

Settlement of Income Tax Audits and Litigation

As of December 31, 2015, Exelon, Generation, and BGE have approximately $174 million, $54 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 $54 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.

Total amounts of interest and penalties recognized

The following table represents the net interest receivable (payable), including interest related to tax positions reflected in the Registrants’ Consolidated Balance Sheets.



Net interest receivable (payable) as of	Exelon			Generation		ComEd			PECO		BGE
December 31, 2015	$	(288	)	$	80	$	(210	)	$	3	$	(1	)
December 31, 2014	(310		)	40		(203		)	3		(1		)

The following table sets forth the net interest expense, including interest related to tax positions, recognized in interest expense (income) in other income and deductions in the Registrants’ Consolidated Statements of Operations and Comprehensive Income. The Registrants have not accrued any material penalties with respect to uncertain tax positions.



Net interest expense (income) for the years ended	Exelon			Generation			ComEd		PECO			BGE
December 31, 2015	$	(13	)	$	(31	)	$	7	$	—		$	—
December 31, 2014	(36		)	(50		)	6		—			1
December 31, 2013	391			17			281		(1		)	—

Description of tax years that remain open to assessment by major jurisdiction



Taxpayer	Open Years
Exelon (and predecessors) and subsidiaries consolidated Federal income tax returns	1999, 2001-2014
Exelon and subsidiaries Illinois unitary income tax returns	2007-2014
Constellation combined New York corporate income tax returns	2010-March 2012
Various separate company Pennsylvania corporate net income tax returns	2010-2014
BGE Maryland corporate net income tax returns	2011-2014
Various Exelon Maryland corporate net income tax returns	2012-2014
Various Constellation (Non-BGE) Maryland corporate net income tax returns	2011-2014

Other 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 Exelon's purchase and leaseback transaction is substantially similar to a 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 $172 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 took place in August of 2015. Exelon was not required to remit any part of the asserted tax or penalty in order to litigate the issue. While the Tax Court could reach its decision as early as 2016, the litigation could take three to five years if an appeal is necessary. Decisions in the Tax Court are not controlled by the Federal Circuit’s decision in Consolidated Edison.

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. In connection with the termination, Exelon deposited $65 million with the IRS, including $35 million by ComEd. The deposit can be redesignated to any tax year, if necessary, and may be used to satisfy any amounts owed as a result of the litigation.

In the event of a fully successful IRS challenge to Exelon’s like-kind exchange position, the potential tax and after-tax interest, net of the deposit discussed above and exclusive of penalties, that could become currently payable as of December 31, 2015 may be as much as $760 million, of which approximately $280 million would be attributable to ComEd after consideration of Exelon’s agreement to hold ComEd harmless. Interest will continue to accrue until such time as payment is made. An appeal of an adverse decision in the Tax Court would necessitate either the posting of a bond or the payment of the tax and interest for the tax years before the court. A final appellate decision could take several years.

Accounting for Generation Repairs (Exelon and Generation)

On April 30, 2013, the IRS issued Revenue Procedure 2013-24 providing guidance for determining the appropriate tax treatment of costs incurred to repair electric generation assets. Generation changed its method of accounting for deducting repairs in accordance with this guidance beginning in the 2014 tax year. The adoption of the new method resulted in Generation recording a cash tax detriment of approximately $120 million in 2014.

Long-Term State Tax Apportionment (Exelon and Generation)

The long-term state tax apportionment was revised in the fourth quarter of 2015 pursuant to Exelon's long-term state tax apportionment policy, resulting in the recording of a deferred state tax expense for Exelon and Generation of $41 million (net of Federal taxes) and $11 million (net of Federal taxes), respectively. In 2014, in accordance with the policy, Exelon and Generation recorded a deferred state tax benefit of $28 million (net of Federal taxes) and $40 million (net of Federal taxes), respectively. The amounts recorded for 2013 in accordance with the policy were immaterial.

Allocation of Tax Benefits (Exelon, Generation, ComEd, PECO and BGE)

Generation, ComEd, PECO and BGE are all party to an agreement with Exelon and other subsidiaries of Exelon that provides for the allocation of consolidated tax liabilities and benefits (Tax Sharing Agreement). The Tax Sharing Agreement provides that each party is allocated an amount of tax similar to that which would be owed had the party been separately subject to tax. In addition, any net benefit attributable to Exelon is reallocated to the other Registrants. That allocation is treated as a contribution to the capital of the party receiving the benefit. During 2015, Generation, PECO, and BGE recorded an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement of $57 million, $16 million, and $7 million respectively. ComEd did not record an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement as a result of a tax net operating loss.

During 2014, Generation and PECO recorded an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement of $55 million and $25 million, respectively. ComEd and BGE did not record an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement as a result of tax net operating losses.

During 2013, Generation and PECO recorded an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement of $26 million and $27 million, respectively. During 2013, ComEd and BGE did not record an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement as a result of ComEd’s and BGE’s tax net operating loss generated primarily by the bonus depreciation deduction allowed under the Tax Relief Act of 2010.