Income Taxes (All Registrants)

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



																								Successor			Predecessor
	For the Year Ended December 31, 2016																							March 24, 2016 to December 31, 2016			January 1, 2016 to March 23, 2016
	Exelon			Generation			ComEd			PECO		BGE			Pepco			DPL			ACE			PHI			PHI
Included in operations:
Federal
Current	$	60		$	513		$	(135	)	$	63	$	51		$	(118	)	$	(88	)	$	(26	)	$	(281	)	$	—
Deferred	607			(247		)	379			72		88			136			97			22			283			10
Investment tax credit amortization	(24		)	(20		)	(2		)	—		(1		)	—			—			—			(1		)	—
State
Current	39			45			(4		)	9		5			7			1			—			(11		)	—
Deferred	79			(1		)	63			5		31			16			12			—			13			7
Total	$	761		$	290		$	301		$	149	$	174		$	41		$	22		$	(4	)	$	3		$	17



	For the Year Ended December 31, 2015
																									Predecessor
	Exelon			Generation			ComEd			PECO			BGE			Pepco			DPL			ACE			PHI
Included in operations:
Federal
Current	$	407		$	546		$	(80	)	$	64		$	25		$	(54	)	$	(27	)	$	(2	)	$	12
Deferred	566			16			310			69			126			126			73			27			103
Investment tax credit amortization	(22		)	(19		)	(2		)	—			(1		)	—			—			—			(1		)
State
Current	(86		)	(90		)	7			(10		)	—			6			2			3			17
Deferred	208			49			45			20			39			24			1			5			32
Total	$	1,073		$	502		$	280		$	143		$	189		$	102		$	49		$	33		$	163

	For the Year Ended December 31, 2014
																									Predecessor
	Exelon			Generation			ComEd			PECO			BGE			Pepco			DPL			ACE			PHI
Included in operations:
Federal
Current	$	121		$	360		$	(171	)	$	28		$	24		$	(79	)	$	(45	)	$	(6	)	$	(153	)
Deferred	576			(35		)	395			87			90			150			98			31			261
Investment tax credit amortization	(20		)	(16		)	(2		)	—			(1		)	—			(1		)	(1		)	(1		)
State
Current	42			35			7			(2		)	—			(2		)	—			(1		)	(10		)
Deferred	(53		)	(137		)	39			1			27			24			13			7			41
Total	$	666		$	207		$	268		$	114		$	140		$	93		$	65		$	30		$	138

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



																	Successor		Predecessor
	For the Year Ended December 31, 2016																March 24, 2016 to December 31, 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)	3.3		3.3		5.6		1.3		5.0		15.7		52.7		6.2		5.8		11.9
Qualified nuclear decommissioning trust fund loss	3.4		7.8		—		—		—		—		—		—		—		—
Domestic production activities deduction	—		—		—		—		—		—		—		—		—		—
Health care reform legislation	—		—		—		—		—		—		—		—		—		—
Amortization of investment tax credit, including deferred taxes on basis difference	(1.2	)	(2.3	)	(0.3	)	(0.1	)	(0.1	)	(0.2	)	(3.7	)	0.8		1.4		(0.9	)
Plant basis differences	(4.8	)	—		(0.6	)	(9.6	)	(2.7	)	(22.8	)	(25.5	)	10.3		39.0		(13.5	)
Production tax credits and other credits	(3.6	)	(8.2	)	—		—		—		—		—		—		—		—
Noncontrolling interests	(0.2	)	(0.3	)	—		—		—		—		—		—		—		—
Statute of limitations expiration	(0.4	)	(1.7	)	—		—		—		—		—		—		—		—
Penalties	1.9		—		4.5		—		—		—		—		—		(0.7	)	—
Merger Expenses	5.5		1.1		—		—		—		23.5		112.9		(44.9	)	(89.0	)	11.1
Other ^(c)	(0.6	)	(1.5	)	0.1		(1.2	)	—		(1.8	)	(2.2	)	1.3		3.3		3.6
Effective income tax rate	38.3	%	33.2	%	44.3	%	25.4	%	37.2	%	49.4	%	169.2	%	8.7	%	(5.2	)%	47.2	%



	For the Year Ended December 31, 2015
																	Predecessor
	Exelon		Generation		ComEd		PECO		BGE		Pepco		DPL		ACE		PHI
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	3.7		1.0		4.9		1.0		5.3		6.7		1.7		5.7		6.6
Qualified nuclear decommissioning trust fund income	(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	)	(0.1	)	(0.4	)	(0.6	)	(0.2	)
Plant basis differences	(1.5	)	—		(0.1	)	(8.7	)	(0.7	)	(5.8	)	(2.3	)	(1.3	)	(4.3	)
Production tax credits and other credits	(1.9	)	(3.4	)	—		—		—		—		—		—		—
Noncontrolling interests	0.3		0.5		—		—		—		—		—		—		—
Statute of limitations expiration	(1.4	)	(2.4	)	—		—		—		—		—		—		—
Other ^(d)	—		—		0.2		0.2		—		(0.5	)	5.2		6.4		(3.2	)
Effective income tax rate	32.2	%	27.1	%	39.7	%	27.4	%	39.6	%	35.3	%	39.2	%	45.2	%	33.9	%

	For the Year Ended December 31, 2014
																	Predecessor
	Exelon		Generation		ComEd		PECO		BGE		Pepco		DPL		ACE		PHI
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	1.3		(1.9	)	4.5		(0.1	)	5.0		5.4		4.8		5.8		5.3
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	)	(0.1	)	(0.3	)	(0.6	)	(0.3	)
Plant basis differences	(1.9	)	—		(0.1	)	(10.4	)	0.2		(4.9	)	(2.4	)	(0.5	)	(4.5	)
Production tax credits and other credits	(2.4	)	(4.8	)	—		—		—		—		—		—		—
Noncontrolling interests	(1.8	)	(3.7	)	—		—		—		—		—		—		—
Statute of limitations expiration	(2.6	)	(5.3	)	—		—		—		—		—		—		—
Other	(0.2	)	(1.1	)	0.3		0.1		(0.2	)	(0.2	)	1.4		(0.2	)	0.8
Effective income tax rate	26.8	%	16.9	%	39.6	%	24.5	%	39.9	%	35.2	%	38.5	%	39.5	%	36.3	%

_____________________

(a) DPL and ACE recognized a loss before income taxes for the year ended December 31, 2016, and PHI recognized a loss before income taxes for the period of March 24, 2016, through December 31, 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.

(d) Includes impacts of the PHI Global Settlement for Pepco, DPL, ACE, and PHI

The tax effects of temporary differences and carryforwards, which give rise to significant portions of the deferred tax assets (liabilities), as of December 31, 2016 and 2015 are presented below:



	As of December 31, 2016
																									Successor
	Exelon			Generation			ComEd			PECO			BGE			Pepco			DPL			ACE			PHI
Plant basis differences	$	(17,966	)	$	(4,192	)	$	(5,034	)	$	(3,095	)	$	(1,977	)	$	(1,678	)	$	(973	)	$	(869	)	$	(3,586	)
Accrual based contracts	434			(115		)	—			—			—			—			—			—			548
Derivatives and other financial instruments	(179		)	(162		)	(3		)	—			—			—			—			—			(1		)
Deferred pension and postretirement obligation	2,287			(316		)	(453		)	(18		)	(43		)	(122		)	(74		)	(21		)	(111		)
Nuclear decommissioning activities	(509		)	(509		)	—			—			—			—			—			—			—
Deferred debt refinancing costs	325			44			(13		)	(1		)	(3		)	(7		)	(4		)	(2		)	293
Regulatory assets and liabilities	(3,319		)	—			(226		)	10			(240		)	(194		)	(75		)	(69		)	(1,205		)
Tax loss carryforward	189			61			29			—			22			27			39			14			77
Tax credit carryforward	446			493			—			—			—			—			—			—			—
Investment in CENG	(650		)	(650		)	—			—			—			—			—			—			—
Other, net	1,485			403			351			99			27			66			34			34			225
Deferred income tax liabilities (net)	$	(17,457	)	$	(4,943	)	$	(5,349	)	$	(3,005	)	$	(2,214	)	$	(1,908	)	$	(1,053	)	$	(913	)	$	(3,760	)
Unamortized investment tax credits	(658		)	(626		)	(15		)	(1		)	(5		)	(2		)	(3		)	(4		)	(9		)
Total deferred income tax liabilities (net) and unamortized investment tax credits	$	(18,115	)	$	(5,569	)	$	(5,364	)	$	(3,006	)	$	(2,219	)	$	(1,910	)	$	(1,056	)	$	(917	)	$	(3,769	)



	As of December 31, 2015
																									Predecessor
	Exelon			Generation			ComEd			PECO			BGE			Pepco			DPL			ACE			PHI
Plant basis differences	$	(13,393	)	$	(4,269	)	$	(4,424	)	$	(2,901	)	$	(1,821	)	$	(1,599	)	$	(915	)	$	(791	)	$	(3,342	)
Accrual based contracts	(136		)	(136		)	—			—			—			—			—			—			—
Derivatives and other financial instruments	(203		)	(181		)	(4		)	—			—			—			—			—			(1		)
Deferred pension and postretirement obligation	1,801			(371		)	(505		)	(9		)	(47		)	(95		)	(82		)	(20		)	(92		)
Nuclear decommissioning activities	(592		)	(592		)	—			—			—			—			—			—			—
Deferred debt refinancing costs	133			48			(15		)	(1		)	(4		)	(8		)	(4		)	(3		)	(15		)
Regulatory assets and liabilities	(1,706		)	—			(219		)	16			(264		)	(202		)	(91		)	(93		)	(414		)
Tax loss carryforward	103			56			—			—			33			141			122			8			378
Tax credit carryforward	327			374			—			—			—			—			—			—			6
Investment in CENG	(595		)	(595		)	—			—			—			—			—			—			—
Other, net	1,112			425			270			105			27			42			29			18			103
Deferred income tax liabilities (net)	$	(13,149	)	$	(5,241	)	$	(4,897	)	$	(2,790	)	$	(2,076	)	$	(1,721	)	$	(941	)	$	(881	)	$	(3,377	)
Unamortized investment tax credits	(622		)	(598		)	(17		)	(2		)	(5		)	(2		)	(4		)	(4		)	(15		)
Total deferred income tax liabilities (net) and unamortized investment tax credits	$	(13,771	)	$	(5,839	)	$	(4,914	)	$	(2,792	)	$	(2,081	)	$	(1,723	)	$	(945	)	$	(885	)	$	(3,392	)

The following table provides the Registrants’ carryforwards and any corresponding valuation allowances as of December 31, 2016.



																							Successor
	Exelon			Generation			ComEd		PECO		BGE			Pepco			DPL			ACE			PHI
Federal
Federal net operating loss	$	282	^(a)	$	11		$	82	$	—	$	—		$	44		$	38		$	18		$	121
Deferred taxes on Federal net operating loss	99			4			29		—		—			15			13			6			42
Federal general business credits carryforwards	511		^(b)	509			1		—		1			—			—			—			—
State
State net operating losses and credit carryforwards	3,501		^(c)	1,245		^(c)	—		—		425		^(d)	360		^(e)	639		^(f)	272		^(g)	1,522		^(h)
Deferred taxes on state tax attributes (net)	186			65			—		—		23			20			36			16			86
Valuation allowance on state tax attributes	20			9			—		—		1			—			—			—			10

_____________________


(a)	Exelon's federal net operating loss will begin expiring in 2032.


(b)	Exelon’s federal general business credit carryforwards will begin expiring in 2033.


(c)	Exelon’s and Generation's state net operating losses and credit carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2017.


(d)	BGE's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2026.


(e)	Pepco's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2028.


(f)	DPL's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2023.


(g)	ACE's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2032.


(h)	PHI's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2023.

Tabular reconciliation of unrecognized tax benefits

The following tables provide a reconciliation of the Registrants’ unrecognized tax benefits as of December 31, 2016, 2015 and 2014:



																				Successor
	Exelon			Generation			ComEd			PECO		BGE		Pepco		DPL		ACE		PHI
Unrecognized tax benefits at January 1, 2016	$	1,078		$	534		$	142		$	—	$	120	$	8	$	3	$	—	$	22
Merger balance transfer	22			5			—			—		—		—		—		—		(5		)
Increases based on tax positions related to 2016	108			10			—			—		—		21		16		22		59
Change to positions that only affect timing	(332		)	(12		)	(154		)	—		—		—		—		—		—
Increases based on tax positions prior to 2016	88			—			—			—		—		51		18		—		96
Decreases based on tax positions prior to 2016	(21		)	(20		)	—			—		—		—		—		—		—
Decrease from settlements with taxing authorities	(27		)	(27		)	—			—		—		—		—		—		—
Decreases from expiration of statute of limitations	—			—			—			—		—		—		—		—		—
Unrecognized tax benefits at December 31, 2016	$	916		$	490		$	(12	)	$	—	$	120	$	80	$	37	$	22	$	172



																					Predecessor
	Exelon			Generation			ComEd			PECO			BGE		Pepco		DPL		ACE		PHI
Unrecognized tax benefits at January 1, 2015	$	1,829		$	1,357		$	149		$	44		$	—	$	—	$	—	$	—	$	702
Increases based on tax positions related to 2015	108			—			—			—			106		—		—		—		—
Change to positions that only affect timing	(705		)	(659		)	(7		)	(44		)	—		—		—		—		(688		)
Increases based on tax positions prior to 2015	79			65			—			—			14		8		3		—		11
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		)	—			—			—		—		—		—		(3		)
Unrecognized tax benefits at December 31, 2015	$	1,078		$	534		$	142		$	—		$	120	$	8	$	3	$	—	$	22



																							Predecessor
	Exelon			Generation			ComEd			PECO		BGE		Pepco			DPL			ACE			PHI
Unrecognized tax benefits at January 1, 2014	$	2,175		$	1,415		$	324		$	44	$	—	$	45		$	3		$	3		$	743
Increases based on tax positions related to 2014	15			15			—			—		—		—			—			—			—
Change to positions that only affect timing	(255		)	33			(175		)	—		—		(45		)	(3		)	(3		)	(41		)
Increases based on tax positions prior to 2014	18			18			—			—		—		—			—			—			—
Decreases based on tax positions prior to 2014	(1		)	(2		)	—			—		—		—			—			—			—
Decreases 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	$	—	$	—		$	—		$	—		$	702

Exelon, Generation, and ComEd have $83 million, $7 million, and $(12) million of unrecognized tax benefits balance at December 31, 2016 for which the ultimate tax benefit is highly certain, but for which there is uncertainty about the timing of such benefits.

Exelon, Generation, and ComEd had $415 million, $20 million, and $142 million of unrecognized tax benefits at December 31, 2015 for which the ultimate tax benefit is highly certain, but for which there is uncertainty about the timing of such benefits

Exelon, Generation, ComEd, PECO, and PHI had $1,122 million, $680 million, $149 million, $43 million, and $686 million of unrecognized tax benefits at December 31, 2014 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.

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

Exelon, Generation, PHI, Pepco, ACE, and DPL have $633 million, $483 million, $93 million, $21 million, $22 million, and $16 million, respectively, of unrecognized tax benefits at December 31, 2016 that, if recognized, would decrease the effective tax rate. BGE, PHI, Pepco, and DPL have $120 million, $80 million, $59 million, and $21 million of unrecognized tax benefits at December 31, 2016 that, if recognized, may be included in future base rates and that portion would have no impact to the effective tax rate.

Exelon, Generation, and PHI had $538 million, $509 million, and $11 million, respectively, of unrecognized tax benefits at December 31, 2015 that, if recognized, would decrease the effective tax rate. BGE, PHI, Pepco, and DPL had $120 million, $11 million, $8 million, and $3 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, Generation, and PHI had $701 million, $672 million, and $15 million, respectively, of unrecognized tax benefits at December 31, 2014 that, if recognized, would decrease the effective tax rate.

Reasonably possible that 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 December 31, 2016, Exelon, Generation, PHI, Pepco, ACE and DPL have approximately $146 million, $19 million, $59 million, $21 million, $22 million, and $16 million, respectively, of unrecognized federal and state tax benefits that will decrease in the first quarter of 2017 due to the receipt in January of favorable IRS guidance as to whether certain business expenses should be capitalized or deducted. The recognition of these unrecognized tax benefits will decrease the effective tax rate in the first quarter of 2017.

As of December 31, 2016, Exelon, Generation, BGE, PHI, Pepco, and DPL have approximately $244 million, $44 million, $120 million, $80 million, $59 million, and $21 million, respectively, 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 $44 million that, if recognized, would decrease the effective tax rate. The unrecognized tax benefit related to BGE, Pepco, and DPL 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 tables represent the net interest and penalties receivable (payable), including interest and penalties related to tax positions reflected in the Registrants’ Consolidated Balance Sheets.



Net interest receivable (payable) as of	Exelon			Generation		ComEd			PECO		BGE			Pepco		DPL		ACE
December 31, 2016	$	(507	)	$	46	$	(384	)	$	8	$	(1	)	$	1	$	—	$	1
December 31, 2015	(288		)	80		(210		)	3		(1		)	20		3		24



Net penalties receivable (payable) as of	Exelon			Generation		ComEd			PECO		BGE		Pepco		DPL		ACE
December 31, 2016	$	(106	)	$	—	$	(86	)	$	—	$	—	$	—	$	—	$	—
December 31, 2015	—			—		—			—		—		—		—		—



	Successor		Predecessor
PHI	December 31, 2016		December 31, 2015
Net interest receivable (payable)	$	2	$	(34	)
Net penalties receivable (payable)	—		—

The following tables set forth the net interest and penalty expense, including interest and penalties related to tax positions, recognized in Interest expense, net and Other, net in Other income and deductions in the Registrants’ Consolidated Statements of Operations and Comprehensive Income.



Net interest expense (income) for the years ended	Exelon			Generation			ComEd		PECO		BGE		Pepco			DPL		ACE
December 31, 2016	$	165		$	(13	)	$	117	$	—	$	—	$	6		$	—	$	(1	)
December 31, 2015	(13		)	(31		)	7		—		—		(4		)	—		—
December 31, 2014	(36		)	(50		)	6		—		1		(1		)	—		(1		)



Net penalty expense (income) for the years ended	Exelon		Generation		ComEd			PECO		BGE		Pepco		DPL		ACE
December 31, 2016	$	106	$	—	$	86	—	$	—	$	—	$	—	$	—	$	—
December 31, 2015	—		—		—			—		—		—		—		—
December 31, 2014	—		—		—			—		—		—		—		—



	Successor			Predecessor
PHI	March 24, 2016 to December 31, 2016			January 1, 2016 to March 23, 2016		December 31, 2015			December 31, 2014
Net interest expense (income)	$	(2	)	$	—	$	(34	)	$	—
Net penalty expense (income)	—			—		—			—

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, 2001-2015
PHI Holdings and subsidiaries consolidated Federal income tax returns	2013-2015
Exelon and subsidiaries Illinois unitary income tax returns	2010-2015
Constellation combined New York corporate income tax returns	2010-March 2012
Exelon combined New York corporate income tax returns	2011-2015
Various separate company (excluding PECO) Pennsylvania corporate net income tax returns	2011-2015
PECO Pennsylvania separate company returns	2010-2015
DPL Delaware separate company returns	Same as Federal
ACE New Jersey separate company returns	2012-2015
Various separate company Maryland corporate net income tax returns	Same as Federal
Washington D.C. corporate income tax returns	2013-2015

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 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 the second quarter of 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 and ComEd recorded a charge to earnings of approximately $106 million and $86 million, respectively, of penalty and approximately $94 million and $64 million, respectively, of after-tax interest. Exelon and ComEd recorded the penalty and pre-tax 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 Sheets 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, penalty and interest at the time Exelon files its appeal (expected in the second quarter of 2017). While the final calculation of tax, penalty 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 second quarter of 2017. While Exelon will receive a tax benefit of $400 million associated with the deduction for the interest, Exelon expects to have 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.

Of the above amounts payable, Exelon deposited with the IRS approximately $1.25 billion in October of 2016. The remaining amount will be paid in the second quarter of 2017 at the time Exelon files its appeal of the Tax Court decision. Exelon funded the $1.25 billion deposit with a combination of cash on hand and short-term borrowings. The deposit is reflected as a current asset and the related liabilities for the tax, penalty, and interest are included on Exelon’s balance sheet as current obligations.

As of December 31, 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 the second quarter of 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.

PHI Global Tax Settlement

On November 18, 2015, PHI entered into a settlement with the IRS and the DOJ (the Global Tax Settlement) to primarily provide for the resolution of the uncertain tax treatment of its previously held cross-border energy lease investments involving public utility assets located outside of the United States structured as sale-in, lease-out, or SILO, transactions.

As a result of the Global Tax Settlement in the fourth quarter of 2015, PHI re-measured uncertain tax positions resulting in the recognition of a tax benefit of $35 million, including $26 million related to continuing operations and $9 million related to discontinued operations. PHI also recorded an interest benefit, net of tax, of $21 million. Pepco recorded a tax benefit of $6 million and interest benefit, net of tax, of $3 million. ACE and DPL recorded a tax expense of $3 million and $3 million, respectively.

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 $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. The long-term state tax apportionment was revised in the fourth quarter of 2016 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 $8 million and $14 million, net of tax.

Allocation of Tax Benefits (All Registrants)

Generation, ComEd, PECO, BGE, PHI, Pepco, DPL, and ACE 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 2016, Generation, PECO, and BGE recorded an allocation of Federal tax benefits from Exelon under the Tax Sharing Agreement of $94 million, $18 million, and $8 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. PHI, Pepco, DPL, and ACE did not record an allocation of Federal tax benefits from Exelon as they were not a part of Exelon's 2015 consolidated tax return.

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.