10-K 1 d129102d10k.htm FORM 10-K Form 10-K
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2015

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File

        Number

  

Exact Name of Registrant as Specified in its Charter;

State of Incorporation; Address of Principal

Executive Offices; and Telephone Number

   IRS Employer
Identification Number

1-16169

  

EXELON CORPORATION

(a Pennsylvania corporation)

10 South Dearborn Street

P.O. Box 805379

Chicago, Illinois 60680-5379

(800) 483-3220

   23-2990190

333-85496

  

EXELON GENERATION COMPANY, LLC

(a Pennsylvania limited liability company)

300 Exelon Way

Kennett Square, Pennsylvania 19348-2473

(610) 765-5959

   23-3064219

1-1839

  

COMMONWEALTH EDISON COMPANY

(an Illinois corporation)

440 South LaSalle Street

Chicago, Illinois 60605-1028

(312) 394-4321

   36-0938600

000-16844

  

PECO ENERGY COMPANY

(a Pennsylvania corporation)

P.O. Box 8699

2301 Market Street

Philadelphia, Pennsylvania 19101-8699

(215) 841-4000

   23-0970240

1-1910

  

BALTIMORE GAS AND ELECTRIC COMPANY

(a Maryland corporation)

2 Center Plaza

110 West Fayette Street

Baltimore, Maryland 21201-3708

(410) 234-5000

   52-0280210

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

   Name of Each Exchange on
Which Registered

EXELON CORPORATION:

  

Common Stock, without par value

   New York and Chicago

Series A Junior Subordinated Debentures

   New York

Corporate Units

   New York

PECO ENERGY COMPANY:

  

Trust Receipts of PECO Energy Capital Trust III, each representing a 7.38% Cumulative Preferred Security, Series D, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by PECO Energy Company

   New York

BALTIMORE GAS AND ELECTRIC COMPANY:

  

6.20% Trust Preferred Securities ($25 liquidation amount per preferred security) issued by BGE Capital Trust II, fully and unconditionally guaranteed, by Baltimore Gas and Electric Company

   New York

 

Securities registered pursuant to Section 12(g) of the Act:

 

COMMONWEALTH EDISON COMPANY:

Common Stock Purchase Warrants, 1971 Warrants and Series B Warrants


Table of Contents

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Exelon Corporation

  Yes   x    No   ¨

Exelon Generation Company, LLC

  Yes   x    No   ¨

Commonwealth Edison Company

  Yes   x    No   ¨

PECO Energy Company

  Yes   x    No   ¨

Baltimore Gas and Electric Company

  Yes   x    No   ¨

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Exelon Corporation

  Yes   ¨    No   x

Exelon Generation Company, LLC

  Yes   ¨    No   x

Commonwealth Edison Company

  Yes   ¨    No   x

PECO Energy Company

  Yes   ¨    No   x

Baltimore Gas and Electric Company

  Yes   ¨    No   x

 

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

     Large Accelerated    Accelerated    Non-Accelerated    Smaller Reporting
Company

Exelon Corporation

   ü         

Exelon Generation Company, LLC

         ü   

Commonwealth Edison Company

         ü   

PECO Energy Company

         ü   

Baltimore Gas and Electric Company

         ü   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Exelon Corporation

    Yes   ¨      No   x 

Exelon Generation Company, LLC

    Yes   ¨      No   x 

Commonwealth Edison Company

    Yes   ¨      No   x 

PECO Energy Company

    Yes   ¨      No   x 

Baltimore Gas and Electric Company

    Yes   ¨      No   x 

 

The estimated aggregate market value of the voting and non-voting common equity held by nonaffiliates of each registrant as of June 30, 2015 was as follows:

 

Exelon Corporation Common Stock, without par value

   $ 27,049,825,290

Exelon Generation Company, LLC

   Not applicable

Commonwealth Edison Company Common Stock, $12.50 par value

   No established market

PECO Energy Company Common Stock, without par value

   None

Baltimore Gas and Electric Company, without par value

   None

 

The number of shares outstanding of each registrant’s common stock as of January 31, 2016 was as follows:

 

Exelon Corporation Common Stock, without par value

   919,924,742

Exelon Generation Company, LLC

   not applicable

Commonwealth Edison Company Common Stock, $12.50 par value

   127,016,973

PECO Energy Company Common Stock, without par value

   170,478,507

Baltimore Gas and Electric Company, without par value

   1,000

 

Documents Incorporated by Reference

Portions of the Exelon Proxy Statement for the 2016 Annual Meeting of

Shareholders and the Commonwealth Edison Company 2016 information statement are

incorporated by reference in Part III.

 

Exelon Generation Company, LLC, PECO Energy Company and Baltimore Gas and Electric Company meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form in the reduced disclosure format.


Table of Contents

TABLE OF CONTENTS

 

     Page No.  

GLOSSARY OF TERMS AND ABBREVIATIONS

     1   

FILING FORMAT

     5   

FORWARD-LOOKING STATEMENTS

     5   

WHERE TO FIND MORE INFORMATION

     5   

PART I

     

ITEM 1.

  

BUSINESS

     6   
  

General

     6   
  

Exelon Generation Company, LLC

     7   
  

Commonwealth Edison Company

     19   
  

PECO Energy Company

     19   
  

Baltimore Gas and Electric Company

     19   
  

Employees

     23   
  

Environmental Regulation

     24   
  

Executive Officers of the Registrants

     30   

ITEM 1A.

  

RISK FACTORS

     34   

ITEM 1B.

  

UNRESOLVED STAFF COMMENTS

     61   

ITEM 2.

  

PROPERTIES

     62   
  

Exelon Generation Company, LLC

     62   
  

Commonwealth Edison Company

     65   
  

PECO Energy Company

     65   
  

Baltimore Gas and Electric Company

     66   

ITEM 3.

  

LEGAL PROCEEDINGS

     67   
  

Exelon Corporation

     67   
  

Exelon Generation Company, LLC

     67   
  

Commonwealth Edison Company

     67   
  

PECO Energy Company

     67   
  

Baltimore Gas and Electric Company

     67   

ITEM 4.

  

MINE SAFETY DISCLOSURES

     67   

PART II

     

ITEM 5.

  

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     68   

ITEM 6.

  

SELECTED FINANCIAL DATA

     72   
  

Exelon Corporation

     72   
  

Exelon Generation Company, LLC

     73   
  

Commonwealth Edison Company

     74   
  

PECO Energy Company

     74   
  

Baltimore Gas and Electric Company

     75   

ITEM 7.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     76   
  

Exelon Corporation

     76   
  

Executive Overview

     76   
  

Critical Accounting Policies and Estimates

     100   
  

Results of Operations

     117   
  

Liquidity and Capital Resources

     148   
  

Exelon Generation Company, LLC

     182   
  

Commonwealth Edison Company

     184   
  

PECO Energy Company

     186   
  

Baltimore Gas and Electric Company

     188   


Table of Contents
     Page No.  

ITEM 7A.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     169   
  

Exelon Corporation

     169   
  

Exelon Generation Company, LLC

     170   
  

Commonwealth Edison Company

     171   
  

PECO Energy Company

     171   
  

Baltimore Gas and Electric Company

     172   

ITEM 8.

  

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     190   
  

Exelon Corporation

     201   
  

Exelon Generation Company, LLC

     207   
  

Commonwealth Edison Company

     213   
  

PECO Energy Company

     219   
  

Baltimore Gas and Electric Company

     225   
  

Combined Notes to Consolidated Financial Statements

     230   
  

1. Significant Accounting Policies

     230   
  

2. Variable Interest Entities

     247   
  

3. Regulatory Matters

     256   
  

4. Mergers, Acquisitions, and Dispositions

     283   
  

5. Investment in Constellation Energy Nuclear Group, LLC

     289   
  

6. Accounts Receivable

     293   
  

7. Property, Plant and Equipment

     294   
  

8. Impairment of Long-Lived Assets

     297   
  

9. Implications of Potential Early Plant Retirements

     300   
  

10. Jointly Owned Electric Utility Plant

     301   
  

11. Intangible Assets

     302   
  

12. Fair Value of Financial Assets and Liabilities

     307   
  

13. Derivative Financial Instruments

     322   
  

14. Debt and Credit Agreements

     338   
  

15. Income Taxes

     348   
  

16. Asset Retirement Obligations

     356   
  

17. Retirement Benefits

     365   
  

18. Contingently Redeemable Noncontrolling Interest

     381   
  

19. Shareholder’s Equity

     382   
  

20. Stock-Based Compensation Plans

     383   
  

21. Earnings Per Share

     389   
  

22. Changes in Accumulated Other Comprehensive Income

     390   
  

23. Commitments and Contingencies

     394   
  

24. Supplemental Financial Information

     411   
  

25. Segment Information

     419   
  

26. Related Party Transactions

     424   
  

27. Quarterly Data

     432   

ITEM 9.

  

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     435   

ITEM 9A.

  

CONTROLS AND PROCEDURES

     435   
  

Exelon Corporation

     435   
  

Exelon Generation Company, LLC

     435   
  

Commonwealth Edison Company

     435   
  

PECO Energy Company

     435   
  

Baltimore Gas and Electric Company

     435   

ITEM 9B.

  

OTHER INFORMATION

     436   
  

Exelon Corporation

     436   
  

Exelon Generation Company, LLC

     436   
  

Commonwealth Edison Company

     436   
  

PECO Energy Company

     436   
  

Baltimore Gas and Electric Company

     436   


Table of Contents
     Page No.  

PART III

     

ITEM 10.

  

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     437   

ITEM 11.

  

EXECUTIVE COMPENSATION

     438   

ITEM 12.

  

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     439   

ITEM 13.

  

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

     440   

ITEM 14.

  

PRINCIPAL ACCOUNTING FEES AND SERVICES

     441   

PART IV

     

ITEM 15.

   EXHIBITS, FINANCIAL STATEMENT SCHEDULES      442   

SIGNATURES

     476   
  

Exelon Corporation

     476   
  

Exelon Generation Company, LLC

     477   
  

Commonwealth Edison Company

     478   
  

PECO Energy Company

     479   
  

Baltimore Gas and Electric Company

     480   


Table of Contents

GLOSSARY OF TERMS AND ABBREVIATIONS

 

Exelon Corporation and Related Entities

Exelon

   Exelon Corporation

Generation

   Exelon Generation Company, LLC

ComEd

   Commonwealth Edison Company

PECO

   PECO Energy Company

BGE

   Baltimore Gas and Electric Company

BSC

   Exelon Business Services Company, LLC

Exelon Corporate

   Exelon’s holding company

CENG

   Constellation Energy Nuclear Group, LLC

Constellation

   Constellation Energy Group, Inc.

Antelope Valley, AVSR

   Antelope Valley Solar Ranch One

Exelon Transmission Company

   Exelon Transmission Company, LLC

Exelon Wind

   Exelon Wind, LLC and Exelon Generation Acquisition Company, LLC

Ventures

   Exelon Ventures Company, LLC

AmerGen

   AmerGen Energy Company, LLC

BondCo

   RSB BondCo LLC

ComEd Financing III

   ComEd Financing III

PEC L.P.

   PECO Energy Capital, L.P.

PECO Trust III

   PECO Energy Capital Trust III

PECO Trust IV

   PECO Energy Capital Trust IV

BGE Trust II

   BGE Capital Trust II

PETT

   PECO Energy Transition Trust

Registrants

   Exelon, Generation, ComEd, PECO and BGE, collectively

Other Terms and Abbreviations

1998 restructuring settlement

   PECO’s 1998 settlement of its restructuring case mandated by the Competition Act

Act 11

   Pennsylvania Act 11 of 2012

Act 129

   Pennsylvania Act 129 of 2008

AEC

   Alternative Energy Credit that is issued for each megawatt hour of generation from a qualified alternative energy source

AEPS

   Pennsylvania Alternative Energy Portfolio Standards

AEPS Act

   Pennsylvania Alternative Energy Portfolio Standards Act of 2004, as amended

AESO

   Alberta Electric Systems Operator

AFUDC

   Allowance for Funds Used During Construction

ALJ

   Administrative Law Judge

AMI

   Advanced Metering Infrastructure

AMP

   Advanced Metering Program

ARC

   Asset Retirement Cost

ARO

   Asset Retirement Obligation

ARP

   Title IV Acid Rain Program

ARRA of 2009

   American Recovery and Reinvestment Act of 2009

Block contracts

   Forward Purchase Energy Block Contracts

CAIR

   Clean Air Interstate Rule

CAISO

   California ISO

CAMR

   Federal Clean Air Mercury Rule

CAP

   Customer Assistance Program

 

1


Table of Contents

Other Terms and Abbreviations

CERCLA

   Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended

CFL

   Compact Fluorescent Light

Clean Air Act

   Clean Air Act of 1963, as amended

Clean Water Act

   Federal Water Pollution Control Amendments of 1972, as amended

Competition Act

   Pennsylvania Electricity Generation Customer Choice and Competition Act of 1996

CPI

   Consumer Price Index

CPUC

   California Public Utilities Commission

CSAPR

   Cross-State Air Pollution Rule

CTC

   Competitive Transition Charge

D.C. Circuit Court

   United States Court of Appeals for the District of Columbia Circuit

DOE

   United States Department of Energy

DOJ

   United States Department of Justice

DSP

   Default Service Provider

DSP Program

   Default Service Provider Program

EDF

   Electricite de France SA and its subsidiaries

EE&C

   Energy Efficiency and Conservation/Demand Response

EGR

   ExGen Renewables I, LLC

EGS

   Electric Generation Supplier

EGTP

   ExGen Texas Power, LLC

EIMA

   Illinois Energy Infrastructure Modernization Act

EPA

   United States Environmental Protection Agency

ERCOT

   Electric Reliability Council of Texas

ERISA

   Employee Retirement Income Security Act of 1974, as amended

EROA

   Expected Rate of Return on Assets

ESPP

   Employee Stock Purchase Plan

FASB

   Financial Accounting Standards Board

FERC

   Federal Energy Regulatory Commission

FRCC

   Florida Reliability Coordinating Council

FTC

   Federal Trade Commission

GAAP

   Generally Accepted Accounting Principles in the United States

GDP

   Gross Domestic Product

GHG

   Greenhouse Gas

GRT

   Gross Receipts Tax

GSA

   Generation Supply Adjustment

GWh

   Gigawatt Hour

HAP

   Hazardous Air Pollutants

Health Care Reform Acts

   Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010

IBEW

   International Brotherhood of Electrical Workers

ICC

   Illinois Commerce Commission

ICE

   Intercontinental Exchange

Illinois Act

   Illinois Electric Service Customer Choice and Rate Relief Law of 1997

Illinois EPA

   Illinois Environmental Protection Agency

Illinois Settlement Legislation

   Legislation enacted in 2007 affecting electric utilities in Illinois

Integrys

   Integrys Energy Services, Inc.

IPA

   Illinois Power Agency

IRC

   Internal Revenue Code

 

2


Table of Contents

Other Terms and Abbreviations

IRS

   Internal Revenue Service

ISO

   Independent System Operator

ISO-NE

   ISO New England Inc.

ISO-NY

   ISO New York

kV

   Kilovolt

kW

   Kilowatt

kWh

   Kilowatt-hour

LIBOR

   London Interbank Offered Rate

LILO

   Lease-In, Lease-Out

LLRW

   Low-Level Radioactive Waste

LTIP

   Long-Term Incentive Plan

MATS

   Mercury and Air Toxics Standard Rule

MBR

   Market Based Rates Incentive

MDE

   Maryland Department of the Environment

MDPSC

   Maryland Public Service Commission

MGP

   Manufactured Gas Plant

MISO

   Midcontinent Independent System Operator, Inc.

mmcf

   Million Cubic Feet

Moody’s

   Moody’s Investor Service

MOPR

   Minimum Offer Price Rule

MRV

   Market-Related Value

MW

   Megawatt

MWh

   Megawatt Hour

NAAQS

   National Ambient Air Quality Standards

n.m.

   not meaningful

NAV

   Net Asset Value

NDT

   Nuclear Decommissioning Trust

NEIL

   Nuclear Electric Insurance Limited

NERC

   North American Electric Reliability Corporation

NGS

   Natural Gas Supplier

NJDEP

   New Jersey Department of Environmental Protection

Non-Regulatory Agreements Units

   Nuclear generating units or portions thereof whose decommissioning-related activities are not subject to contractual elimination under regulatory accounting including Calvert Cliffs, Nine Mile Point, Ginna, Clinton, Oyster Creek, Three Mile Island, Zion (a former ComEd unit), and portions of Peach Bottom (a former PECO unit)

NOSA

   Nuclear Operating Services Agreement

NOV

   Notice of Violation

NPDES

   National Pollutant Discharge Elimination System

NRC

   Nuclear Regulatory Commission

NSPS

   New Source Performance Standards

NWPA

   Nuclear Waste Policy Act of 1982

NYMEX

   New York Mercantile Exchange

OCI

   Other Comprehensive Income

OIESO

   Ontario Independent Electricity System Operator

OPEB

   Other Postretirement Employee Benefits

PA DEP

   Pennsylvania Department of Environmental Protection

PAPUC

   Pennsylvania Public Utility Commission

PGC

   Purchased Gas Cost Clause

PHI

   Pepco Holdings, Inc.

 

3


Table of Contents

Other Terms and Abbreviations

PJM

   PJM Interconnection, LLC

POLR

   Provider of Last Resort

POR

   Purchase of Receivables

PPA

   Power Purchase Agreement

PPL

   PPL Holtwood, LLC

Price-Anderson Act

   Price-Anderson Nuclear Industries Indemnity Act of 1957

PRP

   Potentially Responsible Parties

PSEG

   Public Service Enterprise Group Incorporated

PURTA

   Pennsylvania Public Realty Tax Act

PV

   Photovoltaic

RCRA

   Resource Conservation and Recovery Act of 1976, as amended

REC

   Renewable Energy Credit which is issued for each megawatt hour of generation from a qualified renewable energy source

Regulatory Agreement Units

   Nuclear generating units whose decommissioning-related activities are subject to contractual elimination under regulatory accounting including the former ComEd units (Braidwood, Byron, Dresden, LaSalle, Quad Cities) and the former PECO units (Limerick, Peach Bottom, Salem)

RES

   Retail Electric Suppliers

RFP

   Request for Proposal

Rider

   Reconcilable Surcharge Recovery Mechanism

RGGI

   Regional Greenhouse Gas Initiative

RMC

   Risk Management Committee

ROE

   Return on Common Equity

RPM

   PJM Reliability Pricing Model

RPS

   Renewable Energy Portfolio Standards

RTEP

   Regional Transmission Expansion Plan

RTO

   Regional Transmission Organization

S&P

   Standard & Poor’s Ratings Services

SEC

   United States Securities and Exchange Commission

Senate Bill 1

   Maryland Senate Bill 1

SERC

   SERC Reliability Corporation (formerly Southeast Electric Reliability Council)

SERP

   Supplemental Employee Retirement Plan

SGIG

   Smart Grid Investment Grant

SGIP

   Smart Grid Initiative Program

SILO

   Sale-In, Lease-Out

SMP

   Smart Meter Program

SMPIP

   Smart Meter Procurement and Installation Plan

SNF

   Spent Nuclear Fuel

SOA

   Society of Actuaries

SOS

   Standard Offer Service

SPP

   Southwest Power Pool

Tax Relief Act of 2010

   Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Upstream

   Natural gas and oil exploration and production activities

VIE

   Variable Interest Entity

WECC

   Western Electric Coordinating Council

 

4


Table of Contents

FILING FORMAT

 

This combined Annual Report on Form 10-K is being filed separately by the Registrants. Information contained herein relating to any individual Registrant is filed by such Registrant on its own behalf. No Registrant makes any representation as to information relating to any other Registrant.

 

FORWARD-LOOKING STATEMENTS

 

This Report contains certain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. The factors that could cause actual results to differ materially from the forward-looking statements made by a Registrants include those factors discussed herein, including those factors discussed with respect to such Registrant discussed in (a) ITEM 1A. Risk Factors, (b) ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and (c) ITEM 8. Financial Statements and Supplementary Data: Note 23; and (d) other factors discussed in filings with the SEC by the Registrants. Readers are cautioned not to place undue reliance on these forward-looking statements, which apply only as of the date of this Report. None of the Registrants undertakes any obligation to publicly release any revision to its forward-looking statements to reflect events or circumstances after the date of this Report.

 

WHERE TO FIND MORE INFORMATION

 

The public may read and copy any reports or other information that the Registrants file with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. These documents are also available to the public from commercial document retrieval services, the website maintained by the SEC at www.sec.gov and the Registrants’ websites at www.exeloncorp.com. Information contained on the Registrants’ websites shall not be deemed incorporated into, or to be a part of, this Report.

 

5


Table of Contents

PART I

 

ITEM 1. BUSINESS

 

General

 

Corporate Structure and Business and Other Information

 

Exelon, incorporated in Pennsylvania in February 1999, is a utility services holding company engaged, through Generation, in the energy generation and power marketing business, and through ComEd, PECO and BGE, in the energy delivery businesses discussed below. Exelon’s principal executive offices are located at 10 South Dearborn Street, Chicago, Illinois 60603, and its telephone number is 800-483-3220.

 

Generation

 

Generation’s integrated business consists of the generation, physical delivery and marketing of power across multiple geographical regions through its customer-facing business, Constellation, which sells electricity and natural gas to both wholesale and retail customers. Generation also sells renewable energy and other energy-related products and services, and engages in natural gas and oil exploration and production activities (Upstream). Generation has six reportable segments consisting of the Mid-Atlantic, Midwest, New England, New York, ERCOT and Other Power Regions.

 

Generation was formed in 2000 as a Pennsylvania limited liability company. Generation began operations as a result of a corporate restructuring, effective January 1, 2001, in which Exelon separated its generation and other competitive businesses from its regulated energy delivery businesses at ComEd and PECO.

 

Generation’s principal executive offices are located at 300 Exelon Way, Kennett Square, Pennsylvania 19348, and its telephone number is 610-765-5959.

 

ComEd

 

ComEd’s energy delivery business consists of the purchase and regulated retail sale of electricity and the provision of electricity transmission and distribution services to retail customers in northern Illinois, including the City of Chicago.

 

ComEd was organized in the State of Illinois in 1913 as a result of the merger of Cosmopolitan Electric Company into the original corporation named Commonwealth Edison Company, which was incorporated in 1907. ComEd’s principal executive offices are located at 440 South LaSalle Street, Chicago, Illinois 60605, and its telephone number is 312-394-4321.

 

PECO

 

PECO’s energy delivery business consists of the purchase and regulated retail sale of electricity and the provision of electricity transmission and distribution services to retail customers in southeastern Pennsylvania, including the City of Philadelphia, as well as the purchase and regulated retail sale of natural gas and the provision of natural gas distribution services to retail customers in the Pennsylvania counties surrounding the City of Philadelphia.

 

PECO was incorporated in Pennsylvania in 1929. PECO’s principal executive offices are located at 2301 Market Street, Philadelphia, Pennsylvania 19103, and its telephone number is 215-841-4000.

 

6


Table of Contents

BGE

 

BGE’s energy delivery business consists of the purchase and regulated retail sale of electricity and the provision of electricity transmission and distribution services to retail customers in central Maryland, including the City of Baltimore, as well as the purchase and regulated retail sale of natural gas and the provision of natural gas distribution services to retail customers in central Maryland, including the City of Baltimore.

 

BGE was incorporated in Maryland in 1906. BGE’s principal executive offices are located at 110 West Fayette Street, Baltimore, Maryland 21201, and its telephone number is 410-234-5000.

 

Operating Segments

 

See Note 25—Segment Information of the Combined Notes to Consolidated Financial Statements for additional information on Exelon’s operating segments.

 

Pending Merger with Pepco Holdings, Inc.

 

On April 29, 2014, Exelon and PHI signed an agreement and plan of merger (as subsequently amended and restated as of July 18, 2014) to combine the two companies in an all cash transaction. The resulting company will retain the Exelon name and be headquartered in Chicago. The merger is expected to be completed in the first quarter of 2016. See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements for additional information on the pending transaction.

 

Generation

 

Generation, one of the largest competitive electric generation companies in the United States as measured by owned and contracted MW, physically delivers and markets power across multiple geographic regions through its customer-facing business, Constellation. Constellation sells electricity and natural gas, including renewable energy, to both wholesale and retail customers. The retail sales include commercial, industrial and residential customers. Generation leverages its energy generation portfolio to ensure delivery of energy to both wholesale and retail customers under long-term and short-term contracts, and in wholesale power markets. Generation operates in well-developed energy markets and employs an integrated hedging strategy to manage commodity price volatility. Generation’s fleet, including its nuclear plants which consistently operate at high capacity factors, also provides geographic and supply source diversity. These factors help Generation mitigate the challenging conditions emanating from competitive energy markets. Generation’s customers include distribution utilities, municipalities, cooperatives, financial institutions, and commercial, industrial, governmental, and residential customers in competitive markets. Generation’s customer facing activities foster development and delivery of other innovative energy-related products and services for its customers. Generation also engages in natural gas and oil exploration and production activities (Upstream).

 

Generation is a public utility under the Federal Power Act and is subject to FERC’s exclusive ratemaking jurisdiction over wholesale sales of electricity and the transmission of electricity in interstate commerce. Under the Federal Power Act, FERC has the authority to grant or deny market-based rates for sales of energy, capacity and ancillary services to ensure that such sales are just and reasonable. FERC’s jurisdiction over ratemaking also includes the authority to suspend the market-based rates of utilities and set cost-based rates should FERC find that its previous grant of market-based rates authority is no longer just and reasonable. Other matters subject to FERC jurisdiction include, but are not limited to, third-party financings; review of mergers; dispositions of jurisdictional facilities and acquisitions of securities of another public utility or an existing operational generating facility; affiliate transactions; intercompany financings and cash management arrangements; certain internal corporate

 

7


Table of Contents

reorganizations; and certain holding company acquisitions of public utility and holding company securities. Additionally, ERCOT is not subject to regulation by FERC but performs a similar function in Texas to that performed by RTOs in markets regulated by FERC. Specific operations of Generation are also subject to the jurisdiction of various other Federal, state, regional and local agencies, including the NRC and Federal and state environmental protection agencies. Additionally, Generation is subject to mandatory reliability standards promulgated by the NERC, with the approval of FERC.

 

RTOs and ISOs exist in a number of regions to provide transmission service across multiple transmission systems. PJM, MISO, ISO-NE and SPP, have been approved by FERC as RTOs, and CAISO and ISO-NY have been approved as ISOs. These entities are responsible for regional planning, managing transmission congestion, developing wholesale markets for energy and capacity, maintaining reliability, market monitoring, the scheduling of physical power sales brokered through ICE and NYMEX and the elimination or reduction of redundant transmission charges imposed by multiple transmission providers when wholesale customers take transmission service across several transmission systems.

 

Constellation Energy Nuclear Group, Inc.

 

Generation owns a 50.01% interest in CENG, a joint venture with EDF. CENG is governed by a board of ten directors, five of which are appointed by Generation and five by EDF. CENG owns a total of five nuclear generating facilities on three sites, Calvert Cliffs, R.E. Ginna and Nine Mile Point. CENG’s ownership share in the total capacity of these units is 4,007 MW. See ITEM 2. PROPERTIES for additional information on these sites.

 

Generation and EDF also entered into a Put Option Agreement on April 1, 2014, pursuant to which EDF has the option, exercisable beginning on January 1, 2016 and thereafter until June 30, 2022, to sell its 49.99% interest in CENG to Generation for a fair market value price determined by agreement of the parties, or absent agreement, a third-party arbitration process. In addition, under limited circumstances, the period for exercise of the put option may be extended for 18 months.

 

Prior to April 1, 2014, Exelon and Generation accounted for their investment in CENG under the equity method of accounting. The transfer of the nuclear operating licenses and the execution of the NOSA on April 1, 2014, resulted in the derecognition of the equity method investment in CENG and the recording of all assets, liabilities and EDF’s noncontrolling interest in CENG at fair value on a fully consolidated basis in Exelon’s and Generation’s Consolidated Balance Sheets. Refer to Note 5— Investment in Constellation Energy Nuclear Group, LLC of the Combined Notes to Consolidated Financial Statements for further information regarding the integration transaction.

 

Significant Acquisitions

 

Integrys Energy Services, Inc. On November 1, 2014, Generation acquired the competitive retail electric and natural gas business activities of Integrys Energy Group, Inc. through the purchase of all of the stock of its wholly owned subsidiary, Integrys Energy Services, Inc. (Integrys) for a purchase price of $332 million, including net working capital. The generation and solar asset businesses of Integrys were excluded from the transaction. See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements for additional information on the above acquisition.

 

Merger with Constellation Energy Group, Inc. On March 12, 2012, Constellation merged into Exelon with Exelon continuing as the surviving corporation pursuant to the transactions contemplated by the Agreement and Plan of Merger. Since the merger transaction, Generation includes the former Constellation generation and customer supply operations.

 

8


Table of Contents

Antelope Valley Solar Ranch One. On September 30, 2011, Exelon completed the acquisition of all of the interests in Antelope Valley, a 242-MW solar project under development in northern Los Angeles County, California, from First Solar, Inc. The facility became fully operational in 2014. The project has a 25-year PPA with Pacific Gas & Electric Company for the full output of the plant, which has been approved by the CPUC. Total capitalized costs for the facility incurred through completion of the project were approximately $1.1 billion.

 

Wolf Hollow Generating Station. On August 24, 2011, Generation completed the acquisition of all of the equity interests of Wolf Hollow, LLC (Wolf Hollow), a combined-cycle natural gas-fired power plant in north Texas, for a purchase price of $311 million which increased Generation’s owned capacity within the ERCOT power market by 704 MWs.

 

Significant Dispositions

 

Asset Divestitures. As of December 31, 2015, Generation has sold certain generating assets with total pre-tax proceeds of $1.8 billion (after-tax proceeds of approximately $1.4 billion). The proceeds are expected to be used primarily to finance a portion of the acquisition of PHI.

 

Maryland Clean Coal Stations. On November 30, 2012, a subsidiary of Generation sold the Brandon Shores generating station and H.A. Wagner generating station in Anne Arundel County, Maryland, and the C.P. Crane generating station in Baltimore County, Maryland to Raven Power Holdings LLC, a subsidiary of Riverstone Holdings LLC to comply with certain of the regulatory approvals required by the merger with Constellation Energy Group, Inc. for net proceeds of approximately $371 million, which resulted in a pre-tax impairment charge of $272 million.

 

See Note 4—Mergers, Acquisitions, and Dispositions and Note 8—Impairment of Long-Lived Assets of the Combined Notes to Consolidated Financial Statements for additional information.

 

Generating Resources

 

At December 31, 2015, the generating resources of Generation consisted of the following:

 

Type of Capacity

   MW  

Owned generation assets (a)(b)

  

Nuclear

     19,460   

Fossil (primarily natural gas)

     9,682   

Renewable (c)

     3,599   
  

 

 

 

Owned generation assets

     32,741   

Long-term power purchase contracts

     7,419   
  

 

 

 

Total generating resources

     40,160   
  

 

 

 

 

(a) See “Fuel” for sources of fuels used in electric generation.
(b) Net generation capacity is stated at proportionate ownership share. See ITEM 2. PROPERTIES—Generation for additional information.
(c) Includes hydroelectric, wind, and solar generating assets.

 

Generation has six reportable segments, the Mid-Atlantic, Midwest, New England, New York, ERCOT and Other Power Regions, representing the different geographical areas in which Generation’s customer-facing activities are conducted and where Generation’s generating resources are located.

 

   

Mid-Atlantic represents operations in the eastern half of PJM, which includes Pennsylvania, New Jersey, Maryland, Virginia, West Virginia, Delaware, the District of Columbia and parts of North Carolina (approximately 36% of capacity).

 

9


Table of Contents
   

Midwest represents operations in the western half of PJM, which includes portions of Illinois, Indiana, Ohio, Michigan, Kentucky and Tennessee; and the United States footprint of MISO (excluding MISO’s Southern Region), which covers all or most of North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Wisconsin, and the remaining parts of Illinois, Indiana, Michigan and Ohio not covered by PJM; and parts of Montana, Missouri and Kentucky (approximately 37% of capacity).

 

   

New England represents the operations within ISO-NE covering the states of Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont (approximately 7% of capacity).

 

   

New York represents the operations within ISO-NY, which covers the state of New York in its entirety (approximately 3% of capacity).

 

   

ERCOT represents operations within Electric Reliability Council of Texas, covering most of the state of Texas (approximately 11% of capacity).

 

   

Other Power Regions is an aggregate of regions not considered individually significant (approximately 6% of capacity).

 

See Note 25—Segment Information of the Combined Notes to Consolidated Financial Statements for additional information on revenues from external customers and revenues net of purchased power and fuel expense for each of Generation’s reportable segments.

 

Nuclear Facilities

 

Generation has ownership interests in fourteen nuclear generating stations currently in service, consisting of 24 units with an aggregate of 19,460 MW of capacity. Generation wholly owns all of its nuclear generating stations, except for Quad Cities Generating Station (75% ownership), Peach Bottom Generating Station (50% ownership), and Salem Generating Station (Salem) (42.59% ownership), which are consolidated on Exelon’s and Generation’s financial statements relative to its proportionate ownership interest in each unit. In addition, Generation owns a 50.01% interest, collectively, in the CENG generating stations (Calvert Cliffs, Nine Mile Point [excluding LIPA’s 18% ownership interest in Nine Mile Point Unit 2] and R.E. Ginna) which are 100% consolidated on Exelon and Generation’s financial statements as of April 1, 2014. See Note 5—Investment in Constellation Energy Nuclear Group, LLC of the Combined Notes to Consolidated Financial Statements for additional information.

 

Generation’s nuclear generating stations are all operated by Generation, with the exception of the two units at Salem, which are operated by PSEG Nuclear, LLC (PSEG Nuclear), an indirect, wholly owned subsidiary of PSEG. In 2015, 2014 and 2013 electric supply (in GWh) generated from the nuclear generating facilities was 68%, 67% and 57%, respectively, of Generation’s total electric supply, which also includes fossil, hydroelectric and renewable generation and electric supply purchased for resale. The majority of this output was dispatched to support Generation’s wholesale and retail power marketing activities. See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for further discussion of Generation’s electric supply sources.

 

Nuclear Operations. Capacity factors, which are significantly affected by the number and duration of refueling and non-refueling outages, can have a significant impact on Generation’s results of operations. As the largest generator of nuclear power in the United States, Generation can negotiate favorable terms for the materials and services that its business requires. Generation’s operations from its nuclear plants have historically had minimal environmental impact and the plants have a safe operating history.

 

10


Table of Contents

During 2015, 2014 and 2013, the nuclear generating facilities operated by Generation achieved capacity factors of 93.7%, 94.3% and 94.1%, respectively. The capacity factors reflect ownership percentage of stations operated by Generation and include CENG as of April 1, 2014. Generation manages its scheduled refueling outages to minimize their duration and to maintain high nuclear generating capacity factors, resulting in a stable generation base for Generation’s wholesale and retail marketing and trading activities. During scheduled refueling outages, Generation performs maintenance and equipment upgrades in order to minimize the occurrence of unplanned outages and to maintain safe, reliable operations.

 

In addition to the maintenance and equipment upgrades performed by Generation during scheduled refueling outages, Generation has extensive operating and security procedures in place to ensure the safe operation of the nuclear units. Generation has extensive safety systems in place to protect the plant, personnel and surrounding area in the unlikely event of an accident or other incident.

 

Regulation of Nuclear Power Generation. Generation is subject to the jurisdiction of the NRC with respect to the operation of its nuclear generating stations, including the licensing for operation of each unit. The NRC subjects nuclear generating stations to continuing review and regulation covering, among other things, operations, maintenance, emergency planning, security and environmental and radiological aspects of those stations. As part of its reactor oversight process, the NRC continuously assesses unit performance indicators and inspection results, and communicates its assessment on a semi-annual basis. As of January 6, 2016, the NRC categorized Clinton and Dresden unit 2 in the Regulatory Response Column, which is the second highest of five performance bands. All other units operated by Generation are categorized in the Licensee Response Column as of December 31, 2015, which is the highest performance band. The NRC may modify, suspend or revoke operating licenses and impose civil penalties for failure to comply with the Atomic Energy Act, the regulations under such Act or the terms of the operating licenses. Changes in regulations by the NRC may require a substantial increase in capital expenditures for nuclear generating facilities and/or increased operating costs of nuclear generating units.

 

On March 11, 2011, Japan experienced a 9.0 magnitude earthquake and ensuing tsunami that seriously damaged the nuclear units at the Fukushima Daiichi Nuclear Power Station, which are operated by Tokyo Electric Power Co. In July 2011, an NRC Task Force formed in the aftermath of the Fukushima Daiichi events issued a report of its review of the accident, including recommendations for future regulatory action by the NRC to be taken in the near and longer term. The Task Force’s report concluded that nuclear reactors in the United States are operating safely and do not present an imminent risk to public health and safety. The NRC and its staff have issued orders and implementation guidance for commercial reactor licensees operating in the United States. The NRC and its staff are continuing to evaluate additional requirements. For additional information on the NRC actions related to the Japan Earthquake and Tsunami and the industry’s response, see ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Executive Overview.

 

11


Table of Contents

Licenses. Generation has 40-year operating licenses from the NRC for each of its nuclear units and has received 20-year operating license renewals for Peach Bottom Units 2 and 3, Dresden Units 2 and 3, Quad Cities Units 1 and 2, Oyster Creek Unit 1, Calvert Cliffs Units 1 and 2, Nine Mile Point Units 1 and 2, R.E. Ginna Unit 1, Three Mile Island Unit 1, Limerick Units 1 and 2, Byron Units 1 and 2 and Braidwood Units 1 and 2. Additionally, PSEG has 40-year operating licenses from the NRC and has received 20-year operating license renewals for Salem Units 1 and 2. On December 8, 2010, Exelon announced that Generation will permanently cease generation operations at Oyster Creek by December 31, 2019. The following table summarizes the current operating license expiration dates for Generation’s nuclear facilities in service:

 

Station

   Unit      In-Service
Date (a)
     Current License
Expiration
 

Braidwood (c)

     1         1988         2046   
     2         1988         2047   

Byron (c)

     1         1985         2044   
     2         1987         2046   

Calvert Cliffs (c)

     1         1975         2034   
     2         1977         2036   

Clinton (d)

     1         1987         2026   

Dresden (c)

     2         1970         2029   
     3         1971         2031   

LaSalle (b)

     1         1984         2022   
     2         1984         2023   

Limerick (c)

     1         1986         2044   
     2         1990         2049   

Nine Mile Point (c)

     1         1969         2029   
     2         1988         2046   

Oyster Creek (c)(e)

     1         1969         2029   

Peach Bottom (c)

     2         1974         2033   
     3         1974         2034   

Quad Cities (c)

     1         1973         2032   
     2         1973         2032   

R.E. Ginna (c)

     1         1970         2029   

Salem (c)

     1         1977         2036   
     2         1981         2040   

Three Mile Island (c)

     1         1974         2034   

 

(a) Denotes year in which nuclear unit began commercial operations.
(b) In December 2014, Generation submitted applications to the NRC to extend the operating licenses of LaSalle Units 1 and 2 by 20 years.
(c) Stations for which the NRC has issued renewed operating licenses.
(d) Although timing has been delayed, Generation currently plans to seek license renewal for Clinton and has advised the NRC that any license renewal application would not be filed until the first quarter of 2021.
(e) In December 2010, Exelon announced that Generation will permanently cease generation operations at Oyster Creek by December 31, 2019.

 

Generation currently has a license renewal application pending for LaSalle Units 1 and 2. Generation has advised the NRC that any license renewal application for Clinton would not be filed until the first quarter of 2021. The operating license renewal process takes approximately four to five years from the commencement of the renewal process until completion of the NRC’s review. The NRC review process takes approximately two years from the docketing of an application. Each requested license renewal is expected to be for 20 years beyond the original operating license expiration. Depreciation provisions are based on the estimated useful lives of the stations, which reflect the actual and assumed renewal of operating licenses for all of Generation’s operating nuclear generating stations except for Oyster Creek.

 

12


Table of Contents

In August 2012, Generation entered into an operating services agreement with the Omaha Public Power District (OPPD) to provide operational and managerial support services for the Fort Calhoun Station and a licensing agreement for use of the Exelon Nuclear Management Model. The terms for both agreements are 20 years. OPPD will continue to own the plant and remain the NRC licensee.

 

Nuclear Uprate Program. Generation is engaged in individual projects as part of a planned power uprate program across its nuclear fleet. When economically viable, the projects take advantage of new production and measurement technologies, new materials and application of expertise gained from a half-century of nuclear power operations. Once all projects are completed in 2016, Generation will have placed in-service 538 MWs of new nuclear generation.

 

As of December 31, 2015, under the nuclear uprate program, Generation has placed into service projects representing 536 MWs of new nuclear generation at a cost of $1,436 million, which has been capitalized to property, plant and equipment on Exelon’s and Generation’s Consolidated Balance Sheets.

 

Nuclear Waste Storage and Disposal. There are no facilities for the reprocessing or permanent disposal of SNF currently in operation in the United States, nor has the NRC licensed any such facilities. Generation currently stores all SNF generated by its nuclear generating facilities in on-site storage pools or in dry cask storage facilities. Since Generation’s SNF storage pools generally do not have sufficient storage capacity for the life of the respective plant, Generation has developed dry cask storage facilities to support operations.

 

As of December 31, 2015, Generation had approximately 75,800 SNF assemblies (18,800 tons) stored on site in SNF pools or dry cask storage (this includes SNF assemblies at Zion Station, for which Generation retains ownership even though the responsibility for decommissioning Zion Station has been assumed by another party; see Note 16—Asset Retirement Obligations of the Combined Notes to Consolidated Financial Statements for additional information regarding Zion Station Decommissioning). All currently operating Generation-owned nuclear sites have on-site dry cask storage, except for Clinton and Three Mile Island, in which on-site dry cask storage will be in operation at Clinton in 2016 and is projected to be in operation at Three Mile Island in 2023. On-site dry cask storage in concert with on-site storage pools will be capable of meeting all current and future SNF storage requirements at Generation’s sites through the end of the license renewal periods and through decommissioning.

 

For a discussion of matters associated with Generation’s contracts with the DOE for the disposal of SNF, see Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements.

 

As a by-product of their operations, nuclear generating units produce LLRW. LLRW is accumulated at each generating station and permanently disposed of at licensed disposal facilities. The Federal Low-Level Radioactive Waste Policy Act of 1980 provides that states may enter into agreements to provide regional disposal facilities for LLRW and restrict use of those facilities to waste generated within the region. Illinois and Kentucky have entered into such an agreement, although neither state currently has an operational site and none is anticipated to be operational until after 2020.

 

Generation ships its Class A LLRW, which represents 93% of LLRW generated at its stations, to disposal facilities in Utah and South Carolina. The disposal facility in South Carolina at present is only receiving LLRW from LLRW generators in South Carolina, New Jersey (which includes Oyster Creek and Salem), and Connecticut.

 

Generation utilizes on-site storage capacity at all its stations to stage for shipping campaigns and store, as needed, Class B and Class C LLRW. Generation has a contract through 2032 to ship Class B

 

13


Table of Contents

and Class C LLRW to a disposal facility in Texas. The agreement provides for disposal of all current Class B and Class C LLRW currently stored at each station as well as the Class B and Class C LLRW generated during the term of the agreement. However, because the production of LLRW from Generation’s nuclear fleet will exceed the capacity at the Texas site (3.9 million curies for 15 years beginning in 2012), Generation will still be required to utilize on-site storage at its stations for Class B and Class C LLRW. Generation currently has enough storage capacity to store all Class B and C LLRW for the life of all stations in Generation’s nuclear fleet. Generation continues to pursue alternative disposal strategies for LLRW, including an LLRW reduction program to minimize cost impacts and on-site storage.

 

Nuclear Insurance. Generation is subject to liability, property damage and other risks associated with major incidents at any of its nuclear stations, including the CENG nuclear stations. Generation has reduced its financial exposure to these risks through insurance and other industry risk-sharing provisions. See “Nuclear Insurance” within Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for details.

 

For information regarding property insurance, see ITEM 2. PROPERTIES—Generation. Generation is self-insured to the extent that any losses may exceed the amount of insurance maintained or are within the policy deductible for its insured losses. Such losses could have a material adverse effect on Exelon’s and Generation’s financial condition and results of operations.

 

Decommissioning. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in specified minimum amounts at the end of the life of the facility to decommission the facility. See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Exelon Corporation, Executive Overview; ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Critical Accounting Policies and Estimates, Nuclear Decommissioning, Asset Retirement Obligations and Nuclear Decommissioning Trust Fund Investments; and Note 3—Regulatory Matters, Note 12—Fair Value of Financial Assets and Liabilities and Note 16—Asset Retirement Obligations of the Combined Notes to Consolidated Financial Statements for additional information regarding Generation’s NDT funds and its decommissioning obligations.

 

Zion Station Decommissioning. On December 11, 2007, Generation entered into an Asset Sale Agreement (ASA) with EnergySolutions, Inc. and its wholly owned subsidiaries, EnergySolutions, LLC (EnergySolutions) and ZionSolutions, LLC (ZionSolutions) under which ZionSolutions assumed responsibility for decommissioning Zion Station, which is located in Zion, Illinois and ceased operation in 1998.

 

On September 1, 2010, Generation and EnergySolutions completed the transactions contemplated by the ASA. Specifically, Generation transferred to ZionSolutions substantially all of the assets (other than land) associated with Zion Station, including assets held in related NDT funds. In consideration for Generation’s transfer of those assets, ZionSolutions assumed decommissioning and other liabilities, excluding the obligation to dispose of SNF, associated with Zion Station. Pursuant to the ASA, ZionSolutions will periodically request reimbursement from the Zion Station-related NDT funds for costs incurred related to the decommissioning efforts at Zion Station. However, ZionSolutions is subject to certain restrictions on its ability to request reimbursement; specifically, if certain milestones as defined in the ASA are not met, all or a portion of requested reimbursements shall be deferred until such milestones are met. See Note 16—Asset Retirement Obligations of the Combined Notes to Consolidated Financial Statements for additional information regarding Zion Station Decommissioning and see Note 2—Variable Interest Entities of the Combined Notes to Consolidated Financial Statements for a discussion of variable interest entity considerations related to ZionSolutions.

 

14


Table of Contents

Fossil and Renewable Facilities (including Hydroelectric)

 

Generation has ownership interests in 13,281 MW of capacity in fossil and renewable generating facilities currently in service. Generation wholly owns all of its fossil and renewable generating stations, with the exception of: (1) jointly owned facilities that include Wyman; (2) an ownership interest through an equity method investment in Sunnyside; (3) certain wind project entities with minority interest owners; and (4) an ownership interest in the Albany Green Energy, LLC project entity, see Note 2— Variable Interest Entities of the Combined Notes to Consolidated Financial Statements for additional information on these wind project entities. Generation’s fossil and renewable generating stations are all operated by Generation, with the exception of LaPorte, Sunnyside and Wyman, which are operated by third parties. In 2015, 2014 and 2013, electric supply (in GWh) generated from owned fossil and renewable generating facilities was 8%, 13% and 15%, respectively, of Generation’s total electric supply. The majority of this output was dispatched to support Generation’s wholesale and retail power marketing activities. For additional information regarding Generation’s electric generating facilities, see ITEM 2. PROPERTIES—Exelon Generation Company, LLC and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS— Exelon Corporation, Executive Overview for additional information on Generation Renewable Development.

 

Licenses. Fossil and renewable generation plants are generally not licensed, and, therefore, the decision on when to retire plants is, fundamentally, a commercial one. FERC has the exclusive authority to license most non-Federal hydropower projects located on navigable waterways or Federal lands, or connected to the interstate electric grid. On August 29, 2012 and August 30, 2012, Generation submitted hydroelectric license applications to the FERC for 46-year licenses for the Conowingo Hydroelectric Project (Conowingo) and the Muddy Run Pumped Storage Facility Project (Muddy Run), respectively. On December 22, 2015, FERC issued a new 40-year license for Muddy Run. The license term expires on December 1, 2055. Based on the FERC procedural schedule, the FERC licensing process was not completed prior to the expiration of Conowingo’s license on September 1, 2014. FERC is required to issue an annual license for a facility until the new license is issued. On September 10, 2014, FERC issued an annual license for Conowingo, effective as of the expiration of the previous license. If FERC does not issue a new license prior to the expiration of annual license, the annual license will renew automatically. The stations are currently being depreciated over their estimated useful lives, which includes the license renewal period. Refer to Note 3—Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

 

Insurance. Generation maintains business interruption insurance for its renewable and fossil projects, and delay in start-up insurance for its renewable and fossil projects currently under construction. Generation does not purchase business interruption insurance for its wholly owned fossil and hydroelectric operations, unless required by financing agreements; see Note 14—Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for additional information on financing agreements. Generation maintains both property damage and liability insurance. For property damage and liability claims for these operations, Generation is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on Exelon’s and Generation’s financial condition and their results of operations and cash flows. For information regarding property insurance, see ITEM 2. PROPERTIES—Exelon Generation Company, LLC.

 

15


Table of Contents

Long-Term Power Purchase Contracts

 

In addition to energy produced by owned generation assets, Generation sources electricity and other related output from plants it does not own under long-term contracts. The following tables summarize Generation’s long-term contracts to purchase unit-specific physical power with an original term in excess of one year in duration, by region, in effect as of December 31, 2015:

 

Region

   Number of
Agreements
     Expiration Dates    Capacity (MW)  

Mid-Atlantic

     16       2016 - 2032      805   

Midwest

     7       2016 - 2022      1,536   

New England

     8       2016 - 2017      650   

ERCOT

     5       2020 - 2031      1,501   

Other Power Regions

     12       2016 - 2030      2,927   
  

 

 

       

 

 

 

Total

     48            7,419   
  

 

 

       

 

 

 

 

     2016      2017      2018      2019      2020  

Capacity Expiring (MW)

     586         1,761         101         627         980   

 

Fuel

 

The following table shows sources of electric supply in GWh for 2015 and 2014:

 

     Source of Electric Supply  
           2015                  2014        

Nuclear (a)

     175,474         166,454   

Purchases—non-trading portfolio (b)

     61,592         48,200   

Fossil (primarily natural gas)

     14,937         26,324   

Renewable (c)

     5,982         6,429   
  

 

 

    

 

 

 

Total supply

     257,985         247,407   
  

 

 

    

 

 

 

 

(a) Includes the proportionate share of output where Generation has an undivided ownership interest in jointly-owned generating plants and includes the total output of plants that are fully consolidated (e.g., CENG). Nuclear generation for 2015 and 2014 includes physical volumes of 33,415 GWh and 25,053 GWh, respectively, for CENG.
(b) Purchased power for 2015 and 2014 includes physical volumes of 0 GWh and 5,346 GWh, respectively, as a result of the PPA with CENG. On April 1, 2014, Generation assumed operational control of CENG’s nuclear fleet. As a result, 100% of CENG volumes are included in nuclear generation after April 1, 2014.
(c) Includes hydroelectric, wind, and solar generating assets.

 

The fuel costs per MWh for nuclear generation are less than those for fossil-fuel generation. Consequently, nuclear generation is generally the most cost-effective way for Generation to meet its wholesale and retail load servicing requirements.

 

The cycle of production and utilization of nuclear fuel includes the mining and milling of uranium ore into uranium concentrates, the conversion of uranium concentrates to uranium hexafluoride, the enrichment of the uranium hexafluoride and the fabrication of fuel assemblies. Generation has uranium concentrate inventory and supply contracts sufficient to meet all of its uranium concentrate requirements through 2018. Generation’s contracted conversion services are sufficient to meet all of its uranium conversion requirements through 2018. All of Generation’s enrichment requirements have been contracted through 2020. Contracts for fuel fabrication have been obtained through 2022. Generation does not anticipate difficulty in obtaining the necessary uranium concentrates or conversion, enrichment or fabrication services to meet the nuclear fuel requirements of its nuclear units.

 

16


Table of Contents

Natural gas is procured through long-term and short-term contracts, as well as spot-market purchases. Fuel oil inventories are managed so that in the winter months sufficient volumes of fuel are available in the event of extreme weather conditions and during the remaining months to take advantage of favorable market pricing.

 

Generation uses financial instruments to mitigate price risk associated with certain commodity price exposures. Generation also hedges forward price risk, using both over-the-counter and exchange-traded instruments. See ITEM 1A. RISK FACTORS, ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Critical Accounting Policies and Estimates and Note 13—Derivative Financial Instruments of the Combined Notes to Consolidated Financial Statements for additional information regarding derivative financial instruments.

 

Power Marketing

 

Generation’s integrated business operations include the physical delivery and marketing of power obtained through its generation capacity and through long-term, intermediate-term and short-term contracts. Generation maintains an effective supply strategy through ownership of generation assets and power purchase and lease agreements. Generation has also contracted for access to additional generation through bilateral long-term PPAs. PPAs, including tolling agreements, are commitments related to power generation of specific generation plants and/or are dispatchable in nature similar to asset ownership depending on the type of underlying asset. Generation secures contracted generation as part of its overall strategic plan, with objectives such as obtaining low-cost energy supply sources to meet its physical delivery obligations to both wholesale and retail customers and assisting customers to meet renewable portfolio standards. Generation may also buy power in the market to meet the energy demand of its customers. Generation sells electricity, natural gas, and related products and solutions to various customers, including distribution utilities, municipalities, cooperatives, and commercial, industrial, governmental, and residential customers in competitive markets. Generation’s customer facing operations combine a unified sales force with a customer-centric model that leverages technology to broaden the range of products and solutions offered, which Generation believes promotes stronger customer relationships. This model focuses on efficiency and cost reduction, which provides a platform that is scalable and able to capitalize on opportunities for future growth.

 

Generation may purchase more than the energy demanded by its customers. Generation then sells this open position, along with capacity not used to meet customer demand, in the wholesale electricity markets. Where necessary, Generation also purchases transmission service to ensure that it has reliable transmission capacity to physically move its power supplies to meet customer delivery needs in markets without an organized RTO. Generation also incorporates contingencies into its planning for extreme weather conditions, including potentially reserving capacity to meet summer loads at levels representative of warmer-than-normal weather conditions. Additionally, Generation is involved in the development, exploration, and harvesting of oil, natural gas and natural gas liquids properties (Upstream).

 

Price Supply Risk Management

 

Generation also manages the price and supply risks for energy and fuel associated with generation assets and the risks of power marketing activities. Generation implements a three-year ratable sales plan to align its hedging strategy with its financial objectives. Generation also enters into transactions that are outside of this ratable sales plan. Generation is exposed to commodity price risk in 2016 and beyond for portions of its electricity portfolio that are unhedged. Generation has been and will continue to be proactive in using hedging strategies to mitigate this risk in subsequent years. As of December 31, 2015, the percentage of expected generation hedged for the major reportable segments was 90%-93%, 60%-63% and 28%-31% for 2016, 2017, and 2018, respectively. The percentage of expected generation hedged is the amount of equivalent sales divided by the expected generation.

 

17


Table of Contents

Expected generation is the volume of energy that best represents our commodity position in energy markets from owned or contracted for capacity based upon a simulated dispatch model that makes assumptions regarding future market conditions, which are calibrated to market quotes for power, fuel, load following products, and options. Equivalent sales represent all hedging products, which include economic hedges and certain non-derivative contracts, including sales to ComEd, PECO and BGE to serve their retail load. A portion of Generation’s hedging strategy may be implemented through the use of fuel products based on assumed correlations between power and fuel prices, which routinely change in the market. The corporate risk management group and Exelon’s RMC monitor the financial risks of the wholesale and retail power marketing activities. Generation also uses financial and commodity contracts for proprietary trading purposes, but this activity accounts for only a small portion of Generation’s efforts. The proprietary trading portfolio is subject to a risk management policy that includes stringent risk management limits, including volume, stop-loss and value-at-risk limits, to manage exposure to market risk. See ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for additional information.

 

At December 31, 2015, Generation’s short and long-term commitments relating to the purchase of energy and capacity from and to unaffiliated utilities and others were as follows:

 

(in millions)

   Net Capacity
Purchases (a)
     REC
Purchases (b)
     Transmission Rights
Purchases (c)
     Total  

2016

   $ 262       $ 229       $ 15       $ 506   

2017

     197         269         21         487   

2018

     92         115         23         230   

2019

     97         34         24         155   

2020

     40         1         16         57   

Thereafter

     221         1         35         257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 909       $ 649       $ 134       $ 1,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Net capacity purchases include PPAs and other capacity contracts including those that are accounted for as operating leases. Amounts presented in the commitments represent Generation’s expected payments under these arrangements at December 31, 2015, net of fixed capacity payments expected to be received (“Capacity offsets”) by Generation under contracts to resell such acquired capacity to third parties under long-term capacity sale contracts. As of December 31, 2015, capacity offsets were $146 million, $149 million, $150 million, $151 million, $142 million, and $462 million for years 2016, 2017, 2018, 2019, 2020, and thereafter, respectively. Expected payments include certain fixed capacity charges which may be reduced based on plant availability.
(b) The table excludes renewable energy purchases that are contingent in nature.
(c) Transmission rights purchases include estimated commitments for additional transmission rights that will be required to fulfill firm sales contracts.

 

Capital Expenditures

 

Generation’s business is capital intensive and requires significant investments in nuclear fuel and energy generation assets and in other internal infrastructure projects. Generation’s estimated capital expenditures for 2016 are as follows:

 

(in millions)

      

Nuclear fuel (a)(b)

   $ 1,150   

Growth

     1,350   

Production plant (b)

     950   

Renewable energy projects

     25   

Other

     125   
  

 

 

 

Total

   $ 3,600   
  

 

 

 

 

(a) Includes Generation’s share of the investment in nuclear fuel for the co-owned Salem plant.
(b) Includes the CENG units on a fully consolidated basis.

 

18


Table of Contents

ComEd

 

ComEd is engaged principally in the purchase and regulated retail sale of electricity and the provision of electricity distribution and transmission services to retail customers in northern Illinois. ComEd is a public utility under the Illinois Public Utilities Act subject to regulation by the ICC related to distribution rates and service, the issuance of securities and certain other aspects of ComEd’s business. ComEd is a public utility under the Federal Power Act subject to regulation by FERC related to transmission rates and certain other aspects of ComEd’s business. Specific operations of ComEd are also subject to the jurisdiction of various other Federal, state, regional and local agencies. Additionally, ComEd is subject to NERC mandatory reliability standards.

 

ComEd’s franchises are sufficient to permit it to engage in the business it now conducts. ComEd’s franchise rights are generally nonexclusive rights documented in agreements and, in some cases, certificates of public convenience issued by the ICC. With few exceptions, the franchise rights have stated expiration dates ranging from 2016 to 2066. ComEd anticipates working with the appropriate governmental bodies to extend or replace the franchise agreements prior to expiration.

 

PECO

 

PECO is engaged principally in the purchase and regulated retail sale of electricity and the provision of electricity distribution and transmission services to retail customers in southeastern Pennsylvania, including the City of Philadelphia, as well as the purchase and regulated retail sale of natural gas and the provision of gas distribution services to retail customers in the Pennsylvania counties surrounding the City of Philadelphia. PECO is a public utility under the Pennsylvania Public Utility Code subject to regulation by the PAPUC related to electric and gas distribution rates and service, the issuances of certain securities and certain other aspects of PECO’s business. PECO is a public utility under the Federal Power Act subject to regulation by FERC related to transmission rates and certain other aspects of PECO’s business and by the U.S. Department of Transportation related to pipeline safety and other areas of gas operations. Specific operations of PECO are subject to the jurisdiction of various other Federal, state, regional and local agencies. Additionally, PECO is also subject to NERC mandatory reliability standards.

 

PECO has the necessary authorizations to provide regulated electric and natural gas distribution services in the various municipalities or territories in which it now supplies such services. PECO’s authorizations consist of charter rights and certificates of public convenience issued by the PAPUC and/or “grandfathered rights,” with all of such rights generally unlimited as to time and generally exclusive from competition from other electric and natural gas utilities. In a few defined municipalities, PECO’s natural gas service territory authorizations overlap with that of another natural gas utility; however, PECO does not consider those situations as posing a material competitive or financial threat.

 

BGE

 

BGE is engaged principally in the purchase and regulated retail sale of electricity and the provision of electricity distribution and transmission services to retail customers in central Maryland, including the City of Baltimore, as well as the purchase and regulated retail sale of natural gas and the provision of gas distribution services to retail customers in central Maryland, including the City of Baltimore. BGE is a public utility under the Public Utilities Article of the Maryland Annotated Code subject to regulation by the MDPSC related to electric and gas distribution rates and service, the issuances of certain securities and certain other aspects of BGE’s business. BGE is a public utility under the Federal Power Act subject to regulation by FERC related to transmission rates and certain other aspects of BGE’s business and by the U.S. Department of Transportation related to pipeline safety and other areas of gas operations. Specific operations of BGE are subject to the jurisdiction of various other Federal, state, regional and local agencies. Additionally, BGE is also subject to NERC mandatory reliability standards.

 

19


Table of Contents

BGE has the necessary authorizations to provide regulated electric and natural gas distribution services in the various municipalities and territories in which it now supplies such services. With respect to electric distribution service, BGE’s authorizations consist of charter rights, a state-wide franchise grant and a franchise grant from the City of Baltimore. The franchise rights are nonexclusive and are perpetual. With respect to natural gas distribution service, BGE’s authorizations consist of charter rights, a perpetual state-wide franchise grant and franchises granted by all the municipalities and/or governmental bodies in which BGE now supplies services. The franchise grants are not exclusive; some are perpetual and some are for a limited duration, which BGE anticipates being able to extend or replace prior to expiration.

 

ComEd, PECO and BGE

 

Utility Operations

 

Service Territories. The following table presents the size of retail service territories, populations of each retail service territory and the number of retail customers within each retail service territory for ComEd, PECO and BGE as of December 31, 2015:

 

     Retail Service Territories
(in square miles)
     Retail Service Territory  Population
(in millions)
     Number of Retail Customers
(in millions)
 
     Total      Electric      Natural gas      Total     Electric      Natural gas      Total      Electric      Natural gas  

ComEd

     11,400         11,400         n/a         9.0 (a)      9.0         n/a         3.8         3.8         n/a   

PECO

     2,100         1,900         1,900         4.6 (b)      4.0         3.1         2.1         1.6         0.5   

BGE

     2,300         2,300         800         3.0 (c)      3.0         1.7         1.3         1.3         0.7   

 

(a) Includes approximately 2.8 million in the city of Chicago.
(b) Includes approximately 1.6 million in the city of Philadelphia.
(c) Includes approximately 0.6 million in the city of Baltimore.

 

Peak Deliveries. ComEd, PECO and BGE electric sales and peak load are generally higher during the summer and winter months, when temperature extremes create demand for either summer cooling or winter heating. For PECO and BGE, natural gas sales are generally higher during the winter months when cold temperatures create demand for winter heating.

 

The following table summarizes peak deliveries for ComEd, PECO and BGE for electric and gas deliveries during peak demand months as of December 31, 2015:

 

     Electric Peak Deliveries
(in GW)
     Natural Gas Peak Deliveries
(in mmcfs)
 
     Summer
peak date
     Summer
deliveries
     Winter peak
date
     Winter
deliveries
         Winter peak    
date
     Winter
    deliveries    
 

ComEd

     7/20/2011         23.75         1/6/2014         16.51         n/a         n/a   

PECO

     7/22/2011         8.98         1/7/2014         7.17         2/15/2015         777   

BGE

     7/21/2011         7.23         2/20/2015         6.71         2/19/2015         777   

 

Electric and Natural Gas Distribution Services. ComEd, PECO and BGE are allowed to recover reasonable costs and fair and prudent capital expenditures associated with electric and natural gas distribution services and earn a return on those capital expenditures, subject to commission approval. ComEd recovers costs through a performance-based rate formula, pursuant to EIMA. ComEd is required to file an update to the performance-based rate formula on an annual basis. PECO’s and BGE’s electric and gas distribution costs are recovered through traditional rate case proceedings. In certain instances, ComEd, PECO and BGE use specific recovery mechanisms as approved by the ICC, PAPUC, and MDPSC, respectively.

 

20


Table of Contents

Through the ICC, ComEd is obligated to deliver electricity to customers in their respective service territories and also retain significant default service obligations (referred to as POLR) to provide electricity to certain groups of customers in their respective service areas who do not choose a competitive electric generation supplier. Through the PAPUC and MDPSC, PECO and BGE, respectively, are obligated to deliver electricity and natural gas to customers in their respective service territories and also retain significant default service obligations (referred to as DSP and SOS for electric and PGC and MBR for natural gas, respectively) to provide electricity or natural gas to certain groups of customers in their respective service areas who do not choose a competitive electric generation supplier or a competitive natural gas supplier. ComEd is permitted to recover electric costs, and PECO and BGE are permitted to recover electric and natural gas procurement costs from retail customers. Therefore, fluctuations in electric and natural gas procurement costs have no impact on electric and natural gas revenue net of purchased power and fuel expense.

 

ComEd customers have the choice to purchase electricity, and PECO and BGE customers have the choice to purchase electricity and natural gas from competitive electric generation and natural gas suppliers. The customer’s choice of suppliers does not impact the volume of deliveries, but affects revenues collected from customers related to supplied energy and natural gas service. Customer choice program activity has no impact on electric and gas revenue net of purchased power and fuel expense. For those customers that choose a competitive electric generation or natural gas supplier, ComEd, PECO and BGE may act as the billing agent but do not record revenues or purchased power and fuel expense related to the electric and natural gas procurement costs. ComEd, PECO and BGE remain the distribution service providers for all customers in their respective service territories and charge a regulated rate for distribution service.

 

Retail customers participating in customer choice programs, and retail deliveries purchased from competitive electric generation and natural gas suppliers (as a percentage of GWh and mmcf sales, respectively) for ComEd, PECO and BGE consisted of the following at December 31, 2015, 2014 and 2013:

 

     December 31, 2015  
     Number of retail customers      % of total retail customers     Deliveries as a % of retail sales
(for the year ended)
 
         Electric              Natural gas              Electric             Natural gas             Electric             Natural gas      

ComEd (a)

     1,655,400         n/a         42     n/a        76     n/a   

PECO

     563,400         81,100         35     16     70     25

BGE

     343,000         154,000         27     23     61     56
     December 31, 2014  
     Number of retail customers      % of total retail customers     Deliveries as a % of retail sales
(for the year ended)
 
     Electric      Natural gas      Electric     Natural gas     Electric     Natural gas  

ComEd

     2,426,900         n/a         63     n/a        80     n/a   

PECO

     546,900         78,400         34     16     70     22

BGE

     364,000         161,000         29     25     60     53
     December 31, 2013  
     Number of retail customers      % of total retail customers     Deliveries as a % of retail sales
(for the year ended)
 
     Electric      Natural gas      Electric     Natural gas     Electric     Natural gas  

ComEd

     2,630,200         n/a         68     n/a        81     n/a   

PECO

     531,500         66,400         34     13     68     19

BGE

     399,000         172,000         32     26     61     54

 

(a) In September 2015, the City of Chicago discontinued its participation in the customer choice program and began purchasing its electricity from ComEd. Approximately 670,000 customers were impacted by the City of Chicago’s decision which resulted in the reduction in the number of customers participating in customer choice programs in 2015.

 

21


Table of Contents

Procurement-Related Proceedings. ComEd’s, PECO’s and BGE’s electric supply for its customers is primarily procured through contracts as required by the ICC, PAPUC and MDPSC, respectively. ComEd, PECO and BGE procure electricity supply from various approved bidders, including Generation. Charges incurred for electric supply procured through contracts with Generation are included in Purchased power from affiliates on ComEd’s, PECO’s and BGE’s Statement of Operations and Comprehensive Income.

 

PECO’s and BGE’s natural gas supplies are purchased from a number of suppliers for terms of up to three years. PECO and BGE have annual firm supply from transportation contracts of 132,000 mmcf and 128,000 mmcf, respectively. In addition, to supplement gas supply at times of heavy winter demands and in the event of temporary emergencies, PECO and BGE have available storage capacity from the following sources:

 

     Peak Natural Gas Sources (in mmcf)  
     Liquefied Natural
Gas Facility
     Propane-Air Plant      Underground Storage
Service Agreements (a)
 

PECO

     1,200         150         18,000   

BGE

     1,055         546         22,000   

 

(a) Natural gas from underground storage represents approximately 28% and 31% of PECO and BGE’s 2015-2016 heating season planned supplies, respectively.

 

PECO and BGE have long-term interstate pipeline contracts and also participate in the interstate markets by releasing pipeline capacity or bundling pipeline capacity with gas for off-system sales. Off-system gas sales are low-margin direct sales of gas to wholesale suppliers of natural gas. Earnings from these activities are shared between the utilities and customers. PECO and BGE make these sales as part of a program to balance its supply and cost of natural gas.

 

Energy Efficiency Programs. ComEd, PECO and BGE are also allowed to recover costs associated with energy efficiency and demand response programs. Each commission approved program seeks to meet mandated electric consumption reduction targets and implement demand response measures to reduce peak demand. The programs are designed to meet standards required by each respective regulatory agency.

 

Capital Investment. ComEd’s, PECO’s and BGE’s businesses are capital intensive and requires significant investments, primarily in electric transmission and distribution and natural gas transportation and distribution facilities, to ensure the adequate capacity, reliability and efficiency of its system. ComEd’s, PECO’s and BGE’s most recent estimates of capital expenditures for plant additions and improvements for 2016 are $2,425 million, $675 million and $825 million, respectively.

 

ComEd, PECO and BGE each have ICC, PAPUC and MDPSC, respectively, approved smart meter and smart grid deployment programs to enhance their distribution systems. The following table summarizes ComEd’s smart meter and PECO’s and BGE’s smart meter and smart grid technology spending and meter installations as of December 31, 2015:

 

     December 31, 2015  
     Total Spend from
Inception to Date
     Total Meters to be Installed      Meters Installed to Date  
    

 

     (in millions)     

 

 
     Projected      Actual      Electric      Natural gas      Electric      Natural gas  

ComEd (a)

   $ 2,615       $ 1,526         4.0         n/a         2.0         n/a   

PECO (b)

     818         803         1.7         0.5         1.7         0.5   

BGE (c)

     527         512         1.3         0.7         1.2         0.6   

 

22


Table of Contents

 

(a) ComEd has committed to invest approximately $2.6 billion over a ten year period to modernize and storm-harden its distribution system and to implement smart grid technology. These amounts represent capital expenditures associated with ComEd’s commitment.
(b) PECO will seek recovery of costs associated with PECO’s gas AMI through the traditional rate case process.
(c) BGE is seeking recovery of its smart grid initiative costs as part of its 2015 electric and gas distribution rate case. See Note 3—Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

 

Transmission Services. ComEd, PECO and BGE provide unbundled transmission service under rates approved by FERC. FERC has used its regulation of transmission to encourage competition for wholesale generation services and the development of regional structures to facilitate regional wholesale markets. Under FERC’s open access transmission policy promulgated in Order No. 888, ComEd, PECO and BGE, as owners of transmission facilities, are required to provide open access to their transmission facilities under filed tariffs at cost-based rates. ComEd, PECO and BGE are required to comply with FERC’s Standards of Conduct regulation governing the communication of non-public information between the transmission owner’s employees and wholesale merchant employees.

 

PJM is the ISO and the FERC-approved RTO for the Mid-Atlantic and Midwest regions. PJM is the transmission provider under, and the administrator of, the PJM Open Access Transmission Tariff (PJM Tariff). PJM operates the PJM energy, capacity and other markets, and, through central dispatch, controls the day-to-day operations of the bulk power system for the PJM region. ComEd, PECO and BGE are members of PJM and provide regional transmission service pursuant to the PJM Tariff. ComEd, PECO, BGE and the other transmission owners in PJM have turned over control of their transmission facilities to PJM, and their transmission systems are currently under the dispatch control of PJM. Under the PJM Tariff, transmission service is provided on a region-wide, open-access basis using the transmission facilities of the PJM members at rates based on the costs of transmission service.

 

ComEd’s and BGE’s transmission rates are established based on a formula that was approved by FERC in January 2008 and April 2006, respectively. FERC’s order establishes the agreed-upon treatment of costs and revenues in the determination of network service transmission rates and the process for updating the formula rate calculation on an annual basis.

 

PECO’s customers are charged for PECO’s PJM retail transmission services on a full and current basis through a Transmission Service Charge (applicable to default service only) and through a Non-Bypassable Transmission Charge (applicable to all distribution customers) in accordance with PECO’s approved distribution rates.

 

See Note 3Regulatory Matters, Note 25—Segment Information of the Combined Notes to Consolidated Financial Statements and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Liquidity and Capital Resources for further information.

 

Employees

 

As of December 31, 2015, Exelon and its subsidiaries had 29,762 employees in the following companies, of which 9,649 or 32% were covered by collective bargaining agreements (CBAs):

 

     IBEW Local 15  (a)      IBEW Local 614  (b)      Other CBAs  (c)      Total Employees
Covered by  CBAs
     Total
Employees
 

Generation

     1,688         102         2,424         4,214         14,512   

ComEd

     3,996         —           —           3,996         6,765   

PECO

     —           1,327         —           1,327         2,641   

BGE

     —           —           —           —           3,293   

Other (d)

     69         —           43         112         2,551   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5,753         1,429         2,467         9,649         29,762   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

 

(a) A separate CBA between ComEd and IBEW Local 15 covers approximately 61 employees in ComEd’s System Services Group and was extended to April 1, 2016. Generation’s and ComEd’s separate CBAs with IBEW Local 15 expires in 2019.
(b) 1,327 PECO craft and call center employees in the Philadelphia service territory are covered by CBAs with IBEW Local 614, both expiring in 2021. Additionally, Exelon Power, an operating unit of Generation, has an agreement with IBEW Local 614, which expires in 2016 and covers 102 employees.
(c) During 2015, Generation finalized its CBA with Clinton Local 51 which will expire in 2020; its two CBAs with Local 369 at Mystic 7 and Mystic 8/9, both expiring in 2020; and four Security Officer unions at Braidwood, Byron, Clinton and TMI, all expiring between 2018 and 2021, respectively. During 2014, Generation finalized CBAs with TMI Local 777 and Oyster Creek Local 1289, expiring in 2019 and 2021, respectively and CENG finalized its CBA with Nine Mile Point which will expire in 2020. Additionally, during 2014, Generation finalized CBAs with the Security Officer unions at Dresden, LaSalle, Limerick and Quad Cities, which expire between 2017 and 2018. Lastly, during 2014, an agreement was negotiated with Las Vegas District Energy and IUOE Local 501, which will expire in 2018. During 2013, Generation finalized its CBA with the Security Officer union at Oyster Creek, expiring in 2016; as well as two other 3-year agreements: New England ENEH, UWUA Local 369, which will expire in 2017; and New Energy IUOE Local 95-95A, which will expire in 2016.
(d) Other includes shared services employees at BSC.

 

Environmental Regulation

 

General

 

Exelon, Generation, ComEd, PECO and BGE are subject to comprehensive and complex legislation regarding environmental matters by the federal government and various state and local jurisdictions in which they operate their facilities. The Registrants are also subject to regulations administered by the EPA and various state and local environmental protection agencies. Federal, state and local regulation includes the authority to regulate air, water, and solid and hazardous waste disposal.

 

The Exelon Board of Directors is responsible for overseeing the management of environmental matters. Exelon has a management team to address environmental compliance and strategy, including the CEO; the Senior Vice President, Corporate Strategy and Chief Sustainability Officer; the Corporate Environmental Strategy Director and the Environmental Regulatory Strategy Director, as well as senior management of Generation, ComEd, PECO and BGE. Performance of those individuals directly involved in environmental compliance and strategy is reviewed and affects compensation as part of the annual individual performance review process. The Exelon Board of Directors has delegated to its corporate governance committee the authority to oversee Exelon’s compliance with laws and regulations and its strategies and efforts to protect and improve the quality of the environment, including Exelon’s climate change and sustainability policies and programs, as discussed in further detail below. The Exelon Board of Directors has also delegated to its Generation Oversight Committee the authority to oversee environmental, health and safety issues relating to Generation. The respective Boards of ComEd, PECO and BGE, which each include directors who also serve on the Exelon Board of Directors, oversee environmental, health and safety issues related to ComEd, PECO and BGE.

 

Air Quality

 

Air quality regulations promulgated by the EPA and the various state and local environmental agencies in Illinois, Maryland, Massachusetts, New York, Pennsylvania and Texas in accordance with the Federal Clean Air Act impose restrictions on emission of particulates, sulfur dioxide (SO2), nitrogen oxides (NOx), mercury and other pollutants and require permits for operation of emissions sources. Such permits have been obtained by Exelon’s subsidiaries and must be renewed periodically. The Clean Air Act establishes a comprehensive and complex national program to substantially reduce air pollution from power plants.

 

See ITEM 7.—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for additional information regarding clean air regulation in the forms of the CSAPR, the regulation of hazardous air pollutants from coal- and oil-fired electric generating facilities under MATS, and regulation of GHG emissions.

 

24


Table of Contents

Water Quality

 

Under the Clean Water Act, NPDES permits for discharges into waterways are required to be obtained from the EPA or from the state environmental agency to which the permit program has been delegated and must be renewed periodically. Certain of Generation’s power generation facilities discharge industrial wastewater into waterways and are therefore subject to these regulations and operate under NPDES permits or pending applications for renewals of such permits after being granted an administrative extension. Generation is also subject to the jurisdiction of certain other state and regional agencies and compacts, including the Delaware River Basin Commission and the Susquehanna River Basin Commission.

 

Section 316(b) of the Clean Water Act. Section 316(b) requires that the cooling water intake structures at electric power plants reflect the best technology available to minimize adverse environmental impacts, and is implemented through state-level NPDES permit programs. All of Generation’s power generation facilities with cooling water systems are subject to the regulations. Facilities without closed-cycle recirculating systems (e.g., cooling towers) are potentially most affected by changes to the existing regulations. For Generation, those facilities are Calvert Cliffs, Clinton, Dresden, Eddystone, Fairless Hills, Ginna, Gould Street, Handley, Mountain Creek, Mystic 7, Nine Mile Point Unit 1, Oyster Creek, Peach Bottom, Quad Cities, Riverside, Salem and Schuylkill.

 

On October 14, 2014, the EPA’s final Section 316(b) rule became effective. The rule requires that a series of studies and analyses be performed to determine the best technology available to minimize adverse impacts on aquatic life, followed by an implementation period for the selected technology. The timing of the various requirements for each facility is related to the status of its current NPDES permit and the subsequent renewal period. There is no fixed compliance schedule, as this is left to the discretion of the state permitting director.

 

Until the compliance requirements are determined by the applicable state permitting director on a site-specific basis for each plant, Generation cannot estimate the effect that compliance with the rule will have on the operation of its generating facilities and its future results of operations, cash flows, and financial position. Should a state permitting director determine that a facility must install cooling towers to comply with the rule, that facility’s economic viability would be called into question. However, the potential impact of the rule has been significantly reduced since the final rule does not mandate cooling towers as a national standard and sets forth technologies that are presumptively compliant, and the state permitting director is required to apply a cost-benefit test and can take into consideration site-specific factors.

 

New York Facilities. In July 2011, the New York Department of Environmental Conservation (DEC) issued a policy regarding the best available technology for cooling water intake structures. Through its policy, the DEC established closed-cycle cooling or its equivalent as the performance goal for all existing facilities, but also provided that the DEC will select a feasible technology whose costs are not wholly disproportionate to the environmental benefits to be gained and allows for a site-specific determination where the entrainment performance goal cannot be achieved. The Ginna and Nine Mile Point Unit 1 power generation facilities received renewals of their state water discharge permits in 2014.

 

Salem. In June 2001, the NJDEP issued a renewed NPDES permit for Salem, expiring in July 2006, allowing for the continued operation of Salem with its existing cooling water system. In February 2006, PSEG filed a renewal application with the NJDEP allowing Salem to continue operating under its existing NPDES permit until a new permit was issued. On June 30, 2015, NJDEP issued a draft NPDES permit for Salem. The draft permit does not require installation of cooling towers and allows Salem to continue to operate utilizing the existing once-through cooling water system with certain required system modifications. The draft permit was subject to a public notice and comment period and the NJDEP may make revisions before issuing the final permit expected during the first half of 2016.

 

25


Table of Contents

Solid and Hazardous Waste

 

CERCLA provides for immediate response and removal actions coordinated by the EPA in the event of threatened releases of hazardous substances into the environment and authorizes the EPA either to clean up sites at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Under CERCLA, generators and transporters of hazardous substances, as well as past and present owners and operators of hazardous waste sites, are strictly, jointly and severally liable for the cleanup costs of waste at sites, most of which are listed by the EPA on the National Priorities List (NPL). These PRPs can be ordered to perform a cleanup, can be sued for costs associated with an EPA-directed cleanup, may voluntarily settle with the EPA concerning their liability for cleanup costs, or may voluntarily begin a site investigation and site remediation under state oversight prior to listing on the NPL. Various states, including Illinois, Maryland and Pennsylvania, have also enacted statutes that contain provisions substantially similar to CERCLA. In addition, RCRA governs treatment, storage and disposal of solid and hazardous wastes and cleanup of sites where such activities were conducted.

 

Generation, ComEd, PECO and BGE and their subsidiaries are, or are likely to become, parties to proceedings initiated by the EPA, state agencies and/or other responsible parties under CERCLA and RCRA with respect to a number of sites, including MGP sites, or may undertake to investigate and remediate sites for which they may be subject to enforcement actions by an agency or third-party.

 

See Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information regarding solid and hazardous waste regulation and legislation.

 

Environmental Remediation

 

ComEd’s, PECO’s and BGE’s environmental liabilities primarily arise from contamination at former MGP sites. ComEd, pursuant to an ICC order, and PECO, pursuant to settlements of natural gas distribution rate cases with the PAPUC, have an on-going process to recover environmental remediation costs of the MGP sites through a provision within customer rates. While BGE does not have a rider for MGP clean-up costs, BGE has historically received recovery of actual clean-up costs on a site-specific basis in distribution rates. The amount to be expended in 2016 at Exelon for compliance with environmental remediation related to contamination at former MGP sites and other gas purification sites is expected to total $38 million, consisting of $32 million and $6 million respectively, at ComEd and PECO.

 

Generation’s environmental liabilities primarily arise from contamination at current and former generation and waste storage facilities. As of December 31, 2015, Generation has established an appropriate liability to comply with environmental remediation requirements including contamination attributable to low level radioactive residues at a storage and reprocessing facility named Latty Avenue, and at a disposal facility named West Lake Landfill, both near St. Louis, Missouri related to operations conducted by Cotter Corporation, a former ComEd subsidiary.

 

In addition, Generation, ComEd, PECO and BGE may be required to make significant additional expenditures not presently determinable for other environmental remediation costs.

 

See Notes 3—Regulatory Matters and 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information regarding the Registrants’ environmental remediation efforts and related impacts to the Registrants’ results of operations, cash flows and financial positions.

 

26


Table of Contents

Global Climate Change

 

Exelon believes the evidence of global climate change is compelling and that the energy industry, though not alone, is a significant contributor to the human-caused emissions of GHGs that many in the scientific community believe contribute to global climate change, and as reported by the Intergovernmental Panel on Climate Change in their Fifth Assessment Report Summary for Policy Makers issued in September 2013. Exelon, as a producer of electricity from predominantly low-carbon generating facilities (such as nuclear, hydroelectric, wind and solar photovoltaic), has a relatively small GHG emission profile, or carbon footprint, compared to other domestic generators of electricity. By virtue of its significant investment in low-carbon intensity assets, Generation’s emission intensity, or rate of carbon dioxide equivalent (CO2e) emitted per unit of electricity generated, is among the lowest in the industry. Exelon does produce GHG emissions, primarily at its natural gas-fired generating plants; CO2, methane and nitrous oxide are all emitted in this process, with CO2 representing the largest portion of these GHG emissions. GHG emissions from combustion of fossil fuels represent the majority of Exelon’s direct GHG emissions in 2015, although only a small portion of Exelon’s electric supply is from fossil generating plants. Other GHG emission sources at Exelon include natural gas (methane) leakage on the natural gas systems, sulfur hexafluoride (SF6) leakage in its electric transmission and distribution operations and refrigerant leakage from its chilling and cooling equipment as well as fossil fuel combustion in its motor vehicles and fossil fuel generation of electricity used to power its facilities. Despite its focus on low-carbon generation, Exelon believes its operations could be significantly affected by the possible physical risks of climate change and by mandatory programs to reduce GHG emissions. See ITEM 1A. RISK FACTORS for information regarding the market and financial, regulatory and legislative, and operational risks associated with climate change.

 

Climate Change Regulation. Exelon is, or may become, subject to climate change regulation or legislation at the Federal, regional and state levels.

 

International Climate Change Regulation. At the international level, the United States is a Party to the United Nations Framework Convention on Climate Change (UNFCCC). The Parties to the UNFCCC adopted the Paris Agreement at the 21st session of the UNFCCC Conference of the Parties (COP 21) on December 12, 2015. The Paris Agreement defines the UNFCCC’s objective of limiting the global temperature increase to 1.5°C above pre-industrial levels. All Parties are required to develop their own national emission reductions and to update those reductions at least every five years. The Developed Country Parties, including the United States, are required to take the lead by undertaking economy-wide absolute emission reduction targets. The United States had previously submitted its national emission reductions to achieve a 2020 target of reducing net emissions in the range of 17% below the 2005 level and to achieve net greenhouse gas emission reductions of 26%—28% below the 2005 level by 2025. The United States has indicated that it intends to achieve these reductions through a variety of mechanisms, including regulations to cut carbon pollution from new and existing power plants. The Paris Agreement will enter into force on the thirtieth day after the date on which at least 55 Parties accounting for at least an estimated 55% of total global greenhouse gas emissions have ratified the Agreement.

 

Federal Climate Change Legislation and Regulation. It is highly uncertain that Federal legislation to reduce GHG emissions will be enacted. If such legislation is adopted, Exelon may incur costs either to further limit or offset the GHG emissions from its operations or to procure emission allowances or credits. In June 2013, the White House released the President’s Climate Action Plan which consists of a wide variety of executive actions targeting GHG reductions, preparing for the impacts of climate change and showing leadership internationally; but the plan did not directly trigger any new requirements or legislative action.

 

The EPA is addressing the issue of carbon dioxide (CO2) emissions regulation for new and existing electric generating units through the New Source Performance Standards (NSPS) under

 

27


Table of Contents

Section 111 of the Clean Air Act. Pursuant to the Climate Action Plan, President Obama directed the EPA to regulate new and modified fossil fired generating units under Section 111(b) of the Clean Air Act. The EPA finalized the rule in August 2015, and the final rule has been challenged in the U.S. Court of Appeals for the District of Columbia.

 

Under the President’s memorandum, the EPA was also required to finalize a rule to establish CO2 emission reduction requirements for existing fossil-fuel generating stations under Section 111(d) of the Clean Air Act. The final rule, known as the Clean Power Plan, became effective on December 22, 2015. The rule sets GHG emission reduction targets for each state, with reductions beginning in 2022, and the target achieved by 2030. States must submit an implementation plan to the EPA by September 2016, unless granted an extension of up to two years. States are granted latitude to select from a number of compliance options, which are designed to achieve the reductions in the most cost-effective manner. The final rule has been challenged in the U.S. Court of Appeals for the District of Columbia. On February 9, 2015, the U.S. Supreme Court issued a stay of the Clean Power Plan until the disposition of the petitions challenging the rule now before the Court of Appeals, and, if such petitions are filed in the future, before the U.S. Supreme Court. While the ultimate impact of the Clean Power Plan rule is expected to be favorable, Exelon and Generation cannot at this time predict to what extent the states’ actions to comply with the Clean Power Plan’s emission reduction targets will impact their future financial position, results of operations and cash flows.

 

Regional and State Climate Change Legislation and Regulation. After a two-year program review, the nine northeast and mid-Atlantic states currently participating in the Regional Greenhouse Gas Reduction Initiative (RGGI) released an updated RGGI Model Rule and Program Review Recommendations Summary on February 7, 2013. Under the updated RGGI program the regional RGGI CO2 budget was reduced, starting in 2014, from its previous 165 million ton level to 91 million tons, with a 25 percent reduction in the cap level each year from 2015 through 2020. Included in the program are provisions for cost containment reserve (CCR) allowances, which will become available if the total demand for allowances, above the CCR trigger price, exceeds the number of CO2 allowances available for purchase at auction. (CCR trigger prices are $6 in 2015, $8 in 2016 and $10 in 2017; after 2017 the CCR price increases by 2.5 percent each year). Such an outcome could put modest upward pressure on wholesale power prices; however, the specifics are currently uncertain.

 

At the state level, the Illinois Climate Change Advisory Group, created by Executive Order 2006-11 on October 5, 2006, made its final recommendations on September 6, 2007 to meet the Governor’s GHG reduction goals. At this time, the only requirements imposed by the state of Illinois are the energy efficiency and renewable portfolio standards in the Illinois Power Act that apply to ComEd.

 

On December 18, 2009, Pennsylvania issued the state’s final Climate Change Action Plan. The plan sets as a target a 30 percent reduction in GHG emissions by 2020. The Climate Change Advisory Committee continues to meet quarterly to review Climate Action Work Plans for the residential, commercial and industrial sectors. The Climate Change Action Plan does not impose any requirements on Generation or PECO at this time.

 

The Maryland Commission on Climate Change was chartered in 2007 and released a greenhouse gas reduction strategy with 42 recommendations on August 27, 2008. The plan’s primary policy recommendation to formally adopt science-based regulatory goals to reduce Maryland’s GHG emissions was realized with the passage of the Greenhouse Gas Emissions Reduction Act of 2009 (GGRA) which requires Maryland to reduce its GHG emissions by 25 percent below 2006 levels by 2020. It also directed the Maryland Department of Environment to prepare and implement an action plan which was published in October of 2013. Maryland’s electricity consumption reduction goals, required under the “EmPOWER Maryland” program, and mandatory State participation in RGGI Program, are listed as the energy sector’s contribution in the plan. The plan also advocated raising the renewable portfolio standard requirement from 20% by 2022 to 25% by 2022. The Department of Environment was required to submit a December 2015 report to the Governor and General Assembly

 

28


Table of Contents

on progress towards the 25% mandate; its costs and benefits; the need for target adjustments; and the status of federal programs. In 2016, the Legislature will review the progress report, its economic impacts on manufacturing sector and other information and determine whether to continue, adjust or eliminate the requirement to achieve a 25% reduction by 2020.

 

Exelon’s Voluntary Climate Change Efforts. In a world increasingly concerned about global climate change and regulatory action to reduce GHG, Exelon’s low-carbon generating fleet is seen by management as a competitive advantage. Exelon remains one of the largest, lowest carbon electric generators in the United States: nuclear for base load, natural gas for marginal and peak demand, hydro and pumped storage, and supplemental wind and solar renewables. As further legislation and regulation imposing requirements on emissions of GHG and air pollutants are promulgated, Exelon’s low-carbon, low-emission generation fleet will position the company to benefit from its comparative advantage over other generation fleets.

 

Renewable and Alternative Energy Portfolio Standards

 

Thirty-nine states and the District of Columbia have adopted some form of RPS requirement. Illinois, Pennsylvania and Maryland have laws specifically addressing energy efficiency and renewable energy initiatives. In addition to state level activity, RPS legislation has been considered and may be considered again in the future by the United States Congress. Also, states that currently do not have RPS requirements may adopt such legislation in the future.

 

Illinois utilities are required to procure cost-effective renewable energy resources in amounts that equal or exceed 2% of the total electricity that each electric utility supplies to its eligible retail customers. ComEd is also required to acquire amounts of renewable energy resources to cumulatively increase this percentage to at least 10% by June 1, 2015 and an ultimate target of at least 25% by June 1, 2025. All goals are subject to rate impact criteria set forth by Illinois legislation. As of December 31, 2015, ComEd had purchased sufficient renewable energy resources or equivalents, such as RECs, to comply with the Illinois legislation. ComEd currently retires all RECs upon transfer and acceptance. ComEd is permitted to recover procurement costs of RECs from retail customers without mark-up through rates.

 

The AEPS Act became effective for PECO on January 1, 2011. During 2015, PECO was required to supply approximately 5.0% of electric energy generated from Tier I alternative energy resources (including solar, wind power, low-impact hydropower, geothermal energy, biologically derived methane gas, fuel cells, biomass energy, coal mine methane and black liquor generated within Pennsylvania), as measured in AECs, through May 31, 2015 and subsequently 5.5% beginning June 1, 2015 and continuing through May 31, 2016. PECO was also required to supply 6.2% of electric energy generated from Tier II alternative energy resources (including waste coal, demand-side management, large-scale hydropower, municipal solid waste, generation of electricity utilizing wood and by-products of the pulping process and wood, distributed generation systems and integrated combined coal gasification technology), as measured in AECs, through May 31, 2015 and subsequently 8.2% beginning June 1, 2015 and continuing through May 31, 2016. The compliance requirements will incrementally escalate to 8.0% for Tier I and 10.0% for Tier II by 2021. In order to comply with these requirements, PECO entered into agreements with varying terms with accepted bidders, including Generation, to purchase non-solar Tier I, solar Tier 1 and Tier II AECs. PECO also purchases AECs through its DSP Program full requirement contracts.

 

Section 7-703 of the Public Utilities Article in Maryland sets forth the RPS requirement, which applies to all retail electricity sales in Maryland by electricity suppliers. The RPS requirement requires that suppliers obtain a specified percentage of the electricity it sells from Tier 1 sources (solar, wind, biomass, methane, geothermal, ocean, fuel cell, small hydroelectric, and poultry litter) and Tier 2

 

29


Table of Contents

sources (hydroelectric, other than pump storage generation, and waste-to-energy). The RPS requirement began in 2006, requiring that suppliers procure 1.0% and 2.5% from Tier 1 and Tier 2 sources, respectively, escalating in 2022 to 22.0% from Tier 1 sources, including at least 2.0% from solar energy, and a phase out of Tier 2 resource options by 2022. In 2015, 10.5% was required from Tier 1 renewable sources, including at least 0.5% derived from solar energy and 2.5% from Tier 2 renewable sources. BGE is subject to requirements established by the Public Utilities Article in Maryland related to the use of alternative energy resources; however, the wholesale suppliers that supply power to BGE through SOS procurement auctions have the obligation, by contract with BGE, to meet the RPS requirements.

 

Similar to ComEd, PECO and BGE, Generation’s retail electric business must source a portion of the electric load it serves in many of the states in which it does business from renewable resources or approved equivalents such as RECs. Potential regulation and legislation regarding renewable and alternative energy resources could increase the pace of development of wind and other renewable/alternative energy resources, which could put downward pressure on wholesale market prices for electricity in some markets where Exelon operates generation assets. At the same time, such developments may present some opportunities for sales of Generation’s renewable power, including from wind, solar, hydroelectric and landfill gas.

 

See Note 3—Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

 

Executive Officers of the Registrants as of February 10, 2016

 

Exelon

 

Name

   Age   

Position

  

Period

Crane, Christopher M.

   57    Chief Executive Officer, Exelon;    2012 - Present
      Chairman, ComEd, PECO & BGE    2012 - Present
      President, Exelon    2008 - Present
      President, Generation    2008 - 2013
      Chief Operating Officer, Exelon    2008 - 2012
      Chief Operating Officer, Generation    2007 - 2010

Cornew, Kenneth W.

   50    Senior Executive Vice President and Chief Commercial Officer, Exelon;    2013 - Present
      President and CEO, Generation    2013 - Present
      Executive Vice President and Chief Commercial Officer, Exelon    2012 - 2013
      President and Chief Executive Officer, Constellation    2012 - 2013
      Senior Vice President, Exelon; President, Power Team    2008 - 2012

O’Brien, Denis P.

   55    Senior Executive Vice President, Exelon; Chief Executive Officer, Exelon Utilities    2012 - Present
      Vice Chairman, ComEd, PECO, BGE    2012 - Present
      Chief Executive Officer, PECO; Executive Vice President, Exelon    2007 - 2012
      President and Director, PECO    2003 - 2012

Pramaggiore, Anne R.

   57    Chief Executive Officer, ComEd    2012 - Present
      President, ComEd    2009 - Present
      Chief Operating Officer, ComEd    2009 - 2012

 

30


Table of Contents

Name

   Age   

Position

  

Period

Adams, Craig L.

   63    President and Chief Executive Officer, PECO    2012 - Present
      Senior Vice President and Chief Operating Officer, PECO    2007 - 2012

Butler, Calvin G.

   46    Chief Executive Officer, BGE    2014 - Present
      Senior Vice President, Regulatory and External Affairs, BGE    2013 - 2014
      Senior Vice President, Corporate Affairs, Exelon    2011 - 2013
      Senior Vice President, Human Resources, Exelon    2010 - 2011
      Senior Vice President, Corporate Affairs, ComEd    2009 - 2010

Von Hoene Jr., William A.

   62    Senior Executive Vice President and Chief Strategy Officer, Exelon    2012 - Present
      Executive Vice President, Finance and Legal, Exelon    2009 - 2012

Thayer, Jonathan W.

   44    Senior Executive Vice President and Chief Financial Officer, Exelon    2012 - Present
      Senior Vice President and Chief Financial Officer, Constellation Energy; Treasurer, Constellation Energy    2008 - 2012

Aliabadi, Paymon

   53    Executive Vice President and Chief Enterprise Risk Officer, Exelon    2013 - Present
      Managing Director, Gleam Capital Management    2012 - 2013
      Principal and Managing Director, Gunvor International    2009 - 2011

DesParte, Duane M.

   52    Senior Vice President and Corporate Controller, Exelon    2008 - Present

 

Generation

 

Name

   Age   

Position

  

Period

Cornew, Kenneth W.

   50    Senior Executive Vice President and Chief Commercial Officer, Exelon;    2013 - Present
      President and CEO, Generation    2013 - Present
      Executive Vice President and Chief Commercial Officer, Exelon    2012 - 2013
      President and Chief Executive Officer, Constellation    2012 - 2013
      Senior Vice President, Exelon; President, Power Team    2008 - 2012

Nigro, Joseph

   51    Executive Vice President, Exelon; Chief Executive Officer, Constellation    2013 - Present
      Senior Vice President, Portfolio Management and Strategy    2012 - 2013
      Vice President, Structuring and Portfolio Management, Exelon Power Team    2010 - 2012

Pacilio, Michael J.

   55    Executive Vice President and Chief Operating Officer, Exelon Generation    2015 - Present
      President, Exelon Nuclear; Senior Vice President and Chief Nuclear Officer, Generation    2010 - 2015
      Chief Operating Officer, Exelon Nuclear    2007 - 2010

 

31


Table of Contents

Name

   Age   

Position

  

Period

Hanson, Bryan C.

   50    President and Chief Nuclear Officer, Exelon Nuclear; Senior Vice President, Exelon Generation    2015 - Present
      Chief Operating Officer, Exelon Nuclear    2014 - 2015
      Senior Vice President of Operations, Generation    2010 - 2013
      Vice President of Operations, Generation    2009 - 2010

DeGregorio, Ronald

   53    Senior Vice President, Generation; President, Exelon Power    2012 - Present
      Chief Integration Officer, Exelon    2011 - 2012
      Chief Operating Officer, Exelon Transmission Company    2010 - 2011
      Senior Vice President, Mid- Atlantic Operations, Exelon Nuclear    2007 - 2010

Wright, Bryan P.

   49    Senior Vice President and Chief Financial Officer, Generation    2013 - Present
      Senior Vice President, Corporate Finance, Exelon    2012 - 2013
      Chief Accounting Officer, Constellation Energy    2009 - 2012
      Vice President and Controller, Constellation Energy    2008 - 2012

Aiken, Robert

   49    Vice President and Controller, Generation    2012 - Present
      Executive Director and Assistant Controller, Constellation    2011 - 2012
      Executive Director of Operational Accounting, Constellation Energy Commodities Group    2009 - 2011

 

ComEd

 

Name

   Age   

Position

  

Period

Pramaggiore, Anne R.

   57    Chief Executive Officer, ComEd    2012 - Present
      President, ComEd    2009 - Present
      Chief Operating Officer, ComEd    2009 - 2012

Donnelly, Terence R.

   55    Executive Vice President and Chief Operating Officer, ComEd    2012 - Present
      Executive Vice President, Operations, ComEd    2009 - 2012

Trpik Jr., Joseph R.

   46    Senior Vice President, Chief Financial Officer and Treasurer, ComEd    2009 - Present

Jensen, Val

   59    Senior Vice President, Customer Operations, ComEd    2012 - Present
      Vice President, Marketing and Environmental Programs, ComEd    2008 - 2012

O’Neill, Thomas S.

   53    Senior Vice President, Regulatory and Energy Policy and General Counsel, ComEd    2010 - Present
      Senior Vice President, Exelon    2009 - 2010

Marquez Jr., Fidel

   54    Senior Vice President, Governmental and External Affairs, ComEd    2012 - Present
      Senior Vice President, Customer Operations, ComEd    2009 - 2012

 

32


Table of Contents

Name

   Age   

Position

  

Period

Brookins, Kevin B.

   54    Senior Vice President, Strategy & Administration, ComEd    2012 - Present
      Vice President, Operational Strategy and Business Intelligence, ComEd    2010 - 2012
      Vice President, Distribution System Operations, ComEd    2008 - 2010

Anthony, J. Tyler

   51    Senior Vice President, Distribution Operations, ComEd    2010 - Present
      Vice President, Transmission and Substations, ComEd    2007 - 2010

Kozel, Gerald J.

   43    Vice President, Controller, ComEd    2013 - Present
      Assistant Corporate Controller, Exelon    2012 - 2013
      Director of Financial Reporting and Analysis, Exelon    2009 - 2012

 

PECO

 

Name

   Age   

Position

  

Period

Adams, Craig L.

   63    President and Chief Executive Officer, PECO    2012 - Present
      Senior Vice President and Chief Operating Officer, PECO    2007 - 2012

Barnett, Phillip S.

   52    Senior Vice President and Chief Financial Officer, PECO    2007 - Present
      Treasurer, PECO    2012 - Present

Innocenzo, Michael A.

   50    Senior Vice President and Chief Operations Officer, PECO    2012 - Present
      Vice President, Distribution System Operations and Smart Grid/Smart Meter, PECO    2010 - 2012
      Vice President, Distribution System Operations    2007 - 2010

Webster Jr., Richard G.

   54    Vice President, Regulatory Policy and Strategy, PECO    2012 - Present
      Director of Rates and Regulatory Affairs    2007 - 2012

Murphy, Elizabeth A.

   56    Vice President, Governmental and External Affairs, PECO    2012 - Present
      Director, Governmental & External Affairs, PECO    2007 - 2012

Jiruska, Frank J.

   55    Vice President, Customer Operations, PECO    2013 - Present
      Director of Energy and Marketing Services, PECO    2010 - 2013

Diaz Jr., Romulo L.

   69    Vice President and General Counsel, PECO    2012 - Present
      Vice President, Governmental and External Affairs, PECO    2009 - 2012

Bailey, Scott A.

   39    Vice President and Controller, PECO    2012 - Present
      Assistant Controller, Generation    2011 - 2012
      Director of Accounting, Power Team    2007 - 2011

 

33


Table of Contents

BGE

 

Name

   Age   

Position

  

Period

Butler, Calvin G.

   46    Chief Executive Officer, BGE    2014 - Present
      Senior Vice President, Regulatory and External Affairs, BGE    2013 - 2014
      Senior Vice President, Corporate Affairs, Exelon    2011 - 2013
      Senior Vice President, Human Resources, Exelon    2010 - 2011
      Senior Vice President, Corporate Affairs, ComEd    2009 - 2010

Woerner, Stephen J.

   48    President, BGE    2014 - Present
      Chief Operating Officer, BGE    2012 - Present
      Senior Vice President, BGE    2009 - 2014
      Vice President and Chief Integration Officer, Constellation Energy    2011 - 2012
      Vice President and Chief Information Officer, Constellation Energy    2010 - 2011
      Vice President, Transformation, Constellation Energy    2009 - 2010

Vahos, David M.

   43    Chief Financial Officer and Treasurer    2014 - Present
      Vice President and Controller, BGE    2012 - 2014
      Executive Director, Audit, Constellation    2010 - 2012
      Director, Finance, BGE    2006 - 2010

Case, Mark D.

   54    Vice President, Strategy and Regulatory Affairs, BGE    2012 - Present
      Senior Vice President, Strategy and Regulatory Affairs, BGE    2007 - 2012

Biagiotti, Robert D.

   45    Vice President, Customer Operations and Chief Customer Officer, BGE    2015 - Present
      Vice President, Gas Distribution, BGE    2011 - 2015
      Director, Gas and Electric Field Services, BGE    2008 - 2011

Gahagan, Daniel P.

   62    Vice President and General Counsel, BGE    2007 - Present

Bauer, Matthew N.

   39    Vice President and Controller, BGE    2014 - Present
      Vice President of Power Finance, Exelon Power    2012 - 2014
      Director, FP&A and Retail, Constellation    2012 - 2012
      Executive Director, Corporate Development, Constellation    2009 - 2012

Núñez, Alexander G.

   44    Vice President, Governmental and External Affairs, BGE    2013 - Present
      Director, State Affairs, BGE    2012 - 2013
      Director, State Affairs, Constellation Energy    2006 - 2012

 

ITEM 1A. RISK FACTORS

 

Each of the Registrants operates in a market and regulatory environment that poses significant risks, many of which are beyond that Registrant’s control. Management of each Registrant regularly meets with the Chief Enterprise Risk Officer and the RMC, which comprises officers of the Registrants, to identify and evaluate the most significant risks of the Registrants’ businesses, and the appropriate steps to manage and mitigate those risks. The Chief Enterprise Risk Officer and senior executives of the Registrants discuss those risks with the finance and risk committee and audit committee of the Exelon board of directors and the ComEd, PECO and BGE boards of directors. In addition, the

 

34


Table of Contents

generation oversight committee of the Exelon board of directors evaluates risks related to the generation business. The risk factors discussed below could adversely affect one or more of the Registrants’ results of operations or cash flows and the market prices of their publicly traded securities. Each of the Registrants has disclosed the known material risks that affect its business at this time. However, there may be further risks and uncertainties that are not presently known or that are not currently believed by a Registrant to be material that could adversely affect its performance or financial condition in the future.

 

Exelon’s financial conditions and results of operations are affected to a significant degree by: (1) Generation’s position as a predominantly nuclear generator selling power into competitive energy markets with a concentration in select regions, and (2) the role of ComEd, PECO and BGE as operators of electric transmission and distribution systems in three of the largest metropolitan areas in the United States. Factors that affect the financial condition and results of operations of the Registrants fall primarily under the following categories, all of which are discussed in further detail below:

 

   

Market and Financial Factors. Exelon’s and Generation’s results of operations are affected by price fluctuations in the energy markets. Power prices are a function of supply and demand, which in turn are driven by factors such as (1) the price of fuels, in particular the price of natural gas, which affects the prices that Generation can obtain for the output of its power plants, (2) the presence of other generation resources in the markets in which Generation’s output is sold, (3) the demand for electricity in the markets where the Registrants conduct their business, and (4) the impacts of on-going competition in the retail channel.

 

   

Regulatory and Legislative Factors. The regulatory and legislative factors that affect the Registrants include changes to the laws and regulations that govern competitive markets and utility cost recovery, and that drive environmental policy. In particular, Exelon’s and Generation’s financial performance could be affected by changes in the design of competitive wholesale power markets or Generation’s ability to sell power in those markets. In addition, potential regulation and legislation, including legislation or regulation regarding climate change and renewable portfolio standards, could have significant effects on the Registrants. Also, returns for ComEd, PECO and BGE are influenced significantly by state regulation and regulatory proceedings.

 

   

Operational Factors. The Registrants’ operational performance is subject to those factors inherent in running the nation’s largest fleet of nuclear power reactors and large electric and gas distribution systems. The safe and effective operation of the nuclear facilities and the ability to effectively manage the associated decommissioning obligations as well as the ability to maintain the availability, reliability and safety of its energy delivery systems are fundamental to Exelon’s ability to protect and grow shareholder value. Additionally, the operating costs of ComEd, PECO and BGE, and the opinions of their customers and regulators, are affected by those companies’ ability to maintain the reliability and safety of their energy delivery systems.

 

   

Risks Related to the Pending Merger with PHI. There are various risks and uncertainties associated with the merger agreement announced with PHI on April 29, 2014.

 

A discussion of each of these risk categories and other risk factors is included below.

 

Market and Financial Factors

 

Generation is exposed to depressed prices in the wholesale and retail power markets, which could negatively affect its results of operations or cash flows. (Exelon and Generation)

 

Generation is exposed to commodity price risk for the unhedged portion of its electricity generation supply portfolio. Generation’s earnings and cash flows are therefore subject to variability as spot and forward market prices in the markets in which it operates rise and fall.

 

35


Table of Contents

Price of Fuels: The spot market price of electricity for each hour is generally determined by the marginal cost of supplying the next unit of electricity to the market during that hour. Thus, the market price of power is affected by the market price of the marginal fuel used to generate the electricity unit. Often, the next unit of electricity will be supplied from generating stations fueled by fossil fuels. Consequently, changes in the market price of fossil fuels often result in comparable changes to the market price of power. For example, the use of new technologies to recover natural gas from shale deposits has increased natural gas supply and reserves, placing downward pressure on natural gas prices and, therefore, on power prices. The continued addition of supply from new alternative generation resources, such as wind and solar, whether mandated through RPS or otherwise subsidized or encouraged through climate legislation or regulation, may displace a higher marginal cost plant, further reducing power prices. In addition, further delay or elimination of EPA air quality regulations could prolong the duration for which the cost of pollution from fossil fuel generation is not factored into market prices.

 

Demand and Supply: The market price for electricity is also affected by changes in the demand for electricity and the available supply of electricity. Unfavorable economic conditions, milder than normal weather, and the growth of energy efficiency and demand response programs could each depress demand. The result is that higher-cost generating resources do not run as frequently, putting downward pressure on electricity market prices. The tepid economic environment in recent years and growing energy efficiency and demand response initiatives have limited the demand for electricity in Generation’s markets. In addition, in some markets, the supply of electricity through wind or solar generation, when combined with other base-load generation such as nuclear, could often exceed demand during some hours of the day, resulting in loss of revenue for base-load generating plants. Increased supply in excess of demand is furthered by the continuation of RPS mandates and subsidies for renewable energy.

 

Retail Competition: Generation’s retail operations compete for customers in a competitive environment, which affects the margins that Generation can earn and the volumes that it is able to serve. In periods of sustained low natural gas and power prices and low market volatility, retail competitors can aggressively pursue market share because the barriers to entry can be low and wholesale generators (including Generation) use their retail operations to hedge generation output. Increased or more aggressive competition could adversely affect overall gross margins and profitability in Generation’s retail operations.

 

Sustained low market prices or depressed demand and over-supply could adversely affect Exelon’s and Generation’s results of operations or cash flows, and such impacts could be emphasized given Generation’s concentration of base-load electric generating capacity within primarily two geographic market regions, namely the Midwest and the Mid-Atlantic. These impacts could adversely affect Exelon’s and Generation’s ability to fund other discretionary uses of cash such as growth projects or to pay dividends. In addition, such conditions may no longer support the continued operation of certain generating facilities, which could adversely affect Exelon’s and Generation’s result of operations through accelerated depreciation expense, impairment charges related to inventory that cannot be used at other nuclear units and cancellation of in-flight capital projects, accelerated amortization of plant specific nuclear fuel costs, severance costs, accelerated asset retirement obligation expense relate to future decommissioning activities, and additional funding of decommissioning costs, which can be offset in whole or in part by reduced operating and maintenance expenses. A slow recovery in market conditions could result in a prolonged depression of or further decline in commodity prices, including low forward natural gas and power prices and low market volatility, which could also adversely affect Exelon’s and Generation’s results of operations, cash flows or financial positions. See Note 9—Implications of Potential Early Plant Retirements of the Combined Notes to Consolidated Financial Statements for additional information.

 

36


Table of Contents

In addition to price fluctuations, Generation is exposed to other risks in the power markets that are beyond its control and could negatively affect its results of operations. (Exelon and Generation)

 

Credit Risk. In the bilateral markets, Generation is exposed to the risk that counterparties that owe Generation money, or are obligated to purchase energy or fuel from Generation, will not perform under their obligations for operational or financial reasons. In the event the counterparties to these arrangements fail to perform, Generation could be forced to purchase or sell energy or fuel in the wholesale markets at less favorable prices and incur additional losses, to the extent of amounts, if any, already paid to the counterparties. In the spot markets, Generation is exposed to risk as a result of default sharing mechanisms that exist within certain markets, primarily RTOs and ISOs, the purpose of which is to spread such risk across all market participants. Generation is also a party to agreements with entities in the energy sector that have experienced rating downgrades or other financial difficulties. In addition, Generation’s retail sales subject it to credit risk through competitive electricity and natural gas supply activities to serve commercial and industrial companies, governmental entities and residential customers. Retail credit risk results when customers default on their contractual obligations. This risk represents the loss that could be incurred due to the nonpayment of a customer’s account balance, as well as the loss from the resale of energy previously committed to serve the customer.

 

Market Designs. The wholesale markets remain evolving markets that vary from region to region and are still developing rules, practices and procedures. Changes in these market rules, problems with rule implementation, or failure of any of these markets could adversely affect Generation’s business. In addition, a significant decrease in market participation could affect market liquidity and have a detrimental effect on market stability.

 

The Registrants are potentially affected by emerging technologies that could over time affect or transform the energy industry, including technologies related to energy generation, distribution and consumption. (Exelon, Generation, ComEd, PECO and BGE)

 

Some of these technologies include, but are not limited to further shale gas development or sources, cost-effective renewable energy technologies, broad consumer adoption of electric vehicles, distributed generation and energy storage devices. Such developments could affect the price of energy, could affect energy deliveries as customer-owned generation becomes more cost-effective, could require further improvements to our distribution systems to address changing load demands and could make portions of our electric system power supply and transmission and/or distribution facilities obsolete prior to the end of their useful lives. Such technologies could also result in further declines in commodity prices or demand for delivered energy. Each of these factors could materially affect the Registrants’ results of operations, cash flows or financial positions through, among other things, reduced operating revenues, increased operating and maintenance expenses, and increased capital expenditures, as well as potential asset impairment charges or accelerated depreciation and decommissioning expenses over shortened remaining asset useful lives.

 

Market performance and other factors could decrease the value of NDT funds and employee benefit plan assets and could increase the related employee benefit plan obligations, which then could require significant additional funding. (Exelon, Generation, ComEd, PECO and BGE)

 

Disruptions in the capital markets and their actual or perceived effects on particular businesses and the greater economy could adversely affect the value of the investments held within Generation’s NDTs and Exelon’s employee benefit plan trusts. The Registrants have significant obligations in these areas and Exelon and Generation hold substantial assets in these trusts to meet those obligations. The asset values are subject to market fluctuations and will yield uncertain returns, which could fall below the Registrants’ projected return rates. A decline in the market value of the NDT fund investments could increase Generation’s funding requirements to decommission its nuclear plants. A decline in the

 

37


Table of Contents

market value of the pension and OPEB plan assets will increase the funding requirements associated with Exelon’s pension and OPEB plan obligations. Additionally, Exelon’s pension and OPEB plan liabilities are sensitive to changes in interest rates. As interest rates decrease, the liabilities increase, potentially increasing benefit costs and funding requirements. Changes in demographics, including increased numbers of retirements or changes in life expectancy assumptions or changes to Social Security or Medicare eligibility requirements could also increase the costs and funding requirements of the obligations related to the pension and OPEB plans. If future increases in pension and other postretirement costs as a result of reduced plan assets or other factors cannot be recovered, or cannot be recovered in a timely manner, from ComEd, PECO and BGE customers, the results of operations and financial positions of ComEd, PECO and BGE could be negatively affected. Ultimately, if the Registrants are unable to manage the investments within the NDT funds and benefit plan assets, and are unable to manage the related benefit plan liabilities, their results of operations, cash flows or financial positions could be negatively impacted.

 

Unstable capital and credit markets and increased volatility in commodity markets could adversely affect the Registrants’ businesses in several ways, including the availability and cost of short-term funds for liquidity requirements, the Registrants’ ability to meet long-term commitments, Generation’s ability to hedge effectively its generation portfolio, and the competitiveness and liquidity of energy markets; each could negatively impact the Registrants’ results of operations, cash flows or financial positions. (Exelon, Generation, ComEd, PECO and BGE)

 

The Registrants rely on the capital markets, particularly for publicly offered debt, as well as the banking and commercial paper markets, to meet their financial commitments and short-term liquidity needs if internal funds are not available from the Registrants’ respective operations. Disruptions in the capital and credit markets in the United States or abroad could adversely affect the Registrants’ ability to access the capital markets or draw on their respective bank revolving credit facilities. The Registrants’ access to funds under their credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Those banks may not be able to meet their funding commitments to the Registrants if they experience shortages of capital and liquidity or if they experience excessive volumes of borrowing requests from the Registrants and other borrowers within a short period of time. The inability to access capital markets or credit facilities, and longer term disruptions in the capital and credit markets as a result of uncertainty, changing or increased regulation, reduced alternatives or failures of significant financial institutions could result in the deferral of discretionary capital expenditures, changes to Generation’s hedging strategy in order to reduce collateral-posting requirements, or a reduction in dividend payments or other discretionary uses of cash.

 

In addition, the Registrants have exposure to worldwide financial markets, including Europe. Disruptions in the European markets could reduce or restrict the Registrants’ ability to secure sufficient liquidity or secure liquidity at reasonable terms. As of December 31, 2015, approximately 25%, or $2.1 billion of the Registrants’ available credit facilities were with European banks. The credit facilities include $8.4 billion in aggregate total commitments of which $6.9 billion was available as of December 31, 2015. There were no borrowings under the Registrants’ credit facilities as of December 31, 2015. See Note 14—Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for additional information on the credit facilities.

 

The strength and depth of competition in energy markets depend heavily on active participation by multiple trading parties, which could be adversely affected by disruptions in the capital and credit markets and legislative and regulatory initiatives that may affect participants in commodities transactions. Reduced capital and liquidity and failures of significant institutions that participate in the energy markets could diminish the liquidity and competitiveness of energy markets that are important to the respective businesses of the Registrants. Perceived weaknesses in the competitive strength of

 

38


Table of Contents

the energy markets could lead to pressures for greater regulation of those markets or attempts to replace market structures with other mechanisms for the sale of power, including the requirement of long-term contracts, which could have a material adverse effect on Exelon’s and Generation’s results of operations or cash flows.

 

If any of the Registrants were to experience a downgrade in its credit ratings to below investment grade or otherwise fail to satisfy the credit standards in its agreements with its trading counterparties, it would be required to provide significant amounts of collateral under its agreements with counterparties and could experience higher borrowing costs. (Exelon, Generation, ComEd, PECO and BGE)

 

Generation’s business is subject to credit quality standards that could require market participants to post collateral for their obligations. If Generation were to be downgraded or lose its investment grade credit rating (based on its senior unsecured debt rating) or otherwise fail to satisfy the credit standards of trading counterparties, it would be required under its hedging arrangements to provide collateral in the form of letters of credit or cash, which may have a material adverse effect upon its liquidity. The amount of collateral required to be provided by Generation at any point in time is dependent on a variety of factors, including (1) the notional amount of the applicable hedge, (2) the nature of counterparty and related agreements, and (3) changes in power or other commodity prices. In addition, if Generation were downgraded, it could experience higher borrowing costs as a result of the downgrade. Generation could experience a downgrade in its ratings if any of the credit rating agencies concludes that the level of business or financial risk and overall creditworthiness of the power generation industry in general, or Generation in particular, has deteriorated. Changes in ratings methodologies by the credit rating agencies could also have a negative impact on the ratings of Generation. Generation has project-specific financing arrangements and must meet the requirements of various agreements relating to those financings. Failure to meet those arrangements could give rise to a project-specific financing default which, if not cured or waived, could result in the specific project being required to repay the associated debt or other borrowings earlier than otherwise anticipated, and if such repayment were not made, the lenders or security holders would generally have rights to foreclose against the project assets and related collateral.

 

ComEd’s, PECO’s and BGE’s operating agreements with PJM and PECO’s and BGE’s natural gas procurement contracts contain collateral provisions that are affected by their credit rating and market prices. If certain wholesale market conditions were to exist and ComEd, PECO and BGE were to lose their investment grade credit ratings (based on their senior unsecured debt ratings), they would be required to provide collateral in the forms of letters of credit or cash, which could have a material adverse effect upon their liquidity. Collateral posting requirements will generally increase as market prices rise and decrease as market prices fall. Collateral posting requirements for PECO and BGE, with respect to their natural gas supply contracts, will generally increase as forward market prices fall and decrease as forward market prices rise. Given the relationship to forward market prices, contract collateral requirements can be volatile. In addition, if ComEd, PECO and BGE were downgraded, they could experience higher borrowing costs as a result of the downgrade.

 

ComEd, PECO or BGE could experience a downgrade in its ratings if any of the credit rating agencies conclude that the level of business or financial risk and overall creditworthiness of the utility industry in general, or ComEd, PECO, or BGE in particular, has deteriorated. ComEd, PECO or BGE could experience a downgrade if the current regulatory environments in Illinois, Pennsylvania or Maryland, respectively, become less predictable by materially lowering returns for utilities in the applicable state or adopting other measures to limit electricity prices. Additionally, the ratings for ComEd, PECO or BGE could be downgraded if their financial results are weakened from current levels due to weaker operating performance or due to a failure to properly manage their capital structure. In addition, changes in ratings methodologies by the agencies could also have a negative impact on the ratings of ComEd, PECO or BGE.

 

39


Table of Contents

ComEd, PECO and BGE conduct their respective businesses and operate under governance models and other arrangements and procedures intended to assure that ComEd, PECO and BGE are treated as separate, independent companies, distinct from Exelon and other Exelon subsidiaries in order to isolate ComEd, PECO and BGE from Exelon and other Exelon subsidiaries in the event of financial difficulty at Exelon or another Exelon subsidiary. These measures (commonly referred to as “ring-fencing”) may help avoid or limit a downgrade in the credit ratings of ComEd, PECO and BGE in the event of a reduction in the credit rating of Exelon. Despite these ring-fencing measures, the credit ratings of ComEd, PECO or BGE could remain linked, to some degree, to the credit ratings of Exelon. Consequently, a reduction in the credit rating of Exelon could result in a reduction of the credit rating of ComEd, PECO or BGE, or all three. A reduction in the credit rating of ComEd, PECO or BGE could have a material adverse effect on ComEd, PECO or BGE, respectively.

 

See Liquidity and Capital Resources—Recent Market Conditions and Security Ratings for further information regarding the potential impacts of credit downgrades on the Registrants’ cash flows.

 

Generation’s financial performance could be negatively affected by price volatility, availability and other risk factors associated with the procurement of nuclear and fossil fuel. (Exelon and Generation)

 

Generation depends on nuclear fuel and fossil fuels to operate its generating facilities. Nuclear fuel is obtained predominantly through long-term uranium supply contracts, contracted conversion services, contracted enrichment services, or a combination thereof, and contracted fuel fabrication services. Natural gas and oil are procured for generating plants through annual, short-term and spot-market purchases. The supply markets for nuclear fuel, natural gas and oil are subject to price fluctuations, availability restrictions and counterparty default that could negatively affect the results of operations or cash flows for Generation.

 

Generation’s risk management policies cannot fully eliminate the risk associated with its commodity trading activities. (Exelon and Generation)

 

Generation’s asset-based power position as well as its power marketing, fuel procurement and other commodity trading activities expose Generation to risks of commodity price movements. Generation attempts to manage this exposure through enforcement of established risk limits and risk management procedures. These risk limits and risk management procedures may not work as planned and cannot eliminate all risks associated with these activities. Even when its policies and procedures are followed, and decisions are made based on projections and estimates of future performance, results of operations could be diminished if the judgments and assumptions underlying those decisions prove to be incorrect. Factors, such as future prices and demand for power and other energy-related commodities, become more difficult to predict and the calculations become less reliable the further into the future estimates are made. As a result, Generation cannot predict the impact that its commodity trading activities and risk management decisions could have on its business, operating results, cash flows or financial positions.

 

Generation buys and sells energy and other products and enters into financial contracts to manage risk and hedge various positions in Generation’s power generation portfolio. The proportion of hedged positions in its power generation portfolio could expose Generation to volatility in future results of operations.

 

Financial performance and load requirements could be adversely affected if Generation is unable to effectively manage its power portfolio. (Exelon and Generation)

 

A significant portion of Generation’s power portfolio is used to provide power under procurement contracts with ComEd, PECO, BGE and other customers. To the extent portions of the power portfolio

 

40


Table of Contents

are not needed for that purpose, Generation’s output is sold in the wholesale power markets. To the extent its power portfolio is not sufficient to meet the requirements of its customers under the related agreements, Generation must purchase power in the wholesale power markets. Generation’s financial results could be negatively affected if it is unable to cost-effectively meet the load requirements of its customers, manage its power portfolio and effectively address the changes in the wholesale power markets.

 

Challenges to tax positions taken by the Registrants as well as tax law changes and the inherent difficulty in quantifying potential tax effects of business decisions, could negatively impact the Registrants’ results of operations or cash flows. (Exelon, Generation, ComEd, PECO and BGE)

 

Corporate Tax Reform. There exists the potential for comprehensive tax reform in the United States that may significantly change the tax rules applicable to U.S. domiciled corporations. Exelon cannot assess what the overall effect of such potential legislation could be on its results of operations or cash flows.

 

1999 sale of fossil generating assets. The IRS has challenged Exelon’s 1999 tax position on its like-kind exchange transaction. Exelon and the IRS failed to reach a settlement on the like-kind exchange position and Exelon filed a petition on December 13, 2013 to initiate litigation in the United States Tax Court and the trial took place in August 2015. Exelon was not required to remit any part of the asserted tax or penalty in order to litigate the like-kind exchange position. The litigation could take three to five years including appeals, if necessary.

 

As of December 31, 2015, if the IRS is successful in its challenge to the like-kind exchange position, Exelon’s potential cash outflow, including tax and after-tax interest, exclusive of penalties, that could become currently payable may be as much as $760 million, of which approximately $280 million would be attributable to ComEd after consideration of Exelon’s agreement to hold ComEd harmless. In addition to attempting to impose tax on the like-kind exchange position, the IRS has asserted approximately $90 million of penalties for a substantial understatement of tax. The timing effects of the final resolution of the like-kind exchange matter are unknown. See Note 15—Income Taxes of the Combined Notes to Consolidated Financial Statements for additional information.

 

Tax reserves. The Registrants are required to make judgments in order to estimate their obligations to taxing authorities. These tax obligations include income, real estate, sales and use and employment-related taxes and ongoing appeals issues related to these tax matters. These judgments include reserves for potential adverse outcomes regarding tax positions that have been taken that could be subject to challenge by the tax authorities. See Notes 1—Significant Accounting Policies and Note 15—Income Taxes of the Combined Notes to Consolidated Financial Statements for additional information.

 

Increases in customer rates and the impact of economic downturns could lead to greater expense for uncollectible customer balances. Additionally, increased rates could lead to decreased volumes delivered. Both of these factors could decrease Generation’s, ComEd’s, PECO’s and BGE’s results from operations or cash flows. (Exelon, Generation, ComEd, PECO and BGE)

 

ComEd’s, PECO’s and BGE’s current procurement plans include purchasing power through contracted suppliers and in the spot market. ComEd’s and PECO’s costs of purchased power are charged to customers without a return or profit component. BGE’s SOS rates charged to customers recover BGE’s wholesale power supply costs and include a return component. For PECO, purchased natural gas costs are charged to customers with no return or profit component. For BGE, purchased natural gas costs are charged to customers using a MBR mechanism that compares the actual cost of gas to a market index. The difference between the actual cost and the market index is shared equally

 

41


Table of Contents

between shareholders and customers. Purchased power and natural gas prices fluctuate based on their relevant supply and demand. Significantly higher rates related to purchased power and natural gas could result in declines in customer usage, lower revenues and potentially additional uncollectible accounts expense for ComEd, PECO and BGE. In addition, any challenges by the regulators or ComEd, PECO and BGE as to the recoverability of these costs could have a material effect on the Registrants’ results of operations or cash flows. Also, ComEd’s, PECO’s and BGE’s cash flows could be affected by differences between the time period when electricity and natural gas are purchased and the ultimate recovery from customers.

 

Further, the impacts of economic downturns on ComEd, PECO and BGE customers and purchased natural gas costs for PECO and BGE customers, such as unemployment for residential customers and less demand for products and services provided by commercial and industrial customers, and the related regulatory limitations on residential service terminations, could result in an increase in the number of uncollectible customer balances, which would negatively impact ComEd’s, PECO’s and BGE’s results of operations or cash flows. Generation’s customer-facing energy delivery activities face economic downturn risks similar to Exelon’s utility businesses, such as lower volumes sold and increased expense for uncollectible customer balances. As Generation increases its customer-facing energy delivery activities, economic downturn impacts could negatively affect Generation’s results of operations or cash flows. See ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK for further discussion of the Registrants’ credit risk.

 

The effects of weather could impact the Registrants’ results of operations or cash flows. (Exelon, Generation, ComEd, PECO and BGE)

 

Weather conditions directly influence the demand for electricity and natural gas and affect the price of energy commodities. Temperatures above normal levels in the summer tend to increase summer cooling electricity demand and revenues, and temperatures below normal levels in the winter tend to increase winter heating electricity and gas demand and revenues. Moderate temperatures adversely affect the usage of energy and resulting revenues at ComEd and PECO. Due to revenue decoupling, BGE recognizes revenues at MDPSC-approved levels per customer, regardless of what actual distribution volumes are for a billing period, and is not affected by actual weather with the exception of major storms. Extreme weather conditions or damage resulting from storms could stress ComEd’s, PECO’s and BGE’s transmission and distribution systems, communication systems and technology, resulting in increased maintenance and capital costs and limiting each company’s ability to meet peak customer demand. These extreme conditions could have detrimental effects on ComEd’s, PECO’s and BGE’s results of operations or cash flows. First and third quarter financial results, in particular, are substantially dependent on weather conditions, and could make period comparisons less relevant.

 

Generation’s operations are also affected by weather, which affects demand for electricity as well as operating conditions. To the extent that weather is warmer in the summer or colder in the winter than assumed, Generation could require greater resources to meet its contractual commitments. Extreme weather conditions or storms could affect the availability of generation and its transmission, limiting Generation’s ability to source or send power to where it is sold. In addition, drought-like conditions limiting water usage could impact Generation’s ability to run certain generating assets at full capacity. These conditions, which cannot be accurately predicted, could have an adverse effect by causing Generation to seek additional capacity at a time when wholesale markets are tight or to seek to sell excess capacity at a time when markets are weak.

 

42


Table of Contents

Certain long-lived assets and other assets recorded on the Registrants’ statements of financial position could become impaired, which would result in write-offs of the impaired amounts. (Exelon, Generation, ComEd, PECO and BGE)

 

Long-lived assets represent the single largest asset class on the Registrants’ statement of financial positions. Specifically, long-lived assets account for 60%, 56%, 66%, 69% and 80% of total assets for Exelon, Generation, ComEd, PECO and BGE, respectively, as of December 31, 2015. In addition, Exelon and Generation have significant balances related to unamortized energy contracts. See Note 11—Intangible Assets of the Combined Notes to Consolidated Financial Statements for additional information on Exelon’s unamortized energy contracts. The Registrants evaluate the recoverability of the carrying value of long-lived assets to be held and used whenever events or circumstances indicating a potential impairment exist. Factors such as the business climate, including current and future energy and market conditions, environmental regulation, and the condition of assets are considered when evaluating long-lived assets for potential impairment. An impairment would require the Registrants to reduce the carrying value of the long-lived asset through a non-cash charge to expense by the amount of the impairment, and such an impairment could have a material adverse impact on the Registrants’ results of operations.

 

Exelon holds investments in coal-fired plants in Georgia that are subject to long-term leases. The investments are accounted for as direct financing lease investments. The investments represent the estimated residual value of the leased assets at the end of the lease term. On an annual basis, Exelon reviews the estimated residual values of its direct financing lease investments and records a non-cash impairment charge to expense if the review indicates an other than temporary decline in the fair value of the residual values below their carrying values. Such an impairment could have a material adverse impact on Exelon’s results of operations.

 

Exelon and ComEd had approximately $2.7 billion of goodwill recorded at December 31, 2015 in connection with the merger between PECO and Unicom Corporation, the former parent company of ComEd. Under GAAP, goodwill remains at its recorded amount unless it is determined to be impaired, which is generally based upon an annual analysis that compares the implied fair value of the goodwill to its carrying value. If an impairment occurs, the amount of the impaired goodwill will be written-off to expense, which will also reduce equity. The actual timing and amounts of any goodwill impairments will depend on many sensitive, interrelated and uncertain variables. A successful IRS challenge to Exelon’s and ComEd’s like-kind exchange income tax position, adverse regulatory actions such as early termination of EIMA, or changes in significant assumptions used in estimating ComEd’s fair value (e.g., discount and growth rates, utility sector market performance and transactions, operating and capital expenditure requirements and the fair value of debt) could result in an impairment. Such an impairment would result in a non-cash charge to expense, which could have a material adverse impact on Exelon’s and ComEd’s results of operations.

 

See ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS—Critical Accounting Policies and Estimates and Note 7—Property, Plant and Equipment, Note 8—Impairment of Long Lived Assets and Note 11—Intangible Assets of the Combined Notes to the Consolidated Financial Statements for additional discussion on long-lived asset and goodwill impairments.

 

The Registrants’ businesses are capital intensive, and their assets could require significant expenditures to maintain and are subject to operational failure, which could result in potential liability. (Exelon, Generation, ComEd, PECO and BGE)

 

The Registrants’ businesses are capital intensive and require significant investments by Generation in electric generating facilities and by ComEd, PECO and BGE in transmission and

 

43


Table of Contents

distribution infrastructure projects. These operational systems and infrastructure have been in service for many years. Equipment, even if maintained in accordance with good utility practices, is subject to operational failure, including events that are beyond the Registrants’ control, and could require significant expenditures to operate efficiently. The Registrants’ results of operations, financial conditions, or cash flows could be adversely affected if they were unable to effectively manage their capital projects or raise the necessary capital. Furthermore, operational failure of electric or gas systems or infrastructure could result in potential liability if such failure results in damage to property or injury to individuals. See ITEM 1. BUSINESS for further information regarding the Registrants’ potential future capital expenditures.

 

Exelon and its subsidiaries have guaranteed the performance of third parties, which could result in substantial costs in the event of non-performance by third parties. In addition, the Registrants have rights under agreements which obligate third parties to indemnify the Registrants for various obligations, and the Registrants could incur substantial costs in the event that the applicable Registrant is unable to enforce those agreements or the applicable third-party is otherwise unable to perform. (Exelon, Generation, ComEd, PECO and BGE)

 

The Registrants have issued guarantees of the performance of third parties, which obligate one or more of the Registrants or their subsidiaries to perform in the event that the third parties do not perform. In the event of non-performance by those third parties, the Registrants could incur substantial cost to fulfill their obligations under these guarantees. Such performance guarantees could have a material impact on the operating results, financial conditions, or cash flows of the Registrants.

 

The Registrants have entered into various agreements with counterparties that require those counterparties to reimburse a Registrant and hold it harmless against specified obligations and claims. To the extent that any of these counterparties are affected by deterioration in their creditworthiness or the agreements are otherwise determined to be unenforceable, the affected Registrant could be held responsible for the obligations, which could impact that Registrant’s results of operations, cash flows or financial positions. In connection with Exelon’s 2001 corporate restructuring, Generation assumed certain of ComEd’s and PECO’s rights and obligations with respect to their former generation businesses. Further, ComEd and PECO could have entered into agreements with third parties under which the third-party agreed to indemnify ComEd or PECO for certain obligations related to their respective former generation businesses that have been assumed by Generation as part of the restructuring. If the third-party or Generation experienced events that reduced its creditworthiness or the indemnity arrangement became unenforceable, ComEd or PECO could be liable for any existing or future claims, which could impact ComEd’s or PECO’s results of operations, cash flows or financial positions.

 

Regulatory and Legislative Factors

 

The Registrants’ generation and energy delivery businesses are highly regulated and could be subject to regulatory and legislative actions that adversely affect their operations or financial results. Fundamental changes in regulation or legislation or violation of tariffs or market rules and anti-manipulation laws, could disrupt the Registrants’ business plans and adversely affect their operations or financial results. (Exelon, Generation, ComEd, PECO and BGE)

 

Substantially all aspects of the businesses of the Registrants are subject to comprehensive Federal or state regulation and legislation. Further, Exelon’s and Generation’s operating results and cash flows are heavily dependent upon the ability of Generation to sell power at market-based rates, as opposed to cost-based or other similarly regulated rates, and Exelon’s, ComEd’s, PECO’s and BGE’s operating results and cash flows are heavily dependent on the ability of ComEd, PECO and BGE to recover their costs for the retail purchase and distribution of power to their customers.

 

44


Table of Contents

Similarly, there is risk that financial market regulations could increase the Registrants’ compliance costs and limit their ability to engage in certain transactions. In the planning and management of operations, the Registrants must address the effects of regulation on their businesses and changes in the regulatory framework, including initiatives by Federal and state legislatures, RTOs, exchanges, ratemaking agencies and taxing authorities. Additionally, the Registrants need to be cognizant and understand rule changes or Registrant actions that could result in potential violation of tariffs, market rules and anti-manipulation laws. Fundamental changes in regulations or other adverse legislative actions affecting the Registrants’ businesses would require changes in their business planning models and operations and could negatively impact their results of operations, cash flows or financial positions.

 

Regulatory and legislative developments related to climate change and RPS could also significantly affect Exelon’s and Generation’s results of operations, cash flows or financial positions. Various legislative and regulatory proposals to address climate change through GHG emission reductions, if enacted, could result in increased costs to entities that generate electricity through carbon-emitting fossil fuels, which could increase the market price at which all generators in a region, including Generation, may sell their output, thereby increasing the revenue Generation could realize from its low-carbon nuclear assets. However, national regulation or legislation addressing climate change through an RPS could also increase the pace of development of wind energy facilities in the Midwest, which could put downward pressure on wholesale market prices for electricity from Generation’s Midwest nuclear assets, partially offsetting any additional value Exelon and Generation might derive from Generation’s nuclear assets under a carbon constrained regulatory regime that might exist in the future. Similarly, final regulations under Section 111(d) of the Clean Air Act may not provide sufficient incentives for states to utilize carbon-free nuclear power as a means of meeting greenhouse gas emission reduction requirements, while continuing a policy of favoring renewable energy sources. Current state level climate change and renewable regulation is already providing incentives for regional wind development. The Registrants cannot predict when or whether any of these various legislative and regulatory proposals may become law or what their effect will be on the Registrants.

 

Generation could be negatively affected by possible Federal or state legislative or regulatory actions that could affect the scope and functioning of the wholesale markets. (Exelon and Generation)

 

Federal and state legislative and regulatory bodies are facing pressures to address consumer concerns, or are themselves raising concerns, that energy prices in wholesale markets are too high or insufficient generation is being built because the competitive model is not working, and, therefore, are considering some form of re-regulation or some other means of reducing wholesale market prices or subsidizing new generation. Generation is dependent on robust and competitive wholesale energy markets to achieve its business objectives.

 

Approximately 65% of Generation’s generating resources, which include directly owned assets and capacity obtained through long-term contracts, are located in the area encompassed by PJM. Generation’s future results of operations will depend on (1) FERC’s continued adherence to and support for, policies that favor the preservation of competitive wholesale power markets, such as PJM’s, and (2) the absence of material changes to market structures that would limit or otherwise negatively affect market competitiveness. Generation could also be adversely affected by state laws, regulations or initiatives designed to reduce wholesale prices artificially below competitive levels or to subsidize new generation, such as the subsequently dismissed New Jersey Capacity Legislation and the MDPSC’s RFP for new gas-fired generation in Maryland. See Note 3—Regulatory Matters of the Combined Notes to Consolidated Financial Statements for further details related to the New Jersey Capacity Legislation and the Maryland new electric generation requirements.

 

45


Table of Contents

In addition, FERC’s application of its Order 697 and its subsequent revisions could pose a risk that Generation will have difficulty satisfying FERC’s tests for market-based rates. Since Order 697 became final in June 2007, Generation has obtained orders affirming Generation’s authority to sell at market-based rates and none denying that authority.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) was enacted in July 2010. The part of the Act that applies to Exelon is Title VII, which is known as the Dodd-Frank Wall Street Transparency and Accountability Act (Dodd-Frank). Dodd-Frank requires the creation of a new regulatory regime for over-the-counter swaps (swaps), including mandatory clearing for certain categories of Swaps, incentives to shift swap activity to exchange trading, margin and capital requirements, and other obligations designed to promote transparency. For non security-based swaps including commodity swaps, Dodd-Frank empowers the Commodity Futures Trading Commission (CFTC) to promulgate regulations implementing the law’s objectives. The primary aim of Dodd-Frank is to regulate the key intermediaries in the swaps market, which entities are either swap dealers (SDs), major swap participants (MSPs), and certain other financial entities, but the law also applies to a lesser degree to end-users of swaps. On January 12, 2015, President Obama signed into law a bill that exempts from margin requirements swaps used by end-users to hedge or mitigate commercial risk. Moreover, the CFTC’s Dodd-Frank regulations preserve the ability of end users in the energy industry to hedge their risks using swaps without being subject to mandatory clearing, and accepts or exempts end-users from many of the other substantive regulations. Accordingly, as an end-user, Generation is conducting its commercial business in a manner that does not require registration with the CFTC as an SD or MSP. Generation does not anticipate transacting in the future in a manner in which it would become a SD or MSP.

 

There are, however, some rulemakings that have not yet been finalized, including the capital and margin rules for (non-cleared) swaps. Generation does not expect these rules to directly impact its collateral requirements. However, depending on the substance of these final rules in addition to certain international regulatory requirements still under development and that are similar to Dodd-Frank, Generation’s swap counterparties could be subject to additional and potentially significant capitalization requirements. These regulations could motivate the SDs and MSPs to increase collateral requirements or cash postings from their counterparties, including Generation.

 

Generation continues to monitor the rulemaking proceedings with respect to the capital and margin rules, but cannot predict to what extent, if any, further refinements to Dodd-Frank requirements may impact its cash flows or financial position, but such impacts could be material.

 

ComEd, PECO and BGE could also be subject to some Dodd-Frank requirements to the extent they were to enter into swaps. However, at this time, management of ComEd, PECO and BGE continue to expect that their companies will not be materially affected by Dodd-Frank.

 

Generation’s affiliation with ComEd, PECO and BGE, together with the presence of a substantial percentage of Generation’s physical asset base within the ComEd, PECO and BGE service territories, could increase Generation’s cost of doing business to the extent future complaints or challenges regarding ComEd, PECO and/or BGE retail rates result in settlements or legislative or regulatory requirements funded in part by Generation. (Exelon and Generation)

 

Generation has significant generating resources within the service areas of ComEd, PECO and BGE and makes significant sales to each of them. Those facts tend to cause Generation to be directly affected by developments in those markets. Government officials, legislators and advocacy groups are aware of Generation’s affiliation with ComEd, PECO and BGE and its sales to each of them. In periods of rising utility rates, particularly when driven by increased costs of energy production and supply, those officials and advocacy groups may question or challenge costs and transactions incurred by

 

46


Table of Contents

ComEd, PECO, or BGE, with Generation, irrespective of any previous regulatory processes or approvals underlying those transactions. The prospect of such challenges may increase the time, complexity and cost of the associated regulatory proceedings, and the occurrence of such challenges may subject Generation to a level of scrutiny not faced by other unaffiliated competitors in those markets. In addition, government officials and legislators could seek ways to force Generation to contribute to efforts to mitigate potential or actual rate increases, through measures such as generation-based taxes and contributions to rate-relief packages.

 

The Registrants could incur substantial costs to fulfill their obligations related to environmental and other matters. (Exelon, Generation, ComEd, PECO and BGE)

 

The businesses which the Registrants operate are subject to extensive environmental regulation and legislation by local, state and Federal authorities. These laws and regulations affect the manner in which the Registrants conduct their operations and make capital expenditures including how they handle air and water emissions and solid waste disposal. Violations of these emission and disposal requirements could subject the Registrants to enforcement actions, capital expenditures to bring existing facilities into compliance, additional operating costs for remediation and clean-up costs, civil penalties and exposure to third parties’ claims for alleged health or property damages or operating restrictions to achieve compliance. In addition, the Registrants are subject to liability under these laws for the remediation costs for environmental contamination of property now or formerly owned by the Registrants and of property contaminated by hazardous substances they generate. The Registrants have incurred and expect to incur significant costs related to environmental compliance, site remediation and clean-up. Remediation activities associated with MGP operations conducted by predecessor companies are one component of such costs. Also, the Registrants are currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future.

 

If application of Section 316(b) of the Clean Water Act, which establishes a national requirement for reducing the adverse impacts to aquatic organisms at existing generating stations, requires the retrofitting of cooling water intake structures at Salem or other Exelon power plants, this development could result in material costs of compliance. Pursuant to discussions with the NJDEP regarding the application of Section 316(b) to Oyster Creek, Generation agreed to permanently cease generation operations at Oyster Creek by December 31, 2019, ten years before the expiration of its operating license in 2029. On June 30, 2015, NJDEP issued a draft NPDES permit for Salem. The draft permit does not require installation of cooling towers and allows Salem to continue to operate utilizing the existing once-through cooling water system. The draft permit is subject to a public notice and comment period after which the NJDEP may make revisions before issuing the final permit expected during the first half of 2016.

 

Additionally, Generation is subject to exposure for asbestos-related personal injury liability alleged at certain current and formerly owned generation facilities. Future legislative action could require Generation to make a material contribution to a fund to settle lawsuits for alleged asbestos-related disease and exposure.

 

In some cases, a third-party who has acquired assets from a Registrant has assumed the liability the Registrant could otherwise have for environmental matters related to the transferred property. If the transferee is unable, or fails, to discharge the assumed liability, a regulatory authority or injured person could attempt to hold the Registrant responsible, and the Registrant’s remedies against the transferee may be limited by the financial resources of the transferee. See Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information.

 

47


Table of Contents

Changes in ComEd’s, PECO’s and BGE’s respective terms and conditions of service, including their respective rates, are subject to regulatory approval proceedings and/or negotiated settlements that are at times contentious, lengthy and subject to appeal, which lead to uncertainty as to the ultimate result and which could introduce time delays in effectuating rate changes. (Exelon, ComEd, PECO and BGE)

 

ComEd, PECO and BGE are required to engage in regulatory approval proceedings as a part of the process of establishing the terms and rates for their respective services. These proceedings typically involve multiple parties, including governmental bodies and officials, consumer advocacy groups and various consumers of energy, who have differing concerns but who have the common objective of limiting rate increases or even reducing rates. The proceedings generally have timelines that may not be limited by statute. Decisions are subject to appeal, potentially leading to additional uncertainty associated with the approval proceedings. The potential duration of such proceedings creates a risk that rates ultimately approved by the applicable regulatory body may not be sufficient for ComEd, PECO or BGE to recover its costs by the time the rates become effective. Established rates are also subject to subsequent prudency reviews by state regulators, whereby various portions of rates could be adjusted, including recovery mechanisms for costs associated with the procurement of electricity or gas, bad debt, MGP remediation, smart grid infrastructure, and energy efficiency and demand response programs.

 

In certain instances, ComEd, PECO and BGE may agree to negotiated settlements related to various rate matters, customer initiatives or franchise agreements. These settlements are subject to regulatory approval.

 

ComEd, PECO and BGE cannot predict the ultimate outcomes of any settlements or the actions by Illinois, Pennsylvania, Maryland or Federal regulators in establishing rates, including the extent, if any, to which certain costs such as significant capital projects will be recovered or what rates of return will be allowed. Nevertheless, the expectation is that ComEd, PECO and BGE will continue to be obligated to deliver electricity to customers in their respective service territories and will also retain significant default service obligations, referred to as POLR, DSP and SOS for ComEd, PECO and BGE, respectively, to provide electricity and natural gas to certain groups of customers in their respective service areas who do not choose an alternative supplier. The ultimate outcome and timing of regulatory rate proceedings have a significant effect on the ability of ComEd, PECO and BGE, as applicable, to recover their costs and could have a material adverse effect on ComEd’s, PECO’s and BGE’s results of operations, cash flows and financial position. See Note 3—Regulatory Matters of the Combined Notes to the Consolidated Financial Statements for information regarding rate proceedings.

 

Federal or additional state RPS and/or energy conservation legislation, along with energy conservation by customers, could negatively affect the results of operations or cash flows of Generation, ComEd, PECO and BGE. (Exelon, Generation, ComEd, PECO and BGE)

 

Changes to current state legislation or the development of Federal legislation that requires the use of renewable and alternate fuel sources, such as wind, solar, biomass and geothermal, could significantly impact Generation, ComEd, PECO and BGE, especially if timely cost recovery is not allowed. The impact could include increased costs for RECs and purchased power and increased rates for customers.

 

Federal and state legislation mandating the implementation of energy conservation programs that require the implementation of new technologies, such as smart meters and smart grid, have increased capital expenditures and could significantly impact ComEd, PECO and BGE, if timely cost recovery is not allowed. Furthermore, regulated energy consumption reduction targets and declines in customer energy consumption resulting from the implementation of new energy conservation technologies could

 

48


Table of Contents

lead to a decline in the revenues of Exelon, ComEd, and PECO. For additional information, see ITEM 1. BUSINESS “Environmental Regulation-Renewable and Alternative Energy Portfolio Standards.”

 

The impact of not meeting the criteria of the FASB guidance for accounting for the effects of certain types of regulation could be material to Exelon, ComEd, PECO and BGE. (Exelon, ComEd, PECO and BGE)

 

As of December 31, 2015, Exelon, ComEd, PECO and BGE have concluded that the operations of ComEd, PECO and BGE meet the criteria of the authoritative guidance for accounting for the effects of certain types of regulation. If it is concluded in a future period that a separable portion of their businesses no longer meets the criteria, Exelon, ComEd, PECO and BGE would be required to eliminate the financial statement effects of regulation for that part of their business. That action would include the elimination of any or all regulatory assets and liabilities that had been recorded in their Consolidated Balance Sheets and the recognition of a one-time charge in their Consolidated Statements of Operations and Comprehensive Income. The impact of not meeting the criteria of the authoritative guidance could be material to the financial statements of Exelon, ComEd, PECO and BGE. At December 31, 2015, the gain (loss) could have been as much as $(2.5) billion, $978 million and $559 million (before taxes) as a result of the elimination of ComEd’s, PECO’s and BGE’s regulatory assets and liabilities, respectively. Further, Exelon would record a charge against OCI (before taxes) of up to $2.5 billion and $634 million for ComEd and BGE, respectively, related to Exelon’s net regulatory assets associated with its defined benefit postretirement plans. Exelon also has a net regulatory liability of $47 million (before taxes) associated with PECO’s defined benefit postretirement plans that would result in an increase in OCI if reversed. The impacts and resolution of the above items could lead to an additional impairment of ComEd’s goodwill, which could be significant and at least partially offset the gain at ComEd discussed above. A significant decrease in equity as a result of any changes could limit the ability of ComEd, PECO and BGE to pay dividends under Federal and state law and no longer meeting the regulatory accounting criteria could cause significant volatility in future results of operations. See Notes 1—Significant Accounting Policies, 3—Regulatory Matters and 11—Intangible Assets of the Combined Notes to Consolidated Financial Statements for additional information regarding accounting for the effects of regulation, regulatory matters and ComEd’s goodwill, respectively.

 

Exelon and Generation could incur material costs of compliance if Federal and/or state regulation or legislation is adopted to address climate change. (Exelon and Generation)

 

Various stakeholders, including legislators and regulators, shareholders and non-governmental organizations, as well as other companies in many business sectors, including utilities, are considering ways to address the effect of GHG emissions on climate change. In 2009, select Northeast and Mid-Atlantic states implemented a model rule, developed via the RGGI, to regulate CO2 emissions from fossil-fired generation. RGGI states are working on updated programs to further limit emissions and the EPA has introduced regulation to address greenhouse gases from new fossil plants that could potentially impact existing plants. If carbon reduction regulation or legislation becomes effective, Exelon and Generation may incur costs either to limit further the GHG emissions from their operations or to procure emission allowance credits. For example, more stringent permitting requirements may preclude the construction of lower-carbon nuclear and gas-fired power plants. Similarly, a Federal RPS could increase the cost of compliance by mandating the purchase or construction of more expensive supply alternatives. For more information regarding climate change, see ITEM 1. BUSINESS “Global Climate Change” and Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements.

 

49


Table of Contents

The Registrants could be subject to higher costs and/or penalties related to mandatory reliability standards, including the likely exposure of ComEd, PECO, and BGE to the results of PJM’s RTEP and NERC compliance requirements. (Exelon, Generation, ComEd, PECO and BGE)

 

As a result of the Energy Policy Act of 2005, users, owners and operators of the bulk power transmission system, including Generation, ComEd, PECO and BGE, are subject to mandatory reliability standards promulgated by NERC and enforced by FERC. As operators of natural gas distribution systems, PECO and BGE are also subject to mandatory reliability standards of the U.S. Department of Transportation. The standards are based on the functions that need to be performed to ensure the bulk power system operates reliably and are guided by reliability and market interface principles. Compliance with or changes in the reliability standards could subject the Registrants to higher operating costs and/or increased capital expenditures. In addition, the ICC, PAPUC and MDPSC impose certain distribution reliability standards on ComEd, PECO and BGE, respectively. If the Registrants were found not to be in compliance with the mandatory reliability standards, they could be subject to remediation costs as well as sanctions, which could include substantial monetary penalties.

 

ComEd, PECO and BGE as transmission owners are subject to NERC compliance requirements. NERC provides guidance to transmission owners regarding assessments of transmission lines. The results of these assessments could require ComEd, PECO and BGE to incur incremental capital or operating and maintenance expenditures to ensure their transmission lines meet NERC standards.

 

See Note 3—Regulatory Matters and Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information.

 

The Registrants cannot predict the outcome of the legal proceedings relating to their business activities. An adverse determination could negatively impact their results of operations, cash flows or financial positions. (Exelon, Generation, ComEd, PECO and BGE)

 

The Registrants are involved in legal proceedings, claims and litigation arising out of their business operations, the most significant of which are summarized in Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements. Adverse outcomes in these proceedings could require significant expenditures that could have a material adverse effect on the Registrants’ results of operations.

 

Generation could be negatively affected by possible Nuclear Regulatory Commission actions that could affect the operations and profitability of its nuclear generating fleet. (Exelon and Generation)

 

Regulatory risk. A change in the Atomic Energy Act or the applicable regulations or licenses could require a substantial increase in capital expenditures or could result in increased operating or decommissioning costs and significantly affect Generation’s results of operations or financial positions. Events at nuclear plants owned by others, as well as those owned by Generation, could cause the NRC to initiate such actions.

 

Spent nuclear fuel storage. The approval of a national repository for the storage of SNF, such as the one previously considered at Yucca Mountain, Nevada, and the timing of such facility opening, will significantly affect the costs associated with storage of SNF, and the ultimate amounts received from the DOE to reimburse Generation for these costs. The NRC’s temporary storage rule (also referred to as the “waste confidence decision”) recognizes that licensees can safely store spent nuclear fuel at nuclear power plants for up to 60 years beyond the original and renewed licensed operating life of the plants. In June 2012, the United States Court of Appeals for the DC Circuit vacated the NRC’s temporary storage rule on the grounds that the NRC should have conducted a more comprehensive

 

50


Table of Contents

environmental review to support the rule. On September 19, 2014, the NRC issued a revised rule codifying the NRC’s generic determinations regarding the environmental impacts of continued storage of spent nuclear fuel beyond a reactor’s licensed operating life. The Continued Storage Rule became effective on October 20, 2014.

 

Any regulatory action relating to the timing and availability of a repository for SNF could adversely affect Generation’s ability to decommission fully its nuclear units. Through May 15, 2014, in accordance with the NWPA and Generation’s contract with the DOE, Generation paid the DOE a fee per kWh of net nuclear generation for the cost of SNF disposal. On November 19, 2013, the United States Court of Appeals for the District of Columbia Circuit ordered the DOE to submit to Congress a proposal to reduce the current SNF disposal fee to zero, unless and until there is a viable disposal program. On January 3, 2014, the DOE filed a petition for rehearing which was denied by the D.C. Circuit Court on March 18, 2014. Also, on January 3, 2014, the DOE submitted a proposal to Congress to reduce the current SNF disposal fee to zero. On May 9, 2014, the DOE notified Generation that the SNF disposal fee was set to zero, effective May 16, 2014. Until such time as a new fee structure is in effect, Exelon and Generation will not accrue any further costs related to SNF disposal fees. Generation currently estimates 2025 to be the earliest date when the DOE will begin accepting SNF, which could be delayed by further regulatory action. See Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information on the spent nuclear fuel obligation. Generation cannot predict what, if any, fee will be established in the future for SNF disposal. However, such a fee could be material to Generation’s results of operations or cash flows.

 

License renewals. Generation cannot assure that economics will support the continued operation of the facilities for all or any portion of any renewed license period. If the NRC does not renew the operating licenses for Generation’s nuclear stations or a station cannot be operated through the end of its operating license, Generation’s results of operations could be adversely affected by increased depreciation rates, impairment charges and accelerated future decommissioning costs, since depreciation rates and decommissioning cost estimates currently include assumptions that license renewal will be received. In addition, Generation could lose revenue and incur increased fuel and purchased power expense to meet supply commitments.

 

Operational Factors

 

The Registrants’ employees, contractors, customers and the general public could be exposed to a risk of injury due to the nature of the energy industry. (Exelon, Generation, ComEd, PECO and BGE)

 

Employees and contractors throughout the organization work in, and customers and the general public could be exposed to, potentially dangerous environments near their operations. As a result, employees, contractors, customers and the general public are at risk for serious injury, including loss of life. Significant risks include nuclear accidents, dam failure, gas explosions, pole strikes and electric contact cases.

 

Natural disasters, war, acts and threats of terrorism, pandemic and other significant events could negatively impact the Registrants’ results of operations, its ability to raise capital and its future growth. (Exelon, Generation, ComEd, PECO and BGE)

 

Generation’s fleet of power plants and ComEd’s, PECO’s and BGE’s distribution and transmission infrastructures could be affected by natural disasters, such as seismic activity, more frequent and more extreme weather events, changes in temperature and precipitation patterns, changes to ground and surface water availability, sea level rise and other related phenomena. Severe weather or other natural

 

51


Table of Contents

disasters could be destructive, which could result in increased costs, including supply chain costs. An extreme weather event within the Registrants’ service areas can also directly affect their capital assets, causing disruption in service to customers due to downed wires and poles or damage to other operating equipment. An example of such an event was the February 5, 2014 ice storm, which interrupted electric service delivery to customers in PECO’s service territory and resulted in significant restoration costs.

 

Another example of such an event includes the 9.0 magnitude earthquake and ensuing tsunami experienced by Japan on March 11, 2011, that seriously damaged the nuclear units at the Fukushima Daiichi Nuclear Power Station, which are operated by Tokyo Electric Power Co. Natural disasters and other significant events increase the risk to Generation that the NRC or other regulatory or legislative bodies may change the laws or regulations governing, among other things, operations, maintenance, licensed lives, decommissioning, SNF storage, insurance, emergency planning, security and environmental and radiological aspects. In addition, natural disasters could affect the availability of a secure and economical supply of water in some locations, which is essential for Generation’s continued operation, particularly the cooling of generating units. Additionally, natural disasters and other events that have an adverse effect on the economy in general may adversely affect the Registrants’ operations and their ability to raise capital.

 

Exelon does not know the impact that potential terrorist attacks could have on the industry in general and on Exelon in particular. As owner-operators of infrastructure facilities, such as nuclear, fossil and hydroelectric generation facilities and electric and gas transmission and distribution facilities, the Registrants face a risk that their operations would be direct targets or indirect casualties of, an act of terror. Any retaliatory military strikes or sustained military campaign could affect their operations in unpredictable ways, such as changes in insurance markets and disruptions of fuel supplies and markets, particularly oil. Furthermore, these catastrophic events could compromise the physical or cyber security of Exelon’s facilities, which could adversely affect Exelon’s ability to manage its business effectively. Instability in the financial markets as a result of terrorism, war, natural disasters, pandemic, credit crises, recession or other factors also may result in a decline in energy consumption, which may adversely affect the Registrants’ results of operations and its ability to raise capital. In addition, the implementation of security guidelines and measures has resulted in and is expected to continue to result in increased costs.

 

The Registrants would be significantly affected by the outbreak of a pandemic. Exelon has plans in place to respond to a pandemic. However, depending on the severity of a pandemic and the resulting impacts to workforce and other resource availability, the ability to operate its generating and transmission and distribution assets could be affected, resulting in decreased service levels and increased costs.

 

In addition, Exelon maintains a level of insurance coverage consistent with industry practices against property and casualty losses subject to unforeseen occurrences or catastrophic events that could damage or destroy assets or interrupt operations. However, there can be no assurance that the amount of insurance will be adequate to address such property and casualty losses.

 

Generation’s financial performance could be negatively affected by matters arising from its ownership and operation of nuclear facilities. (Exelon and Generation)

 

Nuclear capacity factors. Capacity factors for generating units, particularly capacity factors for nuclear generating units, significantly affect Generation’s results of operations. Nuclear plant operations involve substantial fixed operating costs but produce electricity at low variable costs due to nuclear fuel costs typically being lower than fossil fuel costs. Consequently, to be successful, Generation must consistently operate its nuclear facilities at high capacity factors. Lower capacity

 

52


Table of Contents

factors increase Generation’s operating costs by requiring Generation to produce additional energy from primarily its fossil facilities or purchase additional energy in the spot or forward markets in order to satisfy Generation’s obligations to committed third-party sales, including ComEd, PECO and BGE. These sources generally have higher costs than Generation incurs to produce energy from its nuclear stations.

 

Nuclear refueling outages. In general, refueling outages are planned to occur once every 18 to 24 months. The total number of refueling outages, along with their duration, could have a significant impact on Generation’s results of operations. When refueling outages last longer than anticipated or Generation experiences unplanned outages, capacity factors decrease and Generation faces lower margins due to higher energy replacement costs and/or lower energy sales.

 

Nuclear fuel quality. The quality of nuclear fuel utilized by Generation could affect the efficiency and costs of Generation’s operations. Certain of Generation’s nuclear units have previously had a limited number of fuel performance issues. Remediation actions could result in increased costs due to accelerated fuel amortization, increased outage costs and/or increased costs due to decreased generation capabilities.

 

Operational risk. Operations at any of Generation’s nuclear generation plants could degrade to the point where Generation has to shut down the plant or operate at less than full capacity. If this were to happen, identifying and correcting the causes could require significant time and expense. Generation could choose to close a plant rather than incur the expense of restarting it or returning the plant to full capacity. In either event, Generation could lose revenue and incur increased fuel and purchased power expense to meet supply commitments. In addition, Generation may not achieve the anticipated results under its series of planned power uprates across its nuclear fleet. For plants operated but not wholly owned by Generation, Generation could also incur liability to the co-owners. For plants not operated and not wholly owned by Generation, from which Generation receives a portion of the plants’ output, Generation’s results of operations are dependent on the operational performance of the operators and could be adversely affected by a significant event at those plants. Additionally, poor operating performance at nuclear plants not owned by Generation could result in increased regulation and reduced public support for nuclear-fueled energy, which could significantly affect Generation’s results of operations or financial positions. In addition, closure of generating plants owned by others, or extended interruptions of generating plants or failure of transmission lines, could affect transmission systems that could adversely affect the sale and delivery of electricity in markets served by Generation.

 

Nuclear major incident risk. Although the safety record of nuclear reactors generally has been very good, accidents and other unforeseen problems have occurred both in the United States and abroad. The consequences of a major incident could be severe and include loss of life and property damage. Any resulting liability from a nuclear plant major incident within the United States, owned or operated by Generation or owned by others, could exceed Generation’s resources, including insurance coverage. Uninsured losses and other expenses, to the extent not recovered from insurers or the nuclear industry, could be borne by Generation and could have a material adverse effect on Generation’s results of operations or financial positions. Additionally, an accident or other significant event at a nuclear plant within the United States or abroad, owned by others or Generation, could result in increased regulation and reduced public support for nuclear-fueled energy and significantly affect Generation’s results of operations or financial positions.

 

Nuclear insurance. As required by the Price-Anderson Act, Generation carries the maximum available amount of nuclear liability insurance. The required amount of nuclear liability insurance is $375 million for each operating site. Claims exceeding that amount are covered through mandatory participation in a financial protection pool. In addition, the U.S. Congress could impose revenue-raising measures on the nuclear industry to pay claims exceeding the $13.5 billion limit for a single incident.

 

53


Table of Contents

Generation is a member of an industry mutual insurance company, NEIL, which provides property and business interruption insurance for Generation’s nuclear operations. In previous years, NEIL has made distributions to its members but Generation cannot predict the level of future distributions or if they will occur at all. See Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional discussion of nuclear insurance.

 

Decommissioning. NRC regulations require that licensees of nuclear generating facilities demonstrate reasonable assurance that funds will be available in certain minimum amounts at the end of the life of the facility to decommission the facility. Generation is required to provide to the NRC a biennial report by unit (annually for units that have been retired and units that are within five years of retirement) addressing Generation’s ability to meet the NRC-estimated funding levels including scheduled contributions to and earnings on the decommissioning trust funds. The NRC funding levels are based upon the assumption that decommissioning will commence after the end of the current licensed life of each unit.

 

Forecasting trust fund investment earnings and costs to decommission nuclear generating stations requires significant judgment, and actual results may differ significantly from current estimates. The performance of capital markets also could significantly affect the value of the trust funds. Currently, Generation is making contributions to certain trust funds of the former PECO units based on amounts being collected by PECO from its customers and remitted to Generation. While Generation, through PECO, has recourse to collect additional amounts from PECO customers (subject to certain limitations and thresholds), it has no recourse to collect additional amounts from utility customers for any of its other nuclear units if there is a shortfall of funds necessary for decommissioning. If circumstances changed such that Generation would be unable to continue to make contributions to the trust funds of the former PECO units based on amounts collected from PECO customers, or if Generation no longer had recourse to collect additional amounts from PECO customers if there was a shortfall of funds for decommissioning, the adequacy of the trust funds related to the former PECO units could be negatively affected and Exelon’s and Generation’s results of operations or financial positions could be significantly affected. See Note 3—Regulatory Matters of the Combined Notes to Consolidated Financial Statements for additional information.

 

Ultimately, if the investments held by Generation’s NDTs are not sufficient to fund the decommissioning of Generation’s nuclear units, Generation may be required to take steps, such as providing financial guarantees through letters of credit or parent company guarantees or making additional contributions to the trusts, which could be significant, to ensure that the trusts are adequately funded and that current and future NRC minimum funding requirements are met. As a result, Generation’s cash flows or financial positions could be significantly adversely affected. Additionally, if the pledged assets are not sufficient to fund the Zion station decommissioning activities under the Asset Sale Agreement (ASA), Generation could have to seek remedies available under the ASA to reduce the risk of default by ZionSolutions and its parent. See Note 16—Asset Retirement Obligations of the Combined Notes to Consolidated Financial Statements for additional information.

 

Generation’s financial performance could be negatively affected by risks arising from its ownership and operation of hydroelectric facilities. (Exelon and Generation)

 

FERC has the exclusive authority to license most non-Federal hydropower projects located on navigable waterways, Federal lands or connected to the interstate electric grid. The license for the Conowingo Hydroelectric Project expires September 1, 2016, and the license for the Muddy Run Pumped Storage Project expires on December 1, 2055. FERC is required to issue annual licenses for the facilities until a final determination is made on the license renewal. Generation cannot predict whether it will receive all the regulatory approvals for the renewed licenses of its hydroelectric facilities. If FERC does not issue new operating licenses for Generation’s hydroelectric facilities or a station cannot be operated through the end of its operating license, Generation’s results of operations could

 

54


Table of Contents

be adversely affected by increased depreciation rates and accelerated future decommissioning costs, since depreciation rates and decommissioning cost estimates currently include assumptions that license renewal will be received. Generation could also lose revenue and incur increased fuel and purchased power expense to meet supply commitments. In addition, conditions could be imposed as part of the license renewal process that could adversely affect operations, could require a substantial increase in capital expenditures or could result in increased operating costs and significantly affect Generation’s results of operations or financial positions. Similar effects could result from a change in the Federal Power Act or the applicable regulations due to events at hydroelectric facilities owned by others, as well as those owned by Generation.

 

ComEd’s, PECO’s and BGE’s operating costs, and customers’ and regulators’ opinions of ComEd, PECO and BGE, respectively, are affected by their ability to maintain the availability and reliability of their delivery and operational systems. (Exelon, ComEd, PECO and BGE)

 

Failures of the equipment or facilities, including information systems, used in ComEd’s, PECO’s and BGE’s delivery systems could interrupt the electric transmission and electric and natural gas delivery, which could negatively impact related revenues, and increase maintenance and capital expenditures. Equipment or facilities failures can be due to a number of factors, including weather or information systems failure. Specifically, if the implementation of advanced metering infrastructure, smart grid or other technologies in ComEd’s, PECO’s or BGE’s service territory fail to perform as intended or are not successfully integrated with billing and other information systems, ComEd’s, PECO’s and BGE’s results of operations, cash flows or financial conditions could be negatively impacted. Furthermore, if any of the financial, accounting, or other data processing systems fail or have other significant shortcomings, ComEd’s, PECO’s or BGE’s financial results could be negatively impacted. If an employee causes the operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating the operational systems, ComEd’s, PECO’s or BGE’s financial results could also be negatively impacted. In addition, dependence upon automated systems may further increase the risk that operational system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect.

 

The aforementioned failures or those of other utilities, including prolonged or repeated failures, could affect customer satisfaction and the level of regulatory oversight and ComEd’s, PECO’s and BGE’s maintenance and capital expenditures. Regulated utilities, which are required to provide service to all customers within their service territory, have generally been afforded liability protections against claims by customers relating to failure of service. Under Illinois law, however, ComEd could be required to pay damages to its customers in some circumstances involving extended outages affecting large numbers of its customers, and those damages could be material to ComEd’s results of operations or cash flows. See Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements for additional information regarding proceedings related to storm-related outages in ComEd’s service territory.

 

ComEd’s, PECO’s and BGE’s respective ability to deliver electricity, their operating costs and their capital expenditures could be negatively impacted by transmission congestion. (Exelon, ComEd, PECO and BGE)

 

Demand for electricity within ComEd’s, PECO’s and BGE’s service areas could stress available transmission capacity requiring alternative routing or curtailment of electricity usage with consequent effects on operating costs, revenues and results of operations. Also, insufficient availability of electric supply to meet customer demand could jeopardize ComEd’s, PECO’s and BGE’s ability to comply with reliability standards and strain customer and regulatory agency relationships. As with all utilities, potential concerns over transmission capacity or generation facility retirements could result in PJM or FERC requiring ComEd, PECO and BGE to upgrade or expand their respective transmission systems through additional capital expenditures.

 

55


Table of Contents

The Registrants are subject to physical security and cybersecurity risks. (Exelon, Generation, ComEd, PECO and BGE)

 

The Registrants face physical security and cybersecurity risks as the owner-operators of generation, transmission and distribution facilities and as a participant in commodities trading. Threat sources continue to seek to exploit potential vulnerabilities in the electric and natural gas utility industry associated with protection of sensitive and confidential information, grid infrastructure and other energy infrastructures, and such attacks and disruptions, both physical and cyber, are becoming increasingly sophisticated and dynamic. Continued implementation of advanced digital technologies increase the potentially unfavorable impacts of such attacks. A security breach of the physical assets or information systems of the Registrants, their competitors, interconnected entities in RTOs and ISOs, or regulators could impact the operation of the generation fleet and/or reliability of the transmission and distribution system or subject the Registrants to financial harm associated with theft or inappropriate release of certain types of information, including sensitive customer, vendor, employee, trading or other confidential data. The risk of these system-related events and security breaches occurring continues to intensify, and while we have been, and will likely continue to be, subjected to physical and cyber-attacks, to date we have not experienced a material breach or disruption to our network or information systems or our service operations. However, as such attacks continue to increase in sophistication and frequency, we may be unable to prevent all such attacks in the future. If a significant breach occurred, the reputation of Exelon and its customer supply activities may be adversely affected, customer confidence in the Registrants or others in the industry may be diminished, or Exelon and its subsidiaries may be subject to legal claims, any of which may contribute to the loss of customers and have a negative impact on the business and/or results of operations. Moreover, the amount and scope of insurance we maintain against losses resulting from any such events or security breaches may not be sufficient to cover our losses or otherwise adequately compensate us for any disruptions to our business that may result. ComEd’s, PECO’s and BGE’s deployment of smart meters throughout their service territories may increase the risk of damage from an intentional disruption of the system by third parties. In addition, new or updated security regulations or unforeseen threat sources could require changes in current measures taken by the Registrants or their business operations and could adversely affect their results of operations, cash flows and financial position.

 

Failure to attract and retain an appropriately qualified workforce could negatively impact the Registrants’ results of operations. (Exelon, Generation, ComEd, PECO and BGE)

 

Certain events, such as an employee strike, loss of contract resources due to a major event, and an aging workforce without appropriate replacements, could lead to operating challenges and increased costs for the Registrants. The challenges include lack of resources, loss of knowledge and a lengthy time period associated with skill development. In this case, costs, including costs for contractors to replace employees, productivity costs and safety costs, could arise. The Registrants are particularly affected due to the specialized knowledge required of the technical and support employees for their generation, transmission and distribution operations. If the Registrants are unable to successfully attract and retain an appropriately qualified workforce, their results of operations could be negatively impacted.

 

The Registrants could make investments in new business initiatives, including initiatives mandated by regulators, and markets that may not be successful, and acquisitions could not achieve the intended financial results. (Exelon, Generation, ComEd, PECO and BGE)

 

Generation continues to pursue growth in its existing businesses and markets and further diversification across the competitive energy value chain. Generation is pursuing investment opportunities in renewables, development of natural gas generation, distributed generation, potential expansion of the existing natural gas and oil Upstream and wholesale gas businesses, and entry into

 

56


Table of Contents

liquefied natural gas. Such initiatives could involve significant risks and uncertainties, including distraction of management from current operations, inadequate return on capital, and unidentified issues not discovered in the diligence performed prior to launching an initiative or entering a market. As these markets mature, there could be new market entrants or expansion by established competitors that increase competition for customers and resources. Additionally, it is possible that FERC, state public utility commissions or others could impose certain other restrictions on such transactions. All of these factors could result in higher costs or lower revenues than expected, resulting in lower than planned returns on investment.

 

ComEd, PECO and BGE face risks associated with their regulatory-mandated Smart Grid initiatives. These risks include, but are not limited to, cost recovery, regulatory concerns, cybersecurity and obsolescence of technology. Due to these risks, no assurance can be given that such initiatives will be successful and will not have a material adverse effect on ComEd’s, PECO’s or BGE’s financial results.

 

Risks Related to the Pending Merger with PHI

 

Exelon and PHI could encounter difficulties in satisfying the conditions for the completion of the Merger and the Merger could not be completed within the expected time frame or at all.

 

Consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including (1) the receipt of regulatory approvals required to consummate the Merger, (2) the expiration or termination of the applicable waiting period under the HSR Act and (3) other customary closing conditions, including (a) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers) and (b) each party’s compliance with its obligations and covenants contained in the Merger Agreement. In addition, the obligation of Exelon to consummate the Merger is subject to the required regulatory approvals not, individually or in the aggregate, imposing terms, conditions, obligations or commitments that constitute a burdensome condition (as defined in the Merger Agreement).

 

In addition, the Merger Agreement provides that either Exelon or PHI could terminate the Merger Agreement if the merger is not completed by October 28, 2015. Exelon and PHI have agreed, among other things, that they will not exercise their rights to terminate the Merger Agreement before March 4, 2016, except under limited circumstances.

 

See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements for additional information regarding the status of the Merger.

 

The Merger is subject to the receipt of consent or approval from governmental entities that could delay the completion of the Merger or impose conditions that could cause abandonment of the Merger.

 

Completion of the Merger is conditioned upon the receipt of consents, orders, approvals or clearances, to the extent required, from various regulatory authorities, including the DCPSC and the public utility commissions or similar entities in certain states in which the companies operate. The Merger has been approved by the Delaware Public Service Commission (DPSC), the Maryland Public Service Commission (MDPSC), the New Jersey Board of Public Utilities (NJBPU) and the Virginia State Corporation Commission. Approval of the Merger by the MDPSC is subject to appeals by the Maryland Office of People’s Counsel, the Sierra Club/Chesapeake Climate Action Network and Public Citizen, Inc. in the Circuit Court of Queen Anne’s County, and the approval by the NJBPU expires on June 30, 2016. The HSR Act waiting period applicable to the Merger expired on December 2, 2015. The Merger remains subject to approval by the DCPSC. See Note 4—Mergers, Acquisitions, and Dispositions of the Combined Notes to Consolidated Financial Statements for additional information regarding the status of regulatory approvals.

 

57


Table of Contents

Exelon and PHI have proposed conditions for approval in the filings that have been made with the DCPSC and other regulatory commissions. The conditions of approval of the Merger by the DCPSC will trigger the “most favored nation” provisions in the approvals of the Merger by the DPSC, MDPSC, and the NJBPU.

 

Exelon cannot provide assurance that all required regulatory consents or approvals will be obtained or that these consents or approvals will not contain terms, conditions or restrictions that would be unacceptable. The Merger Agreement generally permits Exelon to terminate the Merger Agreement if the final terms of any of the required regulatory consents or approvals include burdensome conditions (as defined in the Merger Agreement).

 

Failure to obtain regulatory approval could result in Exelon’s payment of a reverse termination fee.

 

If the Merger Agreement is terminated under certain circumstances due to the failure to obtain regulatory approvals, the failure to obtain regulatory approvals without burdensome conditions, or the breach by Exelon of its obligations in respect of obtaining regulatory approvals, Exelon will be required to pay PHI a reverse termination fee of $180 million, which would occur by means of PHI’s election to redeem the outstanding nonvoting preferred securities purchased by Exelon in connection with the execution of the Merger Agreement for no consideration other than the nominal par value of the stock. In these circumstances, Exelon will also be required to reimburse PHI for up to $40 million of its documented out-of-pocket expenses for the Merger.

 

Failure to complete the Merger could negatively impact the share price and the future business and financial results of Exelon.

 

If the Merger is not completed, the ongoing businesses of Exelon could be negatively impacted and Exelon will be subject to several risks, including:

 

   

having to pay certain significant costs relating to the Merger without receiving the benefits of the Merger, including a termination fee of up to $180 million payable by Exelon to PHI under certain circumstances; and

 

   

the share price of Exelon could decline if and to the extent that the current market prices reflect an assumption by the market that the Merger will be completed.

 

Exelon and PHI have incurred and will incur significant transaction and Merger-related costs in connection with the Merger.

 

Exelon and PHI have incurred and expect to incur non-recurring costs associated with combining the operations of the two companies. Most of these costs will be transaction costs, including fees paid to financial and legal advisors related to the Merger and related financing arrangements, and employment-related costs, including change-in- control related payments made to certain PHI executives. In addition, until the closing of the Merger, Exelon will be required to pay financing costs without having realized any benefits from the Merger during the period of delay. Exelon will also incur transition costs related to formulating integration plans. Exelon expects that the elimination of costs, as well as the realization of other efficiencies related to the integration of the businesses, will exceed incremental transaction and Merger-related costs over time.

 

58


Table of Contents

Exelon may not realize all the expected benefits of the Merger because of integration difficulties.

 

The success of the PHI acquisition will depend, in part, on Exelon’s ability to realize all or some of the anticipated benefits from integrating PHI’s business with Exelon’s existing businesses. The integration process could be complex, costly and time-consuming. The challenges associated with integrating the operations of PHI’s business include, among others:

 

   

delay in implementation of our business plan for the combined business;

 

   

unanticipated issues or costs in integrating financial, information technology, communications and other systems;

 

   

possible inconsistencies in standards, controls, procedures and policies, and compensation structures between PHI’ s structure and our structure; and

 

   

difficulties in retention of key employees.

 

Exelon and PHI will be subject to various uncertainties while the Merger is pending that could negatively impact their ability to attract and retain key employees, and potentially impact the company’s financial results.

 

Uncertainty about the effect of the Merger on employees, suppliers and customers could have a negative impact on Exelon and/or PHI. These uncertainties could impair Exelon’s and/or PHI’s ability to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter, as employees and prospective employees could experience uncertainty about their future roles with the combined company. In addition, current and prospective Exelon and PHI employees could determine that they do not desire to work for the combined company for a variety of possible reasons. Moreover, the pendency of Merger regulatory-review proceedings has caused PHI to delay filing base rate cases on behalf of its utilities Pepco, ACE and Delmarva which have had a material impact to their results of operations and cash flows.

 

The Merger could divert attention of management at Exelon and PHI, which could detract from efforts to meet business goals.

 

The pursuit of the Merger and the preparation for the integration could place a burden on management and internal resources. Any significant diversion of management attention away from ongoing business concerns and any difficulties encountered in the transition and integration process could affect Exelon’s and/or PHI’s financial results.

 

Exelon is obligated to complete the Merger whether or not it has obtained the required financing.

 

Exelon intended to fund the cash consideration in the Merger using a combination of debt, cash from asset sales, the issuance of equity (including mandatory convertible securities). See Note 4—Mergers, Acquisitions, and Dispositions and Note 14—Debt and Credit Agreements of the Combined Notes to Consolidated Financial Statements for additional information regarding the merger financing. Although Exelon had sufficient cash to fund the cash consideration in the Merger as of September 30, 2015, a $2.75 billion portion of the debt incurred to finance the cash consideration was subject to mandatory special redemption on December 31, 2015. On December 2, 2015, the holders of $1.9 billion of that debt exchanged those debt securities for new notes that extend the mandatory special redemption date from December 31, 2015 to June 30, 2016 (or later under some circumstances), and on December 2, 2015, Exelon redeemed $868 million of the debt. Exelon could be required to raise additional cash to fund the cash consideration in the Merger.

 

59


Table of Contents

The combined company’s assets, liabilities or results of operations could be negatively impacted by unknown or unexpected events, conditions or actions that might occur at PHI prior to the closing of the Merger.

 

The PHI assets, liabilities, business, financial condition, cash flows, operating results and prospects to be acquired or assumed by Exelon by reason of the Merger could be negatively impacted before or after the Merger closing as a result of previously unknown events or conditions occurring or existing before the Merger closing. Adverse changes in PHI’s business or operations could occur or arise as a result of actions by PHI, legal or regulatory developments including the emergence or unfavorable resolution of pre-acquisition loss contingencies, deteriorating general business, market, industry or economic conditions, and other factors both within and beyond the control of PHI. A significant decline in the value of PHI assets to be acquired by Exelon or a significant increase in PHI liabilities to be assumed by Exelon could negatively impact the combined company’s future business, operating results, cash flows, financial conditions or prospects.

 

Exelon could record goodwill that could become impaired and adversely affect its operating results.

 

In accordance with GAAP, the Merger will be accounted for as an acquisition of PHI common stock by Exelon and will follow the acquisition method of accounting for business combinations. The assets and liabilities of PHI will be consolidated with those of Exelon. The excess of the purchase price over the fair values of PHI’s assets and liabilities, if any, will be recorded as goodwill.

 

The amount of goodwill, which could be material, will be allocated to the appropriate reporting units of the combined company. Exelon is required to assess goodwill for impairment at least annually by comparing the fair value of reporting units to the carrying value of those reporting units. To the extent the carrying value of any of those reporting units is greater than the fair value, a second step comparing the implied fair value of goodwill to the carrying amount would be required to determine if the goodwill is impaired. Such a potential impairment could result in a material non-cash charge that would have a material impact on Exelon’s future operating results or financial positions.

 

Legal proceedings in connection with the Merger, the outcomes of which are uncertain, could delay or prevent the completion of the Merger.

 

One of the conditions to the closing of the Merger is that no judgment (whether preliminary, temporary or permanent) or other order by any court or other governmental entity shall be in effect that restrains, enjoins or otherwise prohibits or makes illegal the consummation of the Merger.

 

PHI and its directors have been named as defendants in purported class action lawsuits filed on behalf of named plaintiffs and other public stockholders challenging the proposed Merger and seeking, among other things, to enjoin the defendants from consummating the Merger on the agreed-upon terms. Exelon has been named as a defendant in these lawsuits. Exelon has also been named in a federal court case with similar claims. In September 2014, the parties reached a proposed settlement which is subject to court approval. Final court approval of the proposed settlement is not expected to occur until approximately 90 days after the Merger closing date.

 

If a plaintiff in these or any other litigation claims that may be filed in the future is successful in obtaining an injunction prohibiting the parties from completing the Merger on the terms contemplated by the Merger Agreement, the injunction could prevent the completion of the Merger in the expected time frame or altogether. If completion of the Merger is prevented or delayed, it could result in substantial costs to Exelon. In addition, Exelon could incur significant costs in connection with the lawsuits, including costs associated with the indemnification of PHI’s directors and officers.

 

60


Table of Contents

The Merger could be completed on terms different from those contained in the Merger Agreement.

 

Prior to the completion of the Merger, Exelon and PHI could, by their mutual agreement, amend or alter the terms of the Merger Agreement, including with respect to, among other things, the Merger consideration to be received by PHI stockholders or any covenants or agreements with respect to the parties’ respective operations pending completion of the Merger. In addition, Exelon could choose to waive requirements of the Merger Agreement, including some conditions to closing of the Merger.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Exelon, Generation, ComEd, PECO and BGE

 

None.

 

61


Table of Contents
ITEM 2. PROPERTIES

 

Generation

 

The following table describes Generation’s interests in net electric generating capacity by station at December 31, 2015:

 

Station (a)

 

Region

   

Location

   

No. of

Units

  Percent
Owned (b)
    Primary
Fuel Type
    Primary
Dispatch
Type (c)
    Net
Generation
Capacity (MW) (d)
 

Braidwood

    Midwest        Braidwood, IL      2       Uranium        Base-load        2,389   

Byron

    Midwest        Byron, IL      2       Uranium        Base-load        2,347   

LaSalle

    Midwest        Seneca, IL      2       Uranium        Base-load        2,320   

Dresden

    Midwest        Morris, IL      2       Uranium        Base-load        1,845   

Quad Cities

    Midwest        Cordova, IL      2     75        Uranium        Base-load        1,403 (f) 

Clinton

    Midwest        Clinton, IL      1       Uranium        Base-load        1,069   

Michigan Wind 2

    Midwest        Sanilac Co., MI      50       Wind        Base-load        90   

Beebe

    Midwest        Gratiot Co., MI      34       Wind        Base-load        82   

Michigan Wind 1

    Midwest        Huron Co., MI      46       Wind        Base-load        69   

Harvest 2

    Midwest        Huron Co., MI      33       Wind        Base-load        59   

Harvest

    Midwest        Huron Co., MI      32       Wind        Base-load        53   

Beebe 1B

    Midwest        Gratiot Co., MI      21       Wind        Base-load        50   

Ewington

    Midwest        Jackson Co., MN      10     99        Wind        Base-load        20 (f) 

Marshall

    Midwest        Lyon Co., MN      9     99        Wind        Base-load        19 (f) 

Norgaard

    Midwest        Lincoln Co., MN      7     99        Wind        Base-load        9 (f) 

City Solar

    Midwest        Chicago, IL      1       Solar        Base-load        9   

AgriWind

    Midwest        Bureau Co., IL      4     99        Wind        Base-load        8 (f) 

Cisco

    Midwest        Jackson Co., MN      4     99        Wind        Base-load        8 (f) 

Wolf

    Midwest        Nobles Co., MN      5     99        Wind        Base-load        6 (f) 

CP Windfarm

    Midwest        Faribault Co., MN      2       Wind        Base-load        4   

Blue Breezes

    Midwest        Faribault Co., MN      2       Wind        Base-load        3   

Solar Ohio

    Midwest        Toledo, OH      3       Solar        Base-load        3   

Cowell

    Midwest        Pipestone Co., MN      1     99        Wind        Base-load        2 (f) 

Southeast Chicago

    Midwest        Chicago, IL      8       Gas        Peaking        296   
             

 

 

 

Total Midwest

                12,163   

Limerick

    Mid-Atlantic        Sanatoga, PA      2       Uranium        Base-load        2,317   

Peach Bottom

    Mid-Atlantic        Delta, PA      2     50        Uranium        Base-load        1,299 (f) 

Salem

    Mid-Atlantic       
 
Lower Alloways Creek
Township, NJ
  
  
  2     42.59        Uranium        Base-load        1,005 (f) 

Calvert Cliffs

    Mid-Atlantic        Lusby, MD      2     50.01        Uranium        Base-load        878 (f)(g) 

Three Mile Island

    Mid-Atlantic        Middletown, PA      1       Uranium        Base-load        837   

Oyster Creek

    Mid-Atlantic        Forked River, NJ      1       Uranium        Base-load        625 (e) 

Conowingo

    Mid-Atlantic        Darlington, MD      11       Hydroelectric        Base-load        572   

Criterion

    Mid-Atlantic        Oakland, MD      28       Wind        Base-load        70   

Fourmile

    Mid-Atlantic        Garrett County, MD      16       Wind        Base-load        40   

Fair Wind

    Mid-Atlantic        Garrett County, MD      12       Wind        Base-load        30   

Solar Maryland MC

    Mid-Atlantic        Various, MD      15       Solar        Base-load        27   

Solar Horizons

    Mid-Atlantic        Emmitsburg, MD      1       Solar        Base-load        14   

Solar New Jersey 2

    Mid-Atlantic        Various, NJ      2       Solar        Base-load        9   

Solar New Jersey 1

    Mid-Atlantic        Various, NJ      4       Solar        Base-load        8   

Solar Maryland

    Mid-Atlantic        Various, MD      10       Solar        Base-load        7   

Solar Maryland 2

    Mid-Atlantic        Various, MD      3       Solar        Base-load        7   

Solar Federal

    Mid-Atlantic        Trenton, NJ      1       Solar        Base-load        4   

Solar New Jersey 3

    Mid-Atlantic        Middle Township, NJ      5       Solar        Base-load        1   

Muddy Run

    Mid-Atlantic        Drumore, PA      8       Hydroelectric        Intermediate        1,070   

Eddystone 3, 4

    Mid-Atlantic        Eddystone, PA      2       Oil/Gas        Intermediate        760   

Perryman

    Mid-Atlantic        Aberdeen, MD      6       Oil/Gas        Peaking        463 (h) 

Croydon

    Mid-Atlantic        West Bristol, PA      8       Oil        Peaking        391   

Handsome Lake

    Mid-Atlantic        Kennerdell, PA      5       Gas        Peaking        268   

Notch Cliff

    Mid-Atlantic        Baltimore, MD      8       Gas        Peaking        118   

Westport

    Mid-Atlantic        Baltimore, MD      1       Gas        Peaking        116   

Riverside

    Mid-Atlantic        Baltimore, MD      3       Oil/Gas        Peaking        113 (h) 

Richmond

    Mid-Atlantic        Philadelphia, PA      2       Oil        Peaking        98   

 

62


Table of Contents

Station (a)

 

Region

   

Location

   

No. of

Units

  Percent
Owned (b)
    Primary
Fuel Type
    Primary
Dispatch
Type (c)
    Net
Generation
Capacity (MW) (d)
 

Gould Street

    Mid-Atlantic        Baltimore, MD      1       Gas        Peaking        97   

Philadelphia Road

    Mid-Atlantic        Baltimore, MD      4       Oil        Peaking        61   

Eddystone

    Mid-Atlantic        Eddystone, PA      4       Oil        Peaking        60   

Fairless Hills

    Mid-Atlantic        Fairless Hills, PA      2       Landfill Gas        Peaking        60   

Delaware

    Mid-Atlantic        Philadelphia, PA      4       Oil        Peaking        56   

Southwark

    Mid-Atlantic        Philadelphia, PA      4       Oil        Peaking        52   

Falls

    Mid-Atlantic        Morrisville, PA      3       Oil        Peaking        51   

Moser

    Mid-Atlantic        Lower PottsgroveTwp., PA      3       Oil        Peaking        51   

Chester

    Mid-Atlantic        Chester, PA      3       Oil        Peaking        39   

Schuylkill

    Mid-Atlantic        Philadelphia, PA      2       Oil        Peaking        30   

Salem

    Mid-Atlantic        Lower Alloways Creek Twp, NJ      1     42.59        Oil        Peaking        16 (f) 

Pennsbury

    Mid-Atlantic        Morrisville, PA      2       Landfill Gas        Peaking        5   
             

 

 

 

Total Mid-Atlantic

                11,725   

Whitetail

    ERCOT        Webb County, TX      57       Wind        Base-load        91   

Sendero

    ERCOT       
 
Jim Hogg and Zapata
County, TX
  
  
  39       Wind        Base-load        78   

Wolf Hollow 1, 2, 3

    ERCOT        Granbury, TX      3       Gas        Intermediate        704   

Mountain Creek 8

    ERCOT        Dallas, TX      1       Gas        Intermediate        565   

Colorado Bend

    ERCOT        Wharton, TX      6       Gas        Intermediate        498   

Handley 3

    ERCOT        Fort Worth, TX      1       Gas        Intermediate        395   

Handley 4, 5

    ERCOT        Fort Worth, TX      2       Gas        Peaking        870   

Mountain Creek 6, 7

    ERCOT        Dallas, TX      2       Gas        Peaking        240   

LaPorte

    ERCOT        Laporte, TX      4       Gas        Peaking        152   
             

 

 

 

Total ERCOT

                3,593   

Solar Massachusetts

    New England        Various, MA      18       Solar        Base-load        8   

Holyoke Solar

    New England        Various, MA      2       Solar        Base-load        4   

Solar Net Metering

    New England        Uxbridge, MA      1       Solar        Base-load        2   

Solar Connecticut

    New England        Various, CT      2       Solar        Base-load        1   

Mystic 8, 9

    New England        Charlestown, MA      6       Gas        Intermediate        1,418   

Mystic 7

    New England        Charlestown, MA      1       Oil/Gas        Intermediate        575   

Wyman

    New England        Yarmouth, ME      1     5.9        Oil        Intermediate        36 (f) 

West Medway

    New England        West Medway, MA      3       Oil/Gas        Peaking        117   

Framingham

    New England        Framingham, MA      3       Oil        Peaking        33   

New Boston

    New England        South Boston, MA      1       Oil        Peaking        16   

Mystic Jet

    New England        Charlestown, MA      1       Oil        Peaking        9   
             

 

 

 

Total New England

                2,219   

Nine Mile Point

    New York        Scriba, NY      2     50.01        Uranium        Base-load        838 (f)(g) 

Ginna

    New York        Ontario, NY      1     50.01        Uranium        Base-load        288 (f)(g) 

Solar New York

    New York        Bethlehem, NY      1       Solar        Base-load        2   
             

 

 

 

Total New York

                1,128   

AVSR

    Other        Lancaster, CA      1       Solar        Base-load        242   

Shooting Star

    Other        Kiowa County, KS      65       Wind        Base-load        104   

Exelon Wind 4

    Other        Gruver, TX      38       Wind        Base-load        80   

Bluegrass Ridge

    Other        King City, MO      27       Wind        Base-load        57   

Conception

    Other        Barnard, MO      24       Wind        Base-load        50   

Cow Branch

    Other        Rock Port, MO      24       Wind        Base-load        50   

Mountain Home

    Other        Glenns Ferry, ID      20       Wind        Base-load        42   

High Mesa

    Other        Elmore Co., ID      19       Wind        Base-load        40   

Echo 1

    Other        Echo, OR      21     99        Wind        Base-load        34 (f) 

Solar Arizona

    Other        Various, AZ      55       Solar        Base-load        33   

Cassia

    Other        Buhl, ID      14       Wind        Base-load        29   

Wildcat

    Other        Lovington, NM      13       Wind        Base-load        27   

Sacramento PV Energy

    Other        Sacramento, CA      4       Solar        Base-load        26   

Sunnyside

    Other        Sunnyside, UT      1     50        Waste Coal        Base-load        26 (f) 

Echo 2

    Other        Echo, OR      10       Wind        Base-load        20   

Tuana Springs

    Other        Hagerman, ID      8       Wind        Base-load        17   

California PV Energy

    Other        Various, CA      37       Solar        Base-load        16   

Greensburg

    Other        Greensburg, KS      10       Wind        Base-load        13   

 

63


Table of Contents

Station (a)

 

Region

   

Location

   

No. of

Units

  Percent
Owned (b)
    Primary
Fuel Type
    Primary
Dispatch
Type (c)
    Net
Generation
Capacity (MW) (d)
 

Solar Georgia

    Other        Various, GA      14       Solar        Base-load        12   

Echo 3

    Other        Echo, OR      6     99        Wind        Base-load        10 (f) 

Exelon Wind 1

    Other        Gruver, TX      8       Wind        Base-load        10   

Exelon Wind 2

    Other        Gruver, TX      8       Wind        Base-load        10   

Exelon Wind 3

    Other        Gruver, TX      8       Wind        Base-load        10   

Exelon Wind 5

    Other        Texhoma, TX      8       Wind        Base-load        10   

Exelon Wind 6

    Other        Texhoma, TX      8       Wind        Base-load        10   

Exelon Wind 7

    Other        Sunray, TX      8       Wind        Base-load        10   

Exelon Wind 8

    Other        Sunray, TX      8       Wind        Base-load        10   

Exelon Wind 9

    Other        Sunray, TX      8       Wind        Base-load        10   

Exelon Wind 10

    Other        Dumas, TX      8       Wind        Base-load        10   

Exelon Wind 11

    Other        Dumas, TX      8       Wind        Base-load        10   

High Plains

    Other        Panhandle, TX      8     99.5        Wind        Base-load        10 (f) 

Three Mile Canyon

    Other        Boardman, OR      6       Wind        Base-load        10   

Solar California

    Other        Various, CA      25       Solar        Base-load        10   

Outback Solar

    Other        Christmas Valley, OR      1       Solar        Base-load        5   

Loess Hills

    Other        Rock Port, MO      4       Wind        Base-load        5   

Mohave Sunrise Solar

    Other        Fort Mohave, AZ      1       Solar        Base-load        5   

Denver Airport Solar

    Other        Denver, CO      1       Solar        Base-load        4   

Hillabee

    Other        Alexander City, AL      3       Gas        Intermediate        722   

Grande Prairie

    Other        Alberta, Canada      1       Gas        Peaking        105   

SEGS 4, 5, 6

    Other        Boron, CA      3     4.2-12.2        Solar        Peaking        9 (f) 
             

 

 

 

Total Other

                1,913   
             

 

 

 

Total

                32,741   
             

 

 

 

 

(a) All nuclear stations are boiling water reactors except Braidwood, Byron, Calvert Cliffs, Ginna, Salem and Three Mile Island, which are pressurized water reactors.
(b) 100%, unless otherwise indicated.
(c) Base-load units are plants that normally operate to take all or part of the minimum continuous load of a system and, consequently, produce electricity at an essentially constant rate. Intermediate units are plants that normally operate to take load of a system during the daytime higher load hours and, consequently, produce electricity by cycling on and off daily. Peaking units consist of lower-efficiency, quick response steam units, gas turbines and diesels normally used during the maximum load periods.
(d) For nuclear stations, capacity reflects the annual mean rating. Fossil stations reflect a summer rating. Wind and solar facilities reflect name plate capacity.
(e) Generation has agreed to permanently cease generation operation at Oyster Creek by December 31, 2019.
(f) Net generation capacity is stated at proportionate ownership share.
(g) Reflects Generation’s 50.01% interest in CENG, a joint venture with EDF. For Nine Mile Point, the co-owner owns 18% of Unit 2. Thus Exelon’s ownership is 50.01% of 82% of Nine Mile Point Unit 2. Generation also had a unit-contingent PPA with CENG under which it purchased 85% of the nuclear plant output owned by CENG that was not sold to third parties under the pre-existing PPAs through 2014.
(h) Generation has agreed to retire and cease generation operations at the Perryman 2 (51 MWs) and Riverside 4 (74 MWs) units effective February 1, 2016 and May 31, 2016, respectively.

 

The net generation capability available for operation at any time may be less due to regulatory restrictions, transmission congestion, fuel restrictions, efficiency of cooling facilities, level of water supplies or generating units being temporarily out of service for inspection, maintenance, refueling, repairs or modifications required by regulatory authorities.

 

In addition to the electric generating stations, Generation has working interests in 9 natural gas and oil exploration and production properties (Upstream) across the United States. Production volumes will vary from year to year due to the timing of individual project start-ups, operational outages, reservoir performance, regulatory changes, asset sales, weather events, price effects and other factors.

 

Generation maintains property insurance against loss or damage to its principal plants and properties by fire or other perils, subject to certain exceptions. For additional information regarding nuclear insurance of generating facilities, see ITEM 1. BUSINESS—Exelon Generation Company, LLC. For its insured losses, Generation is self-insured to the extent that any losses are within the policy deductible or exceed the amount of insurance maintained. Any such losses could have a material adverse effect on Generation’s consolidated financial condition or results of operations.

 

64


Table of Contents

ComEd

 

ComEd’s electric substations and a portion of its transmission rights of way are located on property that ComEd owns. A significant portion of its electric transmission and distribution facilities is located above or underneath highways, streets, other public places or property that others own. ComEd believes that it has satisfactory rights to use those places or property in the form of permits, grants, easements, licenses and franchise rights; however, it has not necessarily undertaken to examine the underlying title to the land upon which the rights rest.

 

Transmission and Distribution

 

ComEd’s higher voltage electric transmission lines owned and in service at December 31, 2015 were as follows:

 

Voltage (Volts)

 

Circuit Miles

765,000

  90

345,000

  2,656

138,000

  2,306

 

ComEd’s electric distribution system includes 35,419 circuit miles of overhead lines and 31,040 circuit miles of underground lines.

 

First Mortgage and Insurance

 

The principal properties of ComEd are subject to the lien of ComEd’s Mortgage dated July 1, 1923, as amended and supplemented, under which ComEd’s First Mortgage Bonds are issued.

 

ComEd maintains property insurance against loss or damage to its properties by fire or other perils, subject to certain exceptions. For its insured losses, ComEd is self-insured to the extent that any losses are within the policy deductible or exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the consolidated financial condition or results of operations of ComEd.

 

PECO

 

PECO’s electric substations and a significant portion of its transmission lines are located on property that PECO owns. A significant portion of its electric transmission and distribution facilities is located above or underneath highways, streets, other public places or property that others own. PECO believes that it has satisfactory rights to use those places or property in the form of permits, grants, easements and licenses; however, it has not necessarily undertaken to examine the underlying title to the land upon which the rights rest.

 

Transmission and Distribution

 

PECO’s high voltage electric transmission lines owned and in service at December 31, 2015 were as follows:

 

Voltage (Volts)

 

Circuit Miles

500,000

  188(a)

230,000

  548

138,000

  156

69,000

  200

 

(a) In addition, PECO has a 22.00% ownership interest in 127 miles of 500 kV lines located in Pennsylvania and a 42.55% ownership interest in 131 miles of 500 kV lines located in Delaware and New Jersey.

 

65


Table of Contents

PECO’s electric distribution system includes 12,960 circuit miles of overhead lines and 9,218 circuit miles of underground lines.

 

Gas

 

The following table sets forth PECO’s natural gas pipeline miles at December 31, 2015:

 

     Pipeline Miles  

Transmission

     30   

Distribution

     6,826   

Service piping

     6,220   
  

 

 

 

Total

     13,076   
  

 

 

 

 

PECO has an LNG facility located in West Conshohocken, Pennsylvania that has a storage capacity of 1,200 mmcf and a send-out capacity of 157 mmcf/day and a propane-air plant located in Chester, Pennsylvania, with a tank storage capacity of 150 mmcf and a peaking capability of 25 mmcf/day. In addition, PECO owns 31 natural gas city gate stations and direct pipeline customer delivery points at various locations throughout its gas service territory.

 

First Mortgage and Insurance

 

The principal properties of PECO are subject to the lien of PECO’s Mortgage dated May 1, 1923, as amended and supplemented, under which PECO’s first and refunding mortgage bonds are issued.

 

PECO maintains property insurance against loss or damage to its properties by fire or other perils, subject to certain exceptions. For its insured losses, PECO is self-insured to the extent that any losses are within the policy deductible or exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the consolidated financial condition or results of operations of PECO.

 

BGE

 

BGE’s electric substations and a significant portion of its transmission lines are located on property that BGE owns. A significant portion of its electric transmission and distribution facilities is located above or underneath highways, streets, other public places or property that others own. BGE believes that it has satisfactory rights to use those places or property in the form of permits, grants, easements and licenses; however, it has not necessarily undertaken to examine the underlying title to the land upon which the rights rest.

 

Transmission and Distribution

 

BGE’s high voltage electric transmission lines owned and in service at December 31, 2015 were as follows:

 

Voltage (Volts)

 

Circuit Miles

500,000

  218

230,000

  322

138,000

  55

115,000

  703

 

BGE’s electric distribution system includes 9,190 circuit miles of overhead lines and 16,841 circuit miles of underground lines.

 

66


Table of Contents

Gas

 

The following table sets forth BGE’s natural gas pipeline miles at December 31, 2015:

 

     Pipeline Miles  

Transmission

     161   

Distribution

     7,173   

Service piping

     6,225   
  

 

 

 

Total

     13,559   
  

 

 

 

 

BGE has an LNG facility located in Baltimore, Maryland that has a storage capacity of 1,055 mmcf and a send-out capacity of 332 mmcf/day, an LNG facility located in Westminster, Maryland that has a storage capacity of 6 mmcf and a send-out capacity of 6 mmcf/day, and a propane-air plant located in Baltimore, Maryland, with a storage capacity of 546 mmcf and a send-out capacity of 85 mmcf/day. In addition, BGE owns 12 natural gas city gate stations and 20 direct pipeline customer delivery points at various locations throughout its gas service territory.

 

Property Insurance

 

BGE owns its principal headquarters building located in downtown Baltimore. BGE maintains property insurance against loss or damage to its properties by fire or other perils, subject to certain exceptions. For its insured losses, BGE is self-insured to the extent that any losses are within the policy deductible or exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the consolidated financial condition or results of operations of BGE.

 

Exelon

 

Security Measures

 

The Registrants have initiated and work to maintain security measures. On a continuing basis, the Registrants evaluate enhanced security measures at certain critical locations, enhanced response and recovery plans, long-term design changes and redundancy measures. Additionally, the energy industry has strategic relationships with governmental authorities to ensure that emergency plans are in place and critical infrastructure vulnerabilities are addressed in order to maintain the reliability of the country’s energy systems.

 

ITEM 3. LEGAL PROCEEDINGS

 

Exelon, Generation, ComEd, PECO and BGE

 

The Registrants are parties to various lawsuits and regulatory proceedings in the ordinary course of their respective businesses. For information regarding material lawsuits and proceedings, see Note 3—Regulatory Matters and Note 23—Commitments and Contingencies of the Combined Notes to Consolidated Financial Statements. Such descriptions are incorporated herein by these references.