Item 8.01. Other Events.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the Act). While management is still evaluating the impacts of the Act and timing for utility rate adjustments, adjusted non-GAAP operating earnings per share for Exelon Corporation (Exelon) is expected to increase by approximately $0.10 on a run-rate basis in 2019 relative to Exelon’s projections before the Act. The Registrants are still quantifying the impacts of the Act on their results of operations and financial positions as of December 31, 2017 and the amount and timing of the cash impacts will depend on the period over which certain income tax benefits are provided to customers, which may vary from jurisdiction to jurisdiction.
Pursuant to the Act, Exelon, Exelon Generation Company, LLC (Generation), Commonwealth Edison Company (ComEd), PECO Energy Company (PECO), Baltimore Gas and Electric Company (BGE), Pepco Holdings LLC (PHI), Potomac Electric Power Company (Pepco), Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE) (the Registrants) are required to remeasure their existing deferred income tax balances as of December 31, 2017 to reflect the decrease in the corporate income tax rate from 35 percent to 21 percent beginning January 1, 2018, which is expected to result in a material decrease to their net deferred income tax liability balances. Generation will record a corresponding net decrease to income tax expense, while ComEd, PECO, BGE, PHI, Pepco, DPL, and ACE (the Utility Registrants) will record corresponding regulatory liabilities given that changes in income taxes are generally passed through in customer rates. The one-time 2017 impacts of the Act will be excluded from Exelon’s 2017 adjusted non-GAAP operating earnings.
Beginning in 2018, Generation will incur lower income tax expense, which will decrease its projected effective income tax rate, even with the elimination of the domestic production activities deduction, and increase its net income. Generation’s operating cash inflows are also expected to increase beginning in 2018 reflecting the lower income tax rates and full expensing of capital investments. Generation’s projected effective income tax rate in 2018, 2019, and 2020 is expected to be approximately 22 percent.
Beginning in 2018, the Utility Registrants’ will incur lower income tax expense, which will generally decrease their projected effective income tax rates. The Act is expected to lead to lower customer rates over time due to lower income tax expense recoveries and the refund of deferred income tax regulatory liabilities, partially offset by the impacts of higher rate base. The Act is expected to lead to an incremental increase in rate base of approximately $1.6 billion by 2020 relative to our previous expectations across the Utility Registrants. The increased rate base will be funded consistent with each utility jurisdiction, using a combination of debt and equity funding from Exelon with the increased cash flows at Generation exceeding the incremental equity needs at the Utility Registrants. The Act is generally expected to result in lower operating cash inflows for the Utility Registrants as a result of the elimination of bonus depreciation and lower customer rates.
Exelon Corporate expects that the interest on its debt will continue to be fully tax deductible albeit at a lower tax rate.
ComEd and BGE plan to make filings on January 5, 2018 with their state regulatory commissions to begin passing back income tax savings resulting from the Act to their customers. Copies of the ComEd and BGE press releases are attached to this report as Exhibits 99.1 and 99.2. The other Utility Registrants also continue to work with their state regulatory commissions to determine the amount and timing of the income tax savings benefits for their customers.