Asset Retirement Obligations (Exelon, Generation and Pepco)

Nuclear Decommissioning Asset Retirement Obligations (Exelon and Generation)

Generation has a legal obligation to decommission its nuclear power plants following the expiration of their operating licenses. To estimate its decommissioning obligation related to its nuclear generating stations for financial accounting and reporting purposes, Generation uses a probability-weighted, discounted cash flow model which, on a unit-by-unit basis, considers multiple outcome scenarios that include significant estimates and assumptions, and are based on decommissioning cost studies, cost escalation rates, probabilistic cash flow models and discount rates. Generation updates its ARO annually, unless circumstances warrant more frequent updates, based on its review of updated cost studies and its annual evaluation of cost escalation factors and probabilities assigned to various scenarios.

The following table provides a rollforward of the nuclear decommissioning ARO reflected on Exelon’s and Generation’s Consolidated Balance Sheets from December 31, 2017 to September 30, 2018:



Nuclear decommissioning ARO at December 31, 2017 ^(a)	$	9,662
Oyster Creek transferred to Liabilities held for sale	(783		)
Accretion expense	357
Net increase due to changes in, and timing of, estimated future cash flows	116
Costs incurred related to decommissioning plants	(35		)
Nuclear decommissioning ARO at September 30, 2018 ^(a)	$	9,317

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(a)	Includes $12 million and $13 million for the current portion of the ARO at September 30, 2018 and December 31, 2017, respectively, which is included in Other current liabilities on Exelon’s and Generation’s Consolidated Balance Sheets.

During the nine months ended September 30, 2018, Generation’s total nuclear ARO decreased by approximately $345 million, primarily reflecting the reclassification of Oyster Creek ARO as Liabilities held for sale on Exelon's and Generation's Consolidated Balance Sheets following the announced agreement to sell Oyster Creek, offset by the accretion of the ARO liability due to the passage of time, and the impacts of ARO updates completed during 2018. The $116 million increase in the ARO during 2018 due to changes in the amounts and timing of estimated decommissioning cash flows includes a $32 million increase in the first quarter for the impact of the early retirement of Oyster Creek and a $84 million increase in the third quarter for the remeasurement of the ARO to reflect the announced pending sale of Oyster Creek. See Note 4 — Mergers, Acquisitions and Dispositions and Note 8 - Early Plant Retirements for additional information.

Nuclear Decommissioning Trust Fund Investments (Exelon and Generation)

NDT funds have been established for each generation station unit to satisfy Generation’s nuclear decommissioning obligations. Generally, NDT funds established for a particular unit may not be used to fund the decommissioning obligations of any other unit.

The NDT funds associated with Generation’s nuclear units have been funded with amounts collected from the previous owners and their respective utility customers. PECO is authorized to collect funds, in revenues, for decommissioning the former PECO nuclear plants through regulated rates, and these collections are scheduled through the operating lives of the former PECO plants. The amounts collected from PECO customers are remitted to Generation and deposited into the NDT funds for the unit for which funds are collected. Every five years, PECO files a rate adjustment with the PAPUC that reflects PECO’s calculations of the estimated amount needed to decommission each of the former PECO units based on updated fund balances and estimated decommissioning costs. The rate adjustment is used to determine the amount collectible from PECO customers. The most recent rate adjustment occurred on January 1, 2018, and the effective rates currently yield annual collections of approximately $4 million. The next five-year adjustment is expected to be reflected in rates charged to PECO customers effective January 1, 2023. See Note 15 — Asset Retirement Obligations of Exelon's 2017 Form 10-K, for information regarding the amount collected from PECO ratepayers for decommissioning costs.

Exelon and Generation had NDT fund investments totaling $12,584 million and $13,349 million at September 30, 2018 and December 31, 2017, respectively. The decrease is primarily driven by the reclassification of $903 million of Oyster Creek NDT as Assets held for sale on Exelon's and Generation's Consolidated Balance Sheets, partially offset by improved market performance. See Note 4 - Mergers, Acquisitions and Dispositions for additional information regarding the announced pending sale of Oyster Creek. The NDT fund investments include $120 million and $77 million for the current portion of the NDT at September 30, 2018 and December 31, 2017, respectively, which are included in Other current assets on Exelon's and Generation's Consolidated Balance Sheets.

The following table provides net unrealized gains (losses) on NDT funds for the three and nine months ended September 30, 2018 and 2017:



	Exelon and Generation					Exelon and Generation
	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Net unrealized gains (losses) on decommissioning trust funds — Regulatory Agreement Units^(a)	$	(66	)	$	44	$	(335	)	$	253
Net unrealized gains (losses) on decommissioning trust funds — Non-Regulatory Agreement Units^(b)(c)	72			111		(143		)	347

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(a)	Net unrealized gains (losses) related to Generation’s NDT funds associated with Regulatory Agreement Units are included in Regulatory liabilities on Exelon’s Consolidated Balance Sheets and Noncurrent payables to affiliates on Generation’s Consolidated Balance Sheets.

(b)

Excludes $9 million and $4 million of net unrealized losses related to the Zion Station pledged assets for the three months ended September 30, 2018 and 2017, respectively. Excludes $7 million and $5 million of net unrealized losses related to the Zion Station pledged assets for the nine months ended September 30, 2018 and 2017, respectively. Net unrealized losses related to Zion Station pledged assets are included in Other current liabilities on Exelon’s and Generation’s Consolidated Balance Sheets.


(c)	Net unrealized gains (losses) related to Generation’s NDT funds with Non-Regulatory Agreement Units are included in Other, net on Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income.

Interest and dividends on NDT fund investments are recognized when earned and are included in Other, net on Exelon’s and Generation’s Consolidated Statements of Operations and Comprehensive Income. Interest and dividends earned on the NDT fund investments for the Regulatory Agreement Units are eliminated in Other, net on Exelon’s and Generation’s Consolidated Statement of Operations and Comprehensive Income.

See Note 3 — Regulatory Matters and Note 26 — Related Party Transactions of the Exelon 2017 Form 10-K for information regarding regulatory liabilities at ComEd and PECO and intercompany balances between Generation, ComEd and PECO reflecting the obligation to refund to customers any decommissioning-related assets in excess of the related decommissioning obligations.

Zion Station Decommissioning (Exelon and Generation)

On September 1, 2010, Generation completed an Asset Sale Agreement (ASA) with EnergySolutions Inc. and its wholly owned subsidiaries, EnergySolutions, LLC (EnergySolutions) and ZionSolutions, under which ZionSolutions has assumed responsibility for decommissioning Zion Station, which is located in Zion, Illinois and ceased operation in 1998. See Note 15 — Asset Retirement Obligations of the Exelon 2017 Form 10-K for information regarding the specific treatment of assets, including NDT funds, and decommissioning liabilities transferred in the transaction.

ZionSolutions is subject to certain restrictions on its ability to request reimbursements from the Zion Station NDT funds as defined within the ASA. Therefore, the transfer of the Zion Station assets did not qualify for asset sale accounting treatment and, as a result, the related NDT funds were reclassified to Pledged assets for Zion Station decommissioning within Generation’s and Exelon’s Consolidated Balance Sheets and will continue to be measured in the same manner as prior to the completion of the transaction. Additionally, the transferred ARO for decommissioning was replaced with a Payable for Zion Station decommissioning in Generation’s and Exelon’s Consolidated Balance Sheets. Changes in the value of the Zion Station NDT assets, net of applicable taxes, are recorded as a change in the payable to ZionSolutions. At no point will the payable to ZionSolutions exceed the project budget of the costs remaining to decommission Zion Station. Generation has retained its obligation for the SNF. Following ZionSolutions’ completion of its contractual obligations and transfer of the NRC license to Generation, Generation will store the SNF at Zion Station until it is transferred to the DOE for ultimate disposal and will complete all remaining decommissioning activities associated with the SNF dry storage facility. Generation has a liability of approximately $118 million which is included within the nuclear decommissioning ARO at September 30, 2018. Generation also has retained NDT assets to fund its obligation to maintain the SNF at Zion Station until transfer to the DOE and to complete all remaining decommissioning activities for the SNF storage facility. Any shortage of funds necessary to maintain the SNF and decommission the SNF storage facility is ultimately required to be funded by Generation. Any Zion Station NDT funds remaining after the completion of all decommissioning activities will be returned to ComEd customers in accordance with the applicable orders. The following table provides the pledged assets and payables to ZionSolutions, and withdrawals by ZionSolutions at September 30, 2018 and December 31, 2017:



	Exelon and Generation
	September 30, 2018		December 31, 2017
Carrying value of Zion Station pledged assets^(a)	$	9	$	39
Payable to Zion Solutions^(b)(c)	9		37
Cumulative withdrawals by Zion Solutions to pay decommissioning costs^(d)	965		942

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(a)	Included in Other current assets within Exelon's and Generation's Consolidated Balance sheets.


(b)	Excludes a liability recorded within Exelon’s and Generation’s Consolidated Balance Sheets related to the tax obligation on the unrealized activity associated with the Zion Station NDT funds. The NDT funds will be utilized to satisfy the tax obligations as gains and losses are realized.


(c)	Included in Other current liabilities within Exelon’s and Generation’s Consolidated Balance Sheets.


(d)	Includes project expenses to decommission Zion Station and estimated tax payments on Zion Station NDT fund earnings.

NRC Minimum Funding Requirements (Exelon and Generation)

NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in specified minimum amounts to decommission the facility at the end of its life.

Generation filed its biennial decommissioning funding status report with the NRC on March 30, 2017 for all units except for Zion Station which is included in a separate report to the NRC submitted by ZionSolutions (see Zion Station Decommissioning above). The status report demonstrated adequate decommissioning funding assurance for all units except for Peach Bottom Unit 1. As a former PECO plant, financial assurance for decommissioning Peach Bottom Unit 1 is provided by the NDT fund in addition to collections from PECO ratepayers. As discussed under Nuclear Decommissioning Trust Fund Investments above, the amount collected from PECO ratepayers has been adjusted effective January 1, 2018.

On March 28, 2018, Generation submitted its annual decommissioning funding status report with the NRC for shutdown reactors, reactors within five years of shut down except for Zion Station which is included in a separate report to the NRC submitted by EnergySolutions (see Zion Station Decommissioning above), and reactor involved in an acquisition. This report reflected the status of decommissioning funding assurance as of December 31, 2017 and included an update for the acquisition of FitzPatrick on March 31, 2017, the early retirement of TMI announced on May 30, 2017, an adjustment for the February 2, 2018 announced retirement date of Oyster Creek, and the updated status of Peach Bottom Unit 1 based on the new collections rate described above. As of December 31, 2017, Generation provided adequate decommissioning funding assurance for all of its shutdown reactors, reactors within five years of shutdown, and reactor involved in an acquisition.

Generation will file its next decommissioning funding status report for all units with the NRC by March 31, 2019. This report will reflect the status of decommissioning funding assurance as of December 31, 2018. A shortfall at any unit could necessitate that Generation address the shortfall by, among other things, obtaining a parental guarantee for Generation's share of the funding assurance. However, the amount of any guarantee or other assurance will ultimately depend on the decommissioning approach, the associated level of costs, and the decommissioning trust fund investment performance going forward.

Non-Nuclear Asset Retirement Obligations (Pepco)

Pepco has AROs primarily associated with the abatement and disposal of equipment and buildings contaminated with asbestos and PCBs. In the third quarter of 2018, Pepco recorded an increase of $22 million in Operating and maintenance expense primarily related to asbestos identified at its Buzzard Point property as part of an annual ARO study. Buzzard Point is a waterfront property in the District of Columbia occupied by an active substation and former Pepco operated steam plant building, which Pepco retired and closed in 1981. Pepco’s AROs were $38 million and $3 million at September 30, 2018 and December 31, 2017, respectively.