Yes, that is a slug penis.
UC Santa Cruz Graduate Brooke Miller studies the unusual mating behavior of banana slugs (which happens to be the mascot of UCSC!):
So what is so interesting about banana slugs!? Well, these slugs are hermaphrodites, which means that they can act as both males and females at the same time. When they mate, they insert their penises into eachother at the same time. The unusual thing (in case you don't find that unusual enough!) is that sometimes, but not always, when they finish mating one slug will chew the penis completely off the other, a process called Apophallation. Sometimes it happens that both slugs
engage in chewing so that at the end of the mating encounter, both slugs are penis-less.
Does it grow back? Probably the most common question that I get. NO. Past work has suggested that it does not regenerate, at least not within a year. The penis is a very bizarre structure that is very complex. It would be difficult to regenerate it.
http://bio.research.ucsc.edu/grad/weaver/Pages/project.html | Brooke Miller's Homepage
If you like that, definitely check out Neatorama's 30 Strangest Animal Mating Habits