Income Taxes (All Registrants)

Corporate Tax Reform (All Registrants)

On December 22, 2017, President Trump signed the TCJA into law. The TCJA makes many significant changes to the Internal Revenue Code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35% to 21%; (2) creating a 30% limitation on deductible interest expense (not applicable to regulated utilities); (3) allowing 100% expensing for the cost of qualified property (not applicable to regulated utilities); (4) eliminating the domestic production activities deduction; (5) eliminating the corporate alternative minimum tax and changing how existing alternative minimum tax credits can be realized; and (6) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017. The most significant change that impacts the Registrants is the reduction of the corporate federal income tax rate from 35% to 21% beginning January 1, 2018.

Pursuant to the enactment of the TCJA, the Registrants remeasured their existing deferred income tax balances as of December 31, 2017 to reflect the decrease in the corporate income tax rate from 35% to 21%, which resulted in a material decrease to their net deferred income tax liability balances as shown in the table below. Generation recorded a corresponding net decrease to income tax expense, while the Utility Registrants recorded corresponding regulatory liabilities or assets to the extent such amounts are probable of settlement or recovery through customer rates and an adjustment to income tax expense for all other amounts. The amount and timing of potential settlements of the established net regulatory liabilities are determined by the Utility Registrants’ respective rate regulators, subject to certain IRS “normalization” rules. See Note 4 — Regulatory Matters for additional information regarding settlements for passing back of TCJA income tax savings benefits to customers.

The Registrants assessed the applicable provisions in the TCJA and recorded the associated impacts as of December 31, 2017. The Registrants recorded provisional income tax amounts as of December 31, 2017, as allowed under SAB 118 issued by the SEC in December 2017, for changes pursuant to the TCJA related to depreciation because the impacts could not be finalized upon issuance of the Registrants’ financial statements, but for which reasonable estimates could be determined.

On August 3, 2018, the U.S. Department of Treasury, in conjunction with the IRS, released proposed regulations clarifying the immediate expensing provisions enacted by the TCJA, specifically that regulated utility property acquired after September 27, 2017, and placed in service by December 31, 2017, qualifies for 100% expensing. Until the proposed regulations are finalized, taxpayers may rely on the proposed regulations for tax years ending after September 28, 2017. The Registrants recorded the impact of these proposed regulations and the adjustment was immaterial.

While the Registrants have recorded the impacts of the TCJA based on their interpretation of the provisions as enacted, it is expected the U.S. Department of Treasury and the IRS will issue additional interpretative guidance in the future that could result in changes to previously finalized provisions. At this time, many of the states in which Exelon does business have issued guidance regarding TCJA and the impact was not material.

The one-time impacts recorded by the Registrants to remeasure their deferred income tax balances at the 21% corporate federal income tax rate as of December 31, 2017 are presented below:



						Successor
	Exelon^(b)	Generation	ComEd	PECO	BGE	PHI	Pepco	DPL	ACE
Net Decrease to Deferred Income Tax Liability Balances	$8,624	$1,895	$2,819	$1,407	$1,120	$1,944	$968	$540	$456



						Successor
	Exelon	Generation	ComEd	PECO^(c)	BGE	PHI	Pepco	DPL	ACE
Net Regulatory Liability Recorded^(a)	$7,315	N/A	$2,818	$1,394	$1,124	$1,979	$976	$545	$458



						Successor
	Exelon^(b)	Generation	ComEd	PECO	BGE	PHI	Pepco	DPL	ACE
Net Deferred Income Tax Benefit/(Expense) Recorded	$1,309	$1,895	$1	$13	$(4)	$(35)	$(8)	$(5)	$(2)

__________


(a)	Reflects the net regulatory liabilities recorded on a pre-tax basis before taking into consideration the income tax benefits associated with the ultimate settlement with customers.


(b)	Amounts do not sum across due to deferred tax adjustments recorded at the Exelon Corporation parent company, primarily related to certain employee compensation plans.


(c)	Given the regulatory treatment of income tax benefits related to electric and gas distribution repairs, PECO remained in an overall net regulatory asset position as of December 31, 2017 after recording the impacts related to the TCJA.

The net regulatory liabilities above include (1) amounts subject to IRS “normalization” rules that are required to be passed back to customers generally over the remaining useful life of the underlying assets giving rise to the associated deferred income taxes, and (2) amounts for which the timing of settlement with customers is subject to determinations by the rate regulators. The table below sets forth the Registrants’ estimated categorization of their net regulatory liabilities as of December 31, 2017. The amounts in the table below are shown on an after-tax basis reflecting future net cash outflows after taking into consideration the income tax benefits associated with the ultimate settlement with customers.



					Successor
	Exelon	ComEd	PECO^(a)	BGE	PHI	PEPCO	DPL	ACE
Subject to IRS Normalization Rules	$3,040	$1,400	$533	$459	$648	$299	$195	$153
Subject to Rate Regulator Determination	1,694	573	43	324	754	391	194	170
Net Regulatory Liabilities	$4,734	$1,973	$576	$783	$1,402	$690	$389	$	323

_________

(a)

Given the regulatory treatment of income tax benefits related to electric and gas distribution repairs, PECO was in an overall net regulatory asset position as of December 31, 2017 after recording the impacts related to the TCJA. As a result, the amount of customer benefits resulting from the TCJA subject to the discretion of PECO's rate regulators are lower relative to the other Utility Registrants.

The net regulatory liability amounts subject to the IRS normalization rules generally relate to property, plant and equipment with remaining useful lives ranging from 30 to 40 years across the Utility Registrants. For the other amounts, rate regulators could require the passing back of amounts to customers over shorter time frames. See Note 4 - Regulatory Matters for additional information.

Components of Income Tax Expense or Benefit

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



	For the Year Ended December 31, 2018
																Successor
	Exelon			Generation			ComEd			PECO			BGE			PHI			Pepco			DPL			ACE
Included in operations:
Federal
Current	$	226		$	337		$	(63	)	$	11		$	(5	)	$	(4	)	$	28		$	(3	)	$	(14	)
Deferred	(98		)	(347		)	145			10			47			24			(21		)	13			18
Investment tax credit amortization	(24		)	(21		)	(2		)	—			—			(1		)	—			—			—
State
Current	(1		)	6			(29		)	1			—			7			—			—			—
Deferred	17			(83		)	117			(16		)	32			9			6			12			8
Total	$	120		$	(108	)	$	168		$	6		$	74		$	35		$	13		$	22		$	12



	For the Year Ended December 31, 2017^(a)
																Successor
	Exelon			Generation			ComEd			PECO			BGE			PHI			Pepco			DPL			ACE
Included in operations:
Federal
Current	$	194		$	584		$	(191	)	$	71		$	74		$	(60	)	$	(20	)	$	(24	)	$	(12	)
Deferred	(471		)	(2,005		)	523			28			101			250			114			82			34
Investment tax credit amortization	(25		)	(21		)	(2		)	—			(1		)	(1		)	—			—			—
State
Current	14			65			(49		)	14			(5		)	(4		)	(2		)	—			—
Deferred	162			1			136			(9		)	49			32			13			13			4
Total	$	(126	)	$	(1,376	)	$	417		$	104		$	218		$	217		$	105		$	71		$	26



																								Successor			Predecessor
	For the Year Ended December 31, 2016^(a)																							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	600			(254		)	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	78			(2		)	63			5		31			16			12			—			13			7
Total	$	753		$	282		$	301		$	149	$	174		$	41		$	22		$	(4	)	$	3		$	17

__________


(a)	Exelon retrospectively adopted the new standard Revenue from Contracts with Customers. The standard was adopted as of January 1, 2018. Components of income tax expense or benefit are recast to reflect the impact of the new standard.

Rate Reconciliation

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



	For the Year Ended December 31, 2018
											Successor
	Exelon		Generation		ComEd		PECO		BGE		PHI		Pepco		DPL		ACE
U.S. Federal statutory rate	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%	21.0	%
Increase (decrease) due to:
State income taxes, net of Federal income tax benefit	0.6		(16.6	)	8.3		(2.6	)	6.6		3.0		2.2		6.7		7.4
Qualified NDT fund income	(1.9	)	(11.8	)	—		—		—		—		—		—		—
Amortization of investment tax credit, including deferred taxes on basis difference	(1.2	)	(6.5	)	(0.2	)	(0.1	)	(0.1	)	(0.2	)	(0.1	)	(0.3	)	(0.4	)
Plant basis differences	(3.5	)	—		(0.2	)	(14.1	)	(1.3	)	(1.6	)	(2.7	)	(0.3	)	(0.5	)
Production tax credits and other credits	(2.2	)	(13.5	)	—		—		—		—		—		—		—
Noncontrolling interests	(1.0	)	(6.1	)	—		—		—		—		—		—		—
Excess deferred tax amortization	(8.3	)	—		(9.1	)	(3.2	)	(8.0	)	(14.5	)	(14.8	)	(12.0	)	(14.9	)
Tax Cuts and Jobs Act of 2017	0.9		2.7		(0.1	)	—		—		0.1		—		—		—
Other	1.0		1.3		0.5		0.3		0.9		0.3		0.2		0.4		1.2
Effective income tax rate	5.4	%	(29.5	)%	20.2	%	1.3	%	19.1	%	8.1	%	5.8	%	15.5	%	13.8	%



	For the Year Ended December 31, 2017^(a)
											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	2.3		2.9		5.7		0.6		5.4		4.8		3.2		5.4		5.6
Qualified NDT fund income	3.8		9.9		—		—		—		—		—		—		—
Amortization of investment tax credit, including deferred taxes on basis difference	(0.9	)	(2.1	)	(0.2	)	(0.1	)	(0.1	)	(0.2	)	(0.1	)	(0.2	)	(0.4	)
Plant basis differences^(b)	(1.7	)	—		0.3		(13.8	)	0.1		1.1		(0.4	)	2.0		3.6
Production tax credits and other credits	(1.8	)	(4.7	)	—		—		—		—		—		—		—
Like-kind exchange	(1.2	)	—		1.3		—		—		—		—		—		—
Merger expenses	(3.6	)	(1.2	)	—		—		—		(9.5	)	(6.3	)	(7.8	)	(19.8	)
FitzPatrick bargain purchase gain	(2.2	)	(5.6	)	—		—		—		—		—		—		—
Tax Cuts and Jobs Act of 2017^(c)	(33.1	)	(128.3	)	0.1		(2.3	)	0.9		6.4		2.7		2.5		1.6
Other	0.1		(0.5	)	0.2		(0.1	)	0.2		(0.1	)	(0.2	)	0.1		(0.4	)
Effective income tax rate	(3.3	)%	(94.6	)%	42.4	%	19.3	%	41.5	%	37.5	%	33.9	%	37.0	%	25.2	%



																	Successor		Predecessor
	For the Year Ended December 31, 2016^(a)																March 24, 2016 to December 31, 2016		January 1, 2016 to March 23, 2016
	Exelon		Generation		ComEd		PECO		BGE		Pepco		DPL ^(d)		ACE ^(d)		PHI ^(d)		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 ^(e)	3.3		3.2		5.6		1.3		5.0		15.7		52.7		6.2		5.8		11.9
Qualified NDT fund income	3.4		7.9		—		—		—		—		—		—		—		—
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	(4.9	)	—		(0.6	)	(9.6	)	(2.7	)	(22.8	)	(25.5	)	10.3		39.0		(13.5	)
Production tax credits and other credits	(3.6	)	(8.3	)	—		—		—		—		—		—		—		—
Noncontrolling interests	(0.2	)	(0.6	)	—		—		—		—		—		—		—		—
Statute of limitations expiration	(0.4	)	(1.7	)	—		—		—		—		—		—		—		—
Penalties	1.9		—		4.5		—		—		—		—		—		(0.7	)	—
Merger Expenses	5.6		1.1		—		—		—		23.5		112.9		(44.9	)	(89.0	)	11.1
Other ^(f)	(0.7	)	(1.4	)	0.1		(1.2	)	—		(1.8	)	(2.2	)	1.3		3.3		3.6
Effective income tax rate	38.2	%	32.9	%	44.3	%	25.4	%	37.2	%	49.4	%	169.2	%	8.7	%	(5.2	)%	47.2	%

__________


(a)	Exelon retrospectively adopted the new standard Revenue from Contracts with Customers. The standard was adopted as of January 1, 2018. The effective income tax rates are recast to reflect the impact of the new standard.


(b)	Includes the charges related to the transmission-related income tax regulatory asset for Exelon, ComEd, BGE, PHI, Pepco, DPL and ACE of $35 million, $3 million, $5 million, $27 million, $14 million, $6 million and $7 million, respectively. See Note 4 - Regulatory Matters for additional information.


(c)	Included are impacts for TCJA other than the corporate rate change, including revisions further limiting tax deductions for compensation of certain highest paid executives, the write-off of foreign tax credit carryforwards, and loss of a 2015 domestic production activities deduction due to an NOL carryback.


(d)	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.


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


(f)	At PECO, includes a cumulative adjustment related to an anticipated gas repairs tax return accounting method change. The method change request was filed and accepted in 2017. No change to the results recorded as of December 31, 2016.

Tax Differences and Carryforwards

The tax effects of temporary differences and carryforwards, which give rise to significant portions of the deferred tax assets (liabilities), as of December 31, 2018 and 2017 are presented below:



	As of December 31, 2018
																Successor
	Exelon			Generation			ComEd			PECO			BGE			PHI			Pepco			DPL			ACE
Plant basis differences	$	(12,533	)	$	(2,495	)	$	(4,059	)	$	(1,862	)	$	(1,399	)	$	(2,577	)	$	(1,148	)	$	(743	)	$	(645	)
Accrual based contracts	117			(44		)	—			—			—			161			—			—			—
Derivatives and other financial instruments	89			35			69			—			—			3			—			—			—
Deferred pension and postretirement obligation	1,435			(188		)	(255		)	(26		)	(26		)	(102		)	(78		)	(46		)	(14		)
Nuclear decommissioning activities	(351		)	(351		)	—			—			—			—			—			—			—
Deferred debt refinancing costs	234			23			(7		)	—			(3		)	187			(4		)	(2		)	(1		)
Regulatory assets and liabilities	(749		)	—			300			(129		)	172			(90		)	58			96			83
Tax loss carryforward	237			78			—			18			25			96			12			52			26
Tax credit carryforward	811			816			—			—			—			—			—			—			—
Investment in partnerships	(797		)	(775		)	—			—			—			—			—			—			—
Other, net	934			239			151			67			12			196			98			17			19
Deferred income tax liabilities (net)	$	(10,573	)	$	(2,662	)	$	(3,801	)	$	(1,932	)	$	(1,219	)	$	(2,126	)	$	(1,062	)	$	(626	)	$	(532	)
Unamortized investment tax credits	(724		)	(700		)	(12		)	(1		)	(3		)	(8		)	(2		)	(2		)	(3		)
Total deferred income tax liabilities (net) and unamortized investment tax credits	$	(11,297	)	$	(3,362	)	$	(3,813	)	$	(1,933	)	$	(1,222	)	$	(2,134	)	$	(1,064	)	$	(628	)	$	(535	)



	As of December 31, 2017 ^(a)
																Successor
	Exelon			Generation			ComEd			PECO			BGE			PHI			Pepco			DPL			ACE
Plant basis differences	$	(12,490	)	$	(2,819	)	$	(3,825	)	$	(1,762	)	$	(1,368	)	$	(2,521	)	$	(1,152	)	$	(717	)	$	(607	)
Accrual based contracts	150			(66		)	—			—			—			216			—			—			—
Derivatives and other financial instruments	(85		)	(66		)	(2		)	—			—			3			—			—			—
Deferred pension and postretirement obligation	1,463			(205		)	(285		)	(15		)	(29		)	(130		)	(78		)	(51		)	(18		)
Nuclear decommissioning activities	(553		)	(553		)	—			—			—			—			—			—			—
Deferred debt refinancing costs	217			26			(8		)	(1		)	(3		)	203			(4		)	(2		)	(1		)
Regulatory assets and liabilities	(688		)	—			489			(90		)	136			(184		)	39			88			86
Tax loss carryforward	344			76			33			9			11			156			40			68			35
Tax credit carryforward	861			868			1			—			—			6			—			—			—
Investment in partnerships	(434		)	(416		)	—			—			—			—			—			—			—
Other, net	746			78			141			71			13			193			94			14			16
Deferred income tax liabilities (net)	$	(10,469	)	$	(3,077	)	$	(3,456	)	$	(1,788	)	$	(1,240	)	$	(2,058	)	$	(1,061	)	$	(600	)	$	(489	)
Unamortized investment tax credits	(732		)	(705		)	(13		)	(1		)	(4		)	(8		)	(2		)	(3		)	(4		)
Total deferred income tax liabilities (net) and unamortized investment tax credits	$	(11,201	)	$	(3,782	)	$	(3,469	)	$	(1,789	)	$	(1,244	)	$	(2,066	)	$	(1,063	)	$	(603	)	$	(493	)

__________


(a)	Includes remeasurement impacts related to the TCJA.

The following table provides the Registrants’ carryforwards and any corresponding valuation allowances as of December 31, 2018:



										Successor
	Exelon		Generation		ComEd	PECO		BGE		PHI		Pepco		DPL		ACE
Federal
Federal general business credits carryforwards	811	^(a)	816		—	—		—		—		—		—		—
State
State net operating losses	4,103	^(b)	1,544	^(b)	—	224	^(c)	395	^(d)	1,492	^(e)	192	^(f)	772	^(g)	365	^(h)
Deferred taxes on state tax attributes (net)	272		104		—	18		26		102		12		52		26
Valuation allowance on state tax attributes	35		26		—	—		1		6		—		—		—

__________


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


(b)	Exelon’s and Generation's state net operating losses and credit carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2019.


(c)	PECO's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2031.


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


(e)	PHI's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2036.


(f)	Pepco's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2033.


(g)	DPL's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2030.


(h)	ACE's state net operating loss carryforwards, which are presented on a post-apportioned basis, will begin expiring in 2031.

Tabular Reconciliation of Unrecognized Tax Benefits

The following tables provide a reconciliation of the Registrants’ unrecognized tax benefits as of December 31, 2018, 2017 and 2016:



	Exelon			Generation			ComEd		PECO		BGE			PHI			Pepco			DPL			ACE
Unrecognized tax benefits at January 1, 2018	$	743		$	468		$	2	$	—	$	120		$	125		$	59		$	21		$	14
Change to positions that only affect timing	15			15			—		—		—			—			—			—			—
Increases based on tax positions prior to 2018	30			21			—		—		—			8			7			1			—
Decreases based on tax positions prior to 2018	(251		)	(36		)	—		—		(120		)	(88		)	(66		)	(22		)	—
Decrease from settlements with taxing authorities	(53		)	(53		)	—		—		—			—			—			—			—
Decreases from expiration of statute of limitations	(7		)	(7		)	—		—		—			—			—			—			—
Unrecognized tax benefits at December 31, 2018	$	477		$	408		$	2	$	—	$	—		$	45		$	—		$	—		$	14



	Exelon			Generation			ComEd			PECO		BGE		PHI			Pepco			DPL			ACE
Unrecognized tax benefits at January 1, 2017	$	916		$	490		$	(12	)	$	—	$	120	$	172		$	80		$	37		$	22
Increases based on tax positions prior to 2017	28			—			14			—		—		14			—			—			14
Decreases based on tax positions prior to 2017	(196		)	(17		)	—			—		—		(61		)	(21		)	(16		)	(22		)
Decrease from settlements with taxing authorities	(5		)	(5		)	—			—		—		—			—			—			—
Unrecognized tax benefits at December 31, 2017	$	743		$	468		$	2		$	—	$	120	$	125		$	59		$	21		$	14



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

As a result of a court decision issued in July 2018 to an unrelated taxpayer, Exelon's and Generation’s unrecognized federal and state tax benefits increased in the third quarter of 2018 by approximately $71 million. Approximately $20 million of this increase impacted Exelon's and Generation’s effective tax rate and resulted in a charge to earnings in the third quarter of 2018. Exelon’s and Generation’s unrecognized federal and state tax benefits decreased in the fourth quarter of 2018 by approximately $90 million due to the settlement of a federal audit issue with IRS Appeals. The recognition of these tax benefits decreased the effective tax rate at Exelon and Generation resulting in an income tax benefit of approximately $9 million.

In the fourth quarter of 2018, Exelon, Generation, BGE, PHI, Pepco, and DPL decreased their unrecognized state tax benefits by $241 million, $33 million, $120 million, $88 million, $66 million, and $22 million, respectively, due to the receipt of favorable guidance with respect to the deductibility of certain depreciable fixed assets. The recognition of these tax benefits decreased the effective tax rate at Exelon and Generation resulting in an income tax benefit of approximately $26 million. The recognition of the tax benefits related to BGE, PHI, Pepco, and DPL was offset by corresponding regulatory liabilities and that portion had no immediate impact to their effective tax rate.

Exelon established a liability for an uncertain tax position associated with the tax deductibility of certain merger commitments incurred by Exelon in connection with the acquisitions of Constellation in 2012 and PHI in 2016. In the first quarter 2017, as a part of its examination of Exelon's return, the IRS National Office issued guidance concurring with Exelon's position that the merger commitments were deductible. As a result, Exelon, Generation, PHI, Pepco, DPL, and ACE decreased their liability for unrecognized tax benefits by $146 million, $19 million, $59 million, $21 million, $16 million and $22 million, respectively, in the first quarter of 2017 resulting in a benefit to Income taxes on Exelon's, Generation's, PHI's, Pepco's, DPL's, and ACE's Consolidated Statements of Operations and Comprehensive Income and corresponding decreases in their effective tax rates.

Exelon reduced the liability related to the uncertain tax position associated with the like-kind exchange in the second quarter of 2017.

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

Exelon, Generation, ComEd and PHI have $463 million, $408 million, $2 million and $31 million, respectively, of unrecognized tax benefits at December 31, 2018 that, if recognized, would decrease the effective tax rate. PHI has $21 million of unrecognized state tax benefits at December 31, 2018 that, if recognized, $14 million would be in the form of a net operating loss carryforward, which is expected to require a full valuation allowance based on present circumstances. PHI and ACE have $14 million of unrecognized tax benefits at December 31, 2018 that, if recognized, may be included in future base rates and that portion would have no impact to the effective tax rate.

Exelon, Generation, ComEd and PHI had $523 million, $461 million, $2 million and $32 million, respectively, of unrecognized tax benefits at December 31, 2017 that, if recognized, would decrease the effective tax rate. BGE, PHI, Pepco, DPL, and ACE have $120 million, $94 million, $59 million, $21 million and $14 million of unrecognized tax benefits at December 31, 2017 that, if recognized, may be included in future base rates and that portion would have no impact to the effective tax rate.

Exelon, Generation, PHI, Pepco, DPL, and ACE had $633 million, $483 million, $93 million, $21 million, $16 million, and $22 million, respectively, of unrecognized tax benefits at December 31, 2016 that, if recognized, would decrease the effective tax rate. BGE, PHI, Pepco and DPL had $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.

Unrecognized tax benefits that if recognized would affect only the timing of tax payments

There are no unrecognized tax benefits as of December 31, 2018 that affect only the timing of tax payments.

Exelon and Generation had $7 million of unrecognized tax benefits at December 31, 2017 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 $83 million, $7 million and $(12) million of unrecognized tax benefits 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.

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.

Reasonably possible the total amount of unrecognized tax benefits could significantly increase or decrease within 12 months after the reporting date

Like-Kind Exchange

As of December 31, 2018, Exelon and ComEd have approximately $33 million and $2 million, respectively, of unrecognized federal and state income tax benefits related to the like-kind exchange litigation described further below. If Exelon does not appeal the October 2018 U.S. Court of Appeals for the Seventh Circuit's decision to the U.S. Supreme Court, Exelon's and ComEd's unrecognized tax benefits will decrease in the first quarter of 2019. See below for further details.

Settlement of Income Tax Audits, Refund Claims, and Litigation

As of December 31, 2018, Exelon, Generation, PHI and ACE have approximately $425 million, $411 million, $14 million, and $14 million respectively, 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, potential settlements, refund claims, and the outcomes of pending court cases. Of the above unrecognized tax benefits, Exelon and Generation have $411 million that, if recognized, would decrease the effective tax rate. The unrecognized tax benefit related to PHI and ACE, 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		PHI		Pepco		DPL		ACE
December 31, 2018	$	236	$	(2	)	$	4	$	—	$	—	$	1	$	—	$	—	$	—
December 31, 2017	233		(3		)	4		—		—		2		—		—		—



Net penalties payable as of	Exelon			Generation		ComEd		PECO		BGE		PHI		Pepco		DPL		ACE
December 31, 2018	$	(17	)	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
December 31, 2017	(17		)	—		—		—		—		—		—		—		—

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, 2018	$	(3	)	$	—		$	—	$	—	$	—	$	—	$	—	$	—
December 31, 2017	37			(1		)	11		—		—		—		—		—
December 31, 2016	165			(13		)	117		—		—		6		—		(1		)



Net penalty expense (income) for the years ended	Exelon			Generation		ComEd		PECO		BGE		Pepco		DPL		ACE
December 31, 2018	$	—		$	—	$	—	$	—	$	—	$	—	$	—	$	—
December 31, 2017	(2		)	—		—		—		—		—		—		—
December 31, 2016	106			—		86		—		—		—		—		—



	Successor							Predecessor
PHI	December 31, 2018		December 31, 2017		March 24, 2016 to December 31, 2016			January 1, 2016 to March 23, 2016
Net interest expense	$	—	$	—	$	(2	)	$	—

Description of tax years open to assessment by major jurisdiction



Taxpayer	Open Years
Exelon (and predecessors) and subsidiaries consolidated federal income tax returns	1999, 2001-2017
PHI Holdings and subsidiaries consolidated federal income tax returns	2013, 2015-2016
Exelon and subsidiaries Illinois unitary income tax returns	2010-2017
Constellation combined New York corporate income tax returns	2010-March 2012
Exelon combined New York corporate income tax returns	2011-2017
Exelon New Jersey corporate income tax returns	2013-2017
Exelon Pennsylvania corporate net income tax returns	2011-2017
PECO Pennsylvania separate company returns	2015-2017
DPL Delaware separate company returns	Same as federal
ACE New Jersey separate company returns	2014-2017
Exelon and subsidiaries District of Columbia corporate income tax returns	2015-2017
PHI Holdings and subsidiaries District of Columbia corporate income tax returns	2015-2016
Various separate company Maryland corporate net income tax returns	Same as federal

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. As previously disclosed, Exelon terminated its investment in one of the leases in 2014 and the remaining two leases were terminated in 2016.

The IRS asserted that the Exelon purchase and leaseback transaction was substantially similar to a leasing transaction, known as a SILO, which is a listed transaction that the IRS has identified as a potentially abusive tax shelter. Thus, they disagreed with Exelon's position and asserted that the entire gain of approximately $1.2 billion was taxable in 1999. In 2013, the IRS issued a notice of deficiency to Exelon and Exelon filed a petition to initiate litigation in the United States Tax Court. In 2016, the Tax Court held that Exelon was not entitled to defer gain on the transaction. In addition to the tax and interest related to the gain deferral, the Tax Court also ruled that Exelon was liable for $90 million in penalties and interest on the penalties. Exelon has fully paid the amounts assessed resulting from the Tax Court decision.

In September 2017, Exelon appealed the Tax Court decision to the U.S. Court of Appeals for the Seventh Circuit. In October 2018, the U.S. Court of Appeals for the Seventh Circuit affirmed the Tax Court’s decision. Exelon filed a petition seeking rehearing of the Seventh Circuit’s decision, but the Seventh Circuit denied that petition in December 2018. Exelon has until March 5, 2019 to seek a further review by the U.S. Supreme Court.

State Income Tax Law Changes

On April 24, 2018, Maryland enacted companion bills, House Bill 1794 and Senate Bill 1090, providing for a phase in of a single sales factor apportionment formula from the current three factor formula for determining an entity's Maryland state income taxes. The single sales factor will be fully phased in by 2022.

In the second quarter of 2018, Exelon, Generation, PHI, Pepco and DPL recorded a one-time increase to deferred income taxes of approximately $16 million, $5 million, $17 million, $16 million and $1 million, respectively. At PHI, Pepco and DPL, the increase to the Maryland deferred income tax liability was offset by regulatory assets. Further, the change in tax law is not expected to have a material ongoing impact to Exelon's, Generation's, PHI's, Pepco's or DPL's future results of operations.

Long-Term Marginal State Income Tax Rate (Exelon, Generation, PHI and Pepco)

In the third quarter of 2018, Exelon reviewed and updated its marginal state income tax rates based on 2017 state apportionment rates. As a result of the rate changes, in the third quarter of 2018, Exelon, Generation, PHI and DPL recorded a one-time decrease to deferred income taxes of approximately $50 million, $53 million, $4 million and $2 million respectively. Pepco recorded a one-time increase to deferred income taxes of approximately $1 million. Exelon, PHI and DPL recorded a corresponding regulatory liability of approximately $1 million, $1 million and $2 million respectively. Pepco recorded a corresponding regulatory asset of approximately $1 million. Further, Exelon, Generation and PHI recorded a decrease to income tax expense (net of federal taxes) of approximately $50 million, $53 million and $3 million.

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 2018, Generation, PECO, BGE, PHI and ComEd recorded an allocation of federal tax benefits from Exelon under the Tax Sharing Agreement of $155 million, $48 million, $26 million, $2 million and $1 million respectively. Pepco, DPL, and ACE 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 2017, Generation, PECO, BGE, and PHI recorded an allocation of federal tax benefits from Exelon under the Tax Sharing Agreement of $102 million, $16 million, $10 million and $7 million respectively. ComEd, Pepco, DPL, and ACE 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 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.