8. Early Plant Retirements (Exelon and Generation)

Exelon and Generation continue to evaluate the current and expected economic value of each of Generation’s plants. Factors that will continue to affect the economic value of Generation’s plants include, but are 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 decommissioning trust 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.

In 2015 and 2016, Generation identified the Clinton and Quad Cities nuclear plants in Illinois, Ginna and Nine Mile Point nuclear plants in New York and Three Mile Island nuclear plant in Pennsylvania as having the greatest risk of early retirement based on economic valuation and other factors.

Assuming the continued effectiveness of the Illinois ZES and the New York CES, 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 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 positions. Refer to Note 6 — Regulatory Matters for additional discussion on the New York CES and the Illinois ZES.

In Pennsylvania, the TMI nuclear plant did not clear in the May 2017 PJM capacity auction for the 2020-2021 planning year, the third consecutive year that TMI failed to clear the PJM base residual capacity auction. The plant is currently committed to operate through May 2019 and is licensed to operate through 2034. On May 30, 2017, based on these capacity auction results, prolonged periods of low wholesale power prices, and the absence of federal or state policies that place a value on nuclear energy for its ability to produce electricity without air pollution, Exelon announced that Generation will permanently cease generation operations at TMI on or about September 30, 2019. Generation has filed the required market and regulatory notifications to shut down the plant. PJM has subsequently notified Generation that it has not identified any reliability issues and has approved the deactivation of TMI as proposed.

On February 2, 2018, Exelon announced that Generation will permanently cease generation operations at Oyster Creek at the end of its current operating cycle by October 2018. In 2010, Generation announced that Oyster Creek would retire by the end of 2019 as part of an agreement with the State of New Jersey to avoid significant costs associated with the construction of cooling towers to meet the State’s then new environmental regulations. Since then, like other nuclear sites, Oyster Creek has continued to face rising operating costs amid a historically low wholesale power price environment. The decision to retire Oyster Creek in 2018 at the end of its current operating cycle involved consideration of several factors, including economic and operating efficiencies, and avoids a refueling outage scheduled for the fall of 2018 that would have required advanced purchasing of fuel fabrication and materials beginning in late February 2018. Generation has filed the required market and regulatory notifications to shut down the plant. PJM has subsequently notified Generation that it has not identified any reliability issues and has approved the deactivation of Oyster Creek as proposed.

As a result of these plant retirement decisions, Exelon and Generation recognized one-time charges in Operating and maintenance expense related to materials and supplies inventory reserve adjustments, employee-related costs and CWIP impairments, among other items. In addition to these one-time charges, annual incremental non-cash charges to earnings stemming from shortening the expected economic useful lives primarily related to accelerated depreciation of plant assets (including any ARC), accelerated amortization of nuclear fuel, and additional ARO accretion expense associated with the changes in decommissioning timing and cost assumptions were also recorded. See Note 13 — Nuclear Decommissioning for additional detail on changes to the nuclear decommissioning ARO balance.

Exelon's and Generation's first quarter 2018 results included a net incremental $178 million of total pre-tax expense associated with the early retirement decisions for TMI and Oyster Creek, as summarized in the table below.



Income statement expense (pre-tax)	Q1 2018
Depreciation and amortization^(a)
Accelerated depreciation^(b)	$	137
Accelerated nuclear fuel amortization	15
Operating and maintenance^(c)	26
Total	$	178

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(a)	Reflects incremental accelerated depreciation and amortization for TMI for the quarter ended March 31, 2018, and for Oyster Creek from February 2, 2018 through March 31, 2018.


(b)	Reflects incremental accelerated depreciation of plant assets, including any ARC.


(c)	Primarily includes materials and supplies inventory reserve adjustments, employee related costs and CWIP impairments.

Exelon's and Generation's 2017 results included a net incremental $339 million of total pre-tax expense associated with the early retirement decision for TMI, as summarized in the table below.



Income statement expense (pre-tax)	Q2 2017		Q3 2017		Q4 2017		YTD 2017
Depreciation and amortization^(a)
Accelerated depreciation^(b)	$	35	$	106	$	109	$	250
Accelerated Nuclear Fuel amortization	2		6		4		12
Operating and maintenance^(c)	71		5		1		77
Total	$	108	$	117	$	114	$	339

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(a)	Reflects incremental charges for TMI including incremental accelerated depreciation and amortization from May 30, 2017 through December 31, 2017.


(b)	Reflects incremental accelerated depreciation of plant assets, including any ARC.


(c)	Primarily includes materials and supplies inventory reserve adjustments, employee related costs and CWIP impairments.

In 2017, PSEG made public similar financial challenges facing its New Jersey nuclear plants including Salem, of which Generation owns a 42.59% ownership interest. Although Salem is committed to operate through May 2021, the plant faces continued economic challenges and PSEG, as the operator of the plant, is exploring all options.

On April 12, 2018, a bill was passed by both Houses of the New Jersey legislature that would establish a ZEC program providing compensation for nuclear plants that demonstrate to the NJBPU that they meet certain requirements, including that they make a significant contribution to air quality in the state and that their revenues are insufficient to cover their costs and risks. The program provides transparency and includes robust customer protections. The New Jersey Governor has up to 45 days to sign the bill, with the bill becoming effective immediately upon signing. The NJBPU then has 180 days from the effective date to establish procedures for implementation of the ZEC program and 330 days from the effective date to determine which nuclear power plants are selected to receive ZECs under the program. Selected nuclear plants will receive ZEC payments for each energy year (12-month period from June 1 through May 31) within 90 days after the completion of such energy year. Exelon and Generation continue to work with stakeholders.

The following table provides the balance sheet amounts as of March 31, 2018 for Generation’s ownership share of the significant assets and liabilities associated with Salem.



	March 31, 2018
Asset Balances
Materials and supplies inventory	$	45
Nuclear fuel inventory, net	102
Completed plant, net	618
Construction work in progress	27
Liability Balances
Asset retirement obligation	(446		)

NRC License Renewal Term	2036 (Unit 1)
	2040 (Unit 2)

On March 29, 2018, Generation announced it had formally notified grid operator ISO-NE of its plans to early retire its Mystic Generating Station assets absent regulatory reforms on June 1, 2022, at the end of the current capacity commitment for Mystic Units 7 & 8. Mystic Unit 9 is currently committed through May 2021. Absent any regulatory reforms to properly value reliability and regional fuel security, these units will not participate in the Forward Capacity Auction (FCA) scheduled for February 2019 for the 2022 - 2023 planning year.

The ISO-NE recently announced that it would take a three-step approach to fuel security. First, ISO-NE will make a filing soon to obtain tariff waivers to allow it to retain Mystic 8 and 9 for fuel security for the 2022 - 2024 planning years. Second, ISO-NE will file tariff revisions to allow it to retain other resources for fuel security in the capacity market if necessary in the future. Third, ISO-NE will work with stakeholders to develop long-term market rule changes to address system resiliency considering significant reliability risks identified in ISO-NE’s January 2018 fuel security report. Changes to market rules are necessary because critical units to the region, such as Mystic Units 8 and 9, cannot recover future operating costs, including the cost of procuring fuel. On April 3, 2018, ISO-NE issued a memorandum to the NEPOOL Participants’ Committee announcing its intention to seek FERC approval for waiver of certain tariff provisions in order to allow it to retain Mystic Units 8 and 9 for fuel security reasons. On April 4, 2018, Generation issued a letter indicating its willingness to cooperate and submit to full cost-of-service compensation for the Mystic Units 8 and 9, provided that the cost-of-service rate is determined before it commits to any future capacity obligation.

The following table provides the balance sheet amounts as of March 31, 2018 for Generation’s significant assets and liabilities associated with the Mystic Generating Station assets.



	March 31, 2018
Asset Balances
Materials and supplies inventory	$	26
Fuel inventory	18
Completed plant, net	896
Construction work in progress	4
Prepaid expense^(a)	9
Liability Balances
Asset retirement obligation	(5		)
Accrued expense^(a)	(2		)

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(a)	Reflects ending balances only as they relate to Mystic's Long-term Service Agreement.