7. Early Nuclear Plant Retirements (Exelon and Generation)

Exelon and Generation continue to evaluate the current and expected economic value of each of Generation’s nuclear plants. Factors that will continue to affect the economic value of Generation’s nuclear plants include, but are not limited to: market power prices, results of capacity auctions, potential legislative and regulatory solutions to ensure nuclear plants are fairly compensated for their carbon-free emissions, 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. In 2015 and 2016, Generation identified the Clinton, Quad Cities, Ginna, Nine Mile Point, and Three Mile Island (TMI) nuclear plants as having the greatest risk of early retirement based on economic valuation and other factors. PSEG has also recently made public similar financial challenges facing its New Jersey nuclear plants including Salem, of which Generation owns a 42.59% ownership interest. As previously disclosed, Exelon and Generation have committed to cease operation of the Oyster Creek nuclear plant by the end of 2019.

Based on insufficient capacity auction results and the lack of progress on Illinois energy legislation, on June 2, 2016, Generation announced a decision to shut down the Clinton and Quad Cities nuclear plants on June 1, 2017 and June 1, 2018, respectively. With the passage of the Illinois ZES on December 7, 2016, and subject to prevailing over any related administrative or legal challenges, Generation reversed this decision and revised the expected economic useful lives for both facilities; 2027 for Clinton and 2032 for Quad Cities. Refer to Note 5 - Regulatory Matters for additional discussion on the Illinois ZES.

Exelon's and Generation's 2016 results included a net incremental $714 million of total pre-tax expense associated with the initial early retirement decision for Clinton and Quad Cities, as summarized in the table below.



Income statement expense (pre-tax)	Q2 2016			Q3 2016			Q4 2016			YTD 2016
Depreciation and amortization
Accelerated depreciation^(a)	$	115		$	344		$	253		$	712
Accelerated Nuclear Fuel amortization	9			28			23			60
Operating and maintenance
One time charges^(b)	141			5			(120		)	26
ARO accretion, net of contractual offset^(c)	—			2			—			2
Contractual offset for ARC depreciation^(c)	(14		)	(41		)	(31		)	(86		)
Total	$	251		$	338		$	125		$	714

_____________


(a)	Reflected incremental accelerated depreciation of plant assets, including any ARC, for the period June 2, 2016, through December 6, 2016.


(b)	Primarily included materials and supplies inventory reserve adjustments, employee related costs and construction work-in-progress (CWIP) impairments.

(c)

For Quad Cities based on the regulatory agreement with the Illinois Commerce Commission, 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 New York, the Ginna, Nine Mile Point, and Generation’s recently acquired FitzPatrick nuclear plant also faced significant economic challenges and risk of retirement before the end of each unit’s respective operating license period (2029 for Ginna and Nine Mile Point Unit 1, 2046 for Nine Mile Point Unit 2, and 2034 for FitzPatrick). On August 1, 2016, the NYPSC issued an order adopting the CES that, subject to prevailing over any administrative or legal challenges, would allow Ginna, Nine Mile Point, and FitzPatrick to continue to operate at least through the life of the program (March 31, 2029). The assumed useful life for depreciation purposes for each facility is through the end of their current operating licenses. Ginna most recently operated under an RSSA which expired March 31, 2017 and has filed the required notice with the NYPSC of its intent to continue operating beyond the expiry of the RSSA. Refer to Note 4 - Mergers, Acquisitions and Dispositions for additional information on Generation’s acquisition of FitzPatrick and Note 5 - Regulatory Matters for additional discussion on the Ginna RSSA and the New York CES.

Assuming the successful implementation of the Illinois ZES and the New York CES and the continued effectiveness of these programs, 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 (and now including the newly acquired FitzPatrick) could again be at heightened risk for early retirement, which could have a material impact on Exelon’s and Generation’s future results of operations, cash flows and financial position.

The TMI nuclear plant did not clear in the May 2016 PJM capacity auction for the 2019-2020 planning year and will not receive capacity revenue for that period, the second consecutive year that TMI failed to clear the PJM base residual capacity auction. The plant is currently committed to operate through May 2019. TMI will be offered into the May 2017 PJM capacity auction for the 2020-2021 planning year, however the plant faces continued economic challenges and Exelon and Generation are exploring all options to return it to profitability, including the potential for a legislative solution in Pennsylvania similar to that passed in Illinois.

The following table provides the balance sheet amounts as of March 31, 2017 for significant assets and liabilities associated with TMI, the plant currently considered by management to be at the greatest risk of early retirement due to current economic valuations and other factors.



(in millions)	TMI
Asset Balances
Materials and supplies inventory	$	40
Nuclear fuel inventory, net	72
Completed plant, net	1,000
Construction work in progress	40
Liability Balances
Asset retirement obligation	(572		)

NRC License Renewal Term	2034

The precise timing of an early retirement date for any nuclear plant, and the resulting financial statement impacts, may be affected by a number of 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 decommissioning trust fund requirements, 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, where applicable, and just prior to its next scheduled nuclear refueling outage.