Income Taxes (All Registrants)

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



	Three Months Ended September 30, 2016
						Successor
	Exelon	Generation	ComEd	PECO	BGE	PHI	Pepco	DPL	ACE
U.S. Federal statutory rate	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%
Increase (decrease) due to:
State income taxes, net of Federal income tax benefit	3.8	2.6	7.3	2.4	5.2	5.6	5.6	5.2	6.1
Qualified nuclear decommissioning trust fund income	4.0	7.8	—	—	—	—	—	—	—
Domestic production activities deduction	—	—	—	—	—	—	—	—	—
Health care reform legislation	—	—	—	—	—	—	—	—	—
Amortization of investment tax credit, net deferred taxes	(0.9)	(1.6)	(0.6)	(0.1)	(0.2)	(0.1)	—	(0.2)	(0.1)
Plant basis differences	(3.0)	—	(1.9)	(6.7)	(0.5)	(5.0)	(6.7)	(1.3)	(4.6)
Production tax credits and other credits	(2.9)	(5.7)	(0.1)	—	—	—	—	—	—
Noncontrolling interests	0.2	0.5	—	—	—	—	—	—	—
Statute of limitations expiration	(0.1)	0.3	—	—	—	—	—	—	—
Penalties	4.3	—	27.2	—	—	—	—	—	—
Merger expenses	(0.6)	—	—	—	—	(5.7)	(2.3)	(8.6)	(2.9)
Other	(0.8)	(0.5)	0.1	0.1	(0.4)	(0.7)	(0.9)	0.1	(0.6)
Effective income tax rate	39.0%	38.4%	67.0%	30.7%	39.1%	29.1%	30.7%	30.2%	32.9%



	Three Months Ended September 30, 2015
						Predecessor
	Exelon	Generation	ComEd	PECO	BGE	PHI	Pepco	DPL	ACE
U.S. Federal statutory rate	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%
Increase (decrease) due to:
State income taxes, net of Federal income tax benefit	2.7	2.1	5.0	1.2	5.3	6.2	4.8	7.4	5.4
Qualified nuclear decommissioning trust fund income	(5.4)	(12.5)	—	—	—	—	—	—	—
Domestic production activities deduction	(4.9)	(11.6)	—	—	—	—	—	—	—
Health care reform legislation	—	—	—	—	0.2	—	—	—	—
Amortization of investment tax credit, net deferred taxes	(2.3)	(5.2)	(0.3)	(0.1)	(0.2)	(0.2)	(0.1)	(0.6)	(0.3)
Plant basis differences	(1.4)	—	(0.1)	(7.0)	(0.6)	(3.7)	(3.5)	(3.5)	(3.1)
Production tax credits and other credits	(3.8)	(9.0)	—	—	—	(1.2)	—	—	—
Noncontrolling interests	1.7	3.9	—	—	—	—	—	—	—
Statute of limitations expiration	(6.4)	(15.2)	—	—	—	—	—	—	—
Other	1.2	0.4	0.3	—	(0.4)	(1.1)	(1.4)	(0.8)	1.9
Effective income tax rate	16.4%	(12.1)%	39.9%	29.1%	39.3%	35.0%	34.8%	37.5%	38.9%



									Successor	Predecessor
	Nine Months Ended September 30, 2016								March 24, 2016 to September 30, 2016	January 1, 2016 to March 23, 2016
	Exelon	Generation	ComEd	PECO	BGE	Pepco	DPL^(a)	ACE^(a)	PHI^(a)	PHI
U.S. Federal statutory rate	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%
Increase (decrease) due to:
State income taxes, net of Federal income tax benefit^(b)	2.5	2.6	5.4	1.3	4.8	23.0	310.5	5.5	4.4	11.9
Qualified nuclear decommissioning trust fund income	4.8	8.8	—	—	—	—	—	—	—	—
Domestic production activities deduction	—	—	—	—	—	—	—	—	—	—
Health care reform legislation	—	—	—	—	—	—	—	—	—	—
Amortization of investment tax credit, including deferred taxes on basis difference	(1.3)	(2.0)	(0.3)	(0.1)	(0.2)	(0.2)	(17.9)	0.5	0.5	(0.9)
Plant basis differences	(4.5)	—	(0.6)	(8.8)	(3.3)	(29.0)	(98.6)	7.8	17.5	(13.5)
Production tax credits and other credits	(4.1)	(7.6)	—	—	—	—	—	—	—	—
Noncontrolling interests	0.5	0.9	—	—	—	—	—	—	—	—
Statute of limitations expiration	(0.5)	(1.7)	—	—	—	—	—	—	—
Penalties	2.3	—	5.6	—	—	—	—	—	—
Merger expenses	6.2	—	—	—	—	36.7	635.9	(35.4)	(49.8)	11.1
Other^(c)	(1.8)	(2.1)	—	(1.5)	—	(2.5)	35.1	0.4	1.4	3.6
Effective income tax rate	39.1%	33.9%	45.1%	25.9%	36.3%	63.0%	900.0%	13.8%	9.0%	47.2%



	Nine Months Ended September 30, 2015
						Predecessor
	Exelon	Generation	ComEd	PECO	BGE	PHI	Pepco	DPL	ACE
U.S. Federal statutory rate	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%	35.0%
Increase (decrease) due to:
State income taxes, net of Federal income tax benefit	3.1	2.8	5.2	1.2	5.3	7.1	4.6	6.1	5.5
Qualified nuclear decommissioning trust fund income	(0.9)	(1.6)	—	—	—	—	—	—	—
Domestic production activities deduction	(2.8)	(4.9)	—	—	—	—	—	—	—
Health care reform legislation	—	—	—	—	0.2	—	—	—	—
Amortization of investment tax credit, including deferred taxes on basis difference	(1.2)	(1.9)	(0.3)	(0.1)	(0.1)	(0.3)	(0.1)	(0.4)	(0.5)
Plant basis differences	(1.2)	—	(0.1)	(7.3)	(0.4)	(5.0)	(6.2)	(2.0)	(2.5)
Production tax credits and other credits	(2.2)	(3.8)	—	—	—	(1.9)	—	—	—
Noncontrolling interests	—	0.1	—	—	—	—	—	—	—
Statute of limitations expiration	(1.6)	(2.9)	—	—	—	—	—	—	—
Other	0.9	0.6	0.2	0.2	(0.1)	(0.1)	(0.7)	(0.5)	0.8
Effective income tax rate	29.1%	23.4%	40.0%	29.0%	39.9%	34.8%	32.6%	38.2%	38.3%


(a)	DPL and ACE recognized a loss before income taxes for the nine months ended September 30, 2016, and PHI recognized a loss before income taxes for the period of March 24, 2016, through September 30, 2016. As a result, positive percentages represent an income tax benefit for the periods presented.

(b) Includes a remeasurement of uncertain state income tax positions for Pepco and DPL.


(c)	At PECO, includes a cumulative adjustment related to an anticipated gas repairs tax return accounting method change.

Accounting for Uncertainty in Income Taxes

The Registrants have the following unrecognized tax benefits as of September 30, 2016 and December 31, 2015:



												Successor
	Exelon		Generation		ComEd			PECO		BGE		PHI		Pepco		DPL		ACE
September 30, 2016	$	937	$	516	$	(12	)	$	—	$	120	$	157	$	79	$	34	$	22



											Predecessor
	Exelon		Generation		ComEd		PECO		BGE		PHI		Pepco		DPL		ACE
December 31, 2015	$	1,101	$	534	$	142	$	—	$	120	$	22	$	8	$	3	$	—

Exelon and ComEd’s unrecognized tax benefits changed by $328 million and $154 million, respectively, as of September 30, 2016 as a result of the lease termination on the like-kind exchange position discussed below. In addition, as a result of the merger, an assessment and remeasurement of certain federal and state uncertain income tax positions resulted in an increase in unrecognized tax benefits at Exelon, PHI, Pepco, DPL and ACE of $164 million, $135 million, $71 million, $31 million and $22 million, respectively.

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 and Litigation

As of September 30, 2016, Exelon, Generation, BGE, PHI, Pepco, and DPL have approximately $251 million, $52 million, $120 million, $79 million, $59 million, and $20 million of unrecognized federal and state tax benefits that could significantly decrease within the 12 months after the reporting date as a result of completing audits and potential settlements. Of the above unrecognized tax benefits, Exelon and Generation have $52 million that, if recognized, would decrease the effective tax rate. The unrecognized tax benefits related to BGE, DPL, and a portion of Pepco, if recognized, may be included in future regulated base rates and that portion would have no impact to the effective tax rate.

Other Income Tax Matters

Like-Kind Exchange (Exelon and ComEd)

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 was unable to reach agreement with the IRS regarding the dispute over the like-kind exchange position. The IRS asserted that the Exelon purchase and leaseback transaction was 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 asserted that the sale of the fossil plants followed by the purchase and leaseback of the municipal owned generation facilities did not qualify as a like-kind exchange and the gain on the sale is fully subject to tax. The IRS also asserted a penalty of approximately $90 million for a substantial understatement of tax.

In accordance with applicable accounting standards, Exelon was required to assess whether it was more-likely-than-not that to prevail in litigation. In light of the outcome of another case involving a listed transaction and Exelon’s determination that settlement was unlikely, Exelon concluded that subsequent to December 31, 2012, it was no longer more-likely-than-not that its position would be sustained. As a result, in the first quarter of 2013 Exelon recorded a non-cash charge to earnings of approximately $265 million, which represented 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 has agreed to hold ComEd harmless from any unfavorable impacts on ComEd’s equity of the after-tax interest or penalty amounts. As a result, ComEd recorded on its consolidated balance sheet as of March 31, 2013, a $172 million receivable and non-cash equity contributions from Exelon. Based on applicable case law and the facts of the transaction, Exelon did not believe it was likely a penalty would be assessed. Accordingly, no charge was recorded for the penalty asserted nor for after-tax interest that could be due on the asserted penalty.

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.

On September 19, 2016, the Tax Court rejected Exelon’s position in the case and ruled that Exelon was not entitled to defer gain on the transaction. In addition, contrary to Exelon’s evaluation that the penalty was unwarranted, the Tax Court ruled that Exelon is liable for the penalty and interest due on the asserted penalty. In early 2017, Exelon expects to timely appeal this decision to the U.S. Court of Appeals for the Seventh Circuit.

While it has strong arguments on appeal with respect to both the merits and the penalty, Exelon has determined that, pursuant to accounting standards, it is no longer more-likely-than-not to avoid the penalty. As a result, in the third quarter of 2016, Exelon recorded a charge to earnings for the penalty and the after-tax interest due on the asserted penalty of approximately $200 million, of which approximately $150 million was recorded at ComEd. Exelon and ComEd recorded the penalty and interest due on the asserted penalty to Other, net and Interest expense, net, respectively, on their Consolidated Statements of Operations. Consistent with Exelon’s agreement to continue to hold ComEd harmless from any unfavorable impact on its equity, ComEd recorded on its consolidated balance sheet as of September 30, 2016, a $150 million receivable and non-cash equity contributions from Exelon.

In order to appeal the decision, Exelon is required to pay the tax, penalties and interest at the time Exelon files its appeal (expected early 2017). While the final calculation of tax, penalties and interest has not yet been finalized by the IRS, Exelon estimates that a payment of approximately $1.4 billion related to the like-kind exchange will be due, including $300 million from ComEd, in the first quarter of 2017. While Exelon will receive a tax benefit of $400 million associated with the deduction for the interest, Exelon currently has a net operating loss carryforward and thus does not expect to realize the cash benefit until 2018. After taking into account these interest deduction tax benefits, the total estimated net cash outflow for the like-kind exchange is $1 billion, of which approximately $300 million is attributable to ComEd after giving consideration to Exelon’s agreement to hold ComEd harmless from any unfavorable impacts of after-tax interest or penalty amounts on ComEd’s equity. Upon a final appellate decision, which could take up to several years, Exelon expects to receive $80 million related to final interest computations.

As of September 30, 2016, ComEd has a total receivable from Exelon pursuant to the hold harmless agreement of $345 million, which is included in Current Receivables from Affiliates on ComEd’s Consolidated Balance Sheet. Under the agreement, Exelon will settle this receivable with ComEd no later than the time that the payments related to the like-kind exchange are due to the IRS, currently anticipated in first quarter 2017. Exelon will not seek recovery from ComEd customers for any interest or penalty amounts associated with the like-kind exchange tax position.

As previously disclosed, 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. On March 31, 2016, Exelon entered into an agreement to terminate its interests in the remaining two municipal-owned electric generation properties in exchange for $360 million.

Long-Term State Tax Apportionment (Exelon, Generation and PHI)

Exelon, Generation and PHI periodically review events that may significantly impact how income is apportioned among the states and, therefore, the calculation of their respective deferred state income taxes. Events that may require Exelon, Generation and PHI to update their long-term state tax apportionment include significant changes in tax law and/or significant operational changes, such as the merger with PHI. As a result of the merger, Exelon and Generation reevaluated their long-term state tax apportionment for all states where they have state income tax obligations, which include Delaware, Illinois, Maryland, New Jersey, Pennsylvania, and Washington D.C., as well as other states. The total effect of revising the long-term state tax apportionment resulted in the recording of deferred state tax benefit in the amount of $1 million and a state tax expense of $6 million, net of tax, for Exelon and Generation, respectively. Further, Exelon and PHI recorded deferred state tax liabilities of $59 million and $8 million, net of tax, respectively, as part of purchase accounting during the first quarter of 2016.