<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-1839
COMMONWEALTH EDISON COMPANY
(Exact name of registrant as specified in its charter)
ILLINOIS 36-0938600
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
37th Floor, 10 South Dearborn Street,
Post Office Box 767, Chicago, Illinois 60690-0767
(Address of principal executive offices)
(Zip Code)
312/394-4321
(Registrant's telephone number, including area code)
Common Stock outstanding at April 30, 1994: 213,809,641 shares
Indicate by check mark whether the registrant (1) has 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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
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<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PART I. FINANCIAL INFORMATION
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Financial Statements:
Report of Independent Public Accountants............................... 2
Statements of Consolidated Income for the three months and twelve
months ended March 31, 1993 and 1994.................................. 3
Consolidated Balance Sheets--December 31, 1993 and March 31, 1994...... 4-5
Statements of Consolidated Capitalization--December 31, 1993 and March
31, 1994.............................................................. 6
Statements of Consolidated Retained Earnings for the three months and
twelve months ended March 31, 1993 and 1994........................... 7
Statements of Consolidated Premium on Common Stock and Other Paid-In
Capital for the three months and twelve months ended March 31, 1993
and 1994.............................................................. 7
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1993 and 1994.................................. 8
Notes to Financial Statements.......................................... 9-28
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 29-40
</TABLE>
----------------
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Commonwealth Edison Company:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Commonwealth Edison Company (an Illinois
corporation) and subsidiary companies as of December 31, 1993 and March 31,
1994, and the related statements of consolidated income, retained earnings,
premium on common stock and other paid-in capital, and cash flows for the
three-month and twelve-month periods ended March 31, 1993 and 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Commonwealth Edison Company
and subsidiary companies as of December 31, 1993 and March 31, 1994, and the
results of their operations and their cash flows for the three-month and
twelve-month periods ended March 31, 1993 and 1994, in conformity with
generally accepted accounting principles.
As discussed in Notes 13 and 14, effective January 1, 1993, the Company
changed its method of accounting for postretirement health care benefits and
income taxes, respectively.
Arthur Andersen & Co.
Chicago, Illinois
May 11, 1994
2
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
The following statements of consolidated income for the three months and
twelve months ended March 31, 1993 and 1994 reflect the results of past
operations and are not intended as any representation as to results of
operations for any future period. Future operations will necessarily be
affected by various and diverse factors and developments, including changes in
electric rates, population, business activity, taxes, environmental control,
energy use, fuel supply, cost of labor, fuel and purchased power and other
matters, the nature and effect of which cannot now be determined.
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
---------------------- -----------------------
1993 1994 1993 1994
---------- ---------- ---------- -----------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Electric Operating Revenues
(Notes 2 and 3):
Operating revenues......... $1,543,806 $1,530,975 $6,140,531 $ 6,534,375
Provisions for revenue re-
funds..................... (60,421) (6,225) (53,383) (1,232,569)
---------- ---------- ---------- -----------
$1,483,385 $1,524,750 $6,087,148 $ 5,301,806
---------- ---------- ---------- -----------
Electric Operating Expenses
and Taxes:
Fuel (Notes 1, 2, 10 and
19)....................... $ 286,228 $ 264,215 $ 910,311 $ 1,148,922
Purchased power............ 5,119 17,149 35,807 24,333
Deferred (under)/overre-
covered energy costs--net
(Note 1)................... (9,438) 11,753 (22,139) 19,434
Operation.................. 355,704 398,809 1,513,490 1,500,792
Maintenance................ 159,802 165,277 592,738 587,189
Depreciation (Note 1)...... 214,719 221,932 842,041 869,981
Recovery of regulatory as-
sets...................... 800 3,999 3,297 8,435
Taxes (except income) (Note
15)....................... 189,869 200,073 758,703 712,117
Income taxes (Notes 1 and
14)--
Current --Federal........ 42,982 34,648 145,966 (28,263)
--State.......... 8,464 712 22,954 (15,376)
Deferred--Federal--net... (8,015) (6,747) 95,896 89,320
--State--net..... 3,625 7,140 45,277 38,267
Investment tax credits de-
ferred--net (Notes 1 and
14)....................... (7,314) (7,224) (29,130) (29,333)
---------- ---------- ---------- -----------
$1,242,545 $1,311,736 $4,915,211 $ 4,925,818
---------- ---------- ---------- -----------
Electric Operating Income.... $ 240,840 $ 213,014 $1,171,937 $ 375,988
---------- ---------- ---------- -----------
Other Income and (Deduc-
tions):
Interest on long-term debt. $ (166,504) $ (157,152) $ (661,561) $ (641,830)
Interest on notes payable.. (81) (87) (834) (340)
Allowance for funds used
during construction (Note
1)--
Borrowed funds........... 2,204 6,178 15,853 20,904
Equity funds............. 2,726 7,356 18,388 25,248
Income taxes applicable to
nonoperating activities
(Notes 1 and 14).......... 5,608 (2,733) 6,686 21,572
Income tax reduction for
disallowed plant costs.... -- -- -- 792
Deferred carrying charges
(Note 2).................. -- -- -- 438,183
Interest and other costs
for 1993 Settlements (Note
2)........................ -- (10,475) -- (109,149)
Miscellaneous--net......... (17,319) (4,536) (36,268) (44,574)
---------- ---------- ---------- -----------
$ (173,366) $ (161,449) $ (657,736) $ (289,194)
---------- ---------- ---------- -----------
Net Income Before Cumulative
Effect of Change in
Accounting for Income Taxes. $ 67,474 $ 51,565 $ 514,201 $ 86,794
Cumulative Effect of Change
in Accounting for Income
Taxes....................... 9,738 -- 9,738 --
---------- ---------- ---------- -----------
Net Income................... $ 77,212 $ 51,565 $ 523,939 $ 86,794
Provision for Dividends on
Preferred and Preference
Stocks...................... 16,637 15,545 69,224 64,961
---------- ---------- ---------- -----------
Net Income on Common Stock... $ 60,575 $ 36,020 $ 454,715 $ 21,833
========== ========== ========== ===========
Average Number of Common
Shares Outstanding.......... 213,337 213,780 213,085 213,619
Earnings per Common Share
Before Cumulative Effect of
Change in Accounting for
Income Taxes................ $0.23 $0.17 $2.08 $0.10
Cumulative Effect of Change
in Accounting for Income 0.05 -- 0.05 --
Taxes....................... ----- ----- ----- -----
Earnings per Common Share.... $0.28 $0.17 $2.13 $0.10
===== ===== ===== =====
Cash Dividends Declared per
Common Share................ $0.40 $0.40 $1.95 $1.60
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
3
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
ASSETS 1993 1994
------ ------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility Plant (Notes 1, 3, 8, 16 and 18):
Plant and equipment, at original cost (includes
construction work in progress of $1,040 million
and $932 million, respectively)................... $25,581,003 $25,724,286
Less--Accumulated provision for depreciation....... 8,790,519 8,984,546
----------- -----------
$16,790,484 $16,739,740
Nuclear fuel, at amortized cost.................... 662,562 652,448
----------- -----------
$17,453,046 $17,392,188
----------- -----------
Investments:
Nuclear decommissioning funds (Notes 1 and 11)..... $ 706,841 $ 833,369
Subsidiary companies (Notes 1 and 17).............. 122,332 122,548
Other investments, at cost (Note 17)............... 72,379 72,672
----------- -----------
$ 901,552 $ 1,028,589
----------- -----------
Current Assets:
Cash............................................... $ 743 $ 1,891
Temporary cash investments, at cost which approxi-
mates fair value (Note 11)........................ 247,119 185,156
Other cash investments, at cost which approximates
fair value (Note 11).............................. 641,575 569,926
Special deposits, at cost which approximates fair
value (Note 11)................................... 32,635 32,468
Receivables (Note 1)--
Customers........................................ 427,613 382,691
Income taxes..................................... 186,687 46,749
Other............................................ 66,963 38,525
Provisions for uncollectible accounts............ (10,910) (11,337)
Coal and fuel oil, at average cost................. 111,752 108,980
Materials and supplies, at average cost............ 402,714 405,707
Deferred unrecovered energy costs (Note 1)......... 43,885 38,388
Deferred income taxes related to current assets and
liabilities (Note 14)--
Loss carryforward................................ 175,197 134,774
Other............................................ 166,102 182,942
Prepayments and other.............................. 42,190 47,927
----------- -----------
$ 2,534,265 $ 2,164,787
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets (Notes 1 and 14)................. $ 2,698,751 $ 2,666,057
Unrecovered energy costs (Note 1).................. 680,243 670,306
Other (Note 19).................................... 109,949 118,675
----------- -----------
$ 3,488,943 $ 3,455,038
----------- -----------
$24,377,806 $24,040,602
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
4
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
LIABILITIES 1993 1994
----------- ------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity................................. $ 5,421,893 $ 5,373,610
Preferred and preference stocks without mandatory
redemption requirements............................ 441,445 441,265
Preference stock subject to mandatory redemption re-
quirements......................................... 309,964 309,964
Long-term debt...................................... 7,550,762 7,419,995
----------- -----------
$13,724,064 $13,544,834
----------- -----------
Current Liabilities:
Notes payable--bank loans (Note 9).................. $ 5,950 $ 6,100
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations
(Note 11).......................................... 630,050 790,996
Accounts payable.................................... 489,080 383,186
Accrued interest.................................... 186,825 160,686
Accrued taxes....................................... 132,362 209,225
Dividends payable................................... 101,047 101,062
Estimated revenue refunds and related interest (Note
2)................................................. 1,166,308 836,526
Customer deposits................................... 45,757 45,284
Other............................................... 98,519 99,346
----------- -----------
$ 2,855,898 $ 2,632,411
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes (Note 14)..................... $ 4,445,173 $ 4,410,881
Accumulated deferred investment tax credits (Notes 1
and 14)............................................ 746,508 739,285
Accrued spent nuclear fuel disposal fee and related
interest (Note 10)................................. 566,527 570,917
Obligations under capital leases (Note 16).......... 321,393 366,969
Regulatory liabilities (Notes 1, 14 and 19)......... 782,624 771,852
Other (Notes 1, 12 and 13).......................... 935,619 1,003,453
----------- -----------
$ 7,797,844 $ 7,863,357
----------- -----------
Commitments and Contingent Liabilities (Note 19)
$24,377,806 $24,040,602
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
5
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1993 1994
------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Stock Equity (Notes 4, 5 and 19):
Common stock, $12.50 par value per share--
Outstanding--213,751,147 shares and 213,795,095
shares, respectively............................. $ 2,671,889 $ 2,672,439
Premium on common stock and other paid-in capital.. 2,217,110 2,217,775
Capital stock and warrant expense.................. (16,258) (16,259)
Retained earnings (Note 2)......................... 549,152 499,655
----------- -----------
$ 5,421,893 $ 5,373,610
----------- -----------
Preferred and Preference Stocks Without Mandatory
Redemption Requirements (Notes 4, 6 and 11):
Preference stock, cumulative, without par value--
Outstanding--10,499,549 shares.................... $ 432,320 $ 432,320
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--286,949 shares and 281,307 shares,
respectively..................................... 9,125 8,945
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding............................. -- --
----------- -----------
$ 441,445 $ 441,265
----------- -----------
Preference Stock Subject to Mandatory Redemption
Requirements (Notes 4, 7 and 11):
Preference stock, cumulative, without par value--
Outstanding--3,290,290 shares..................... $ 327,653 $ 327,653
Current redemption requirements for preference
stock included in current liabilities............. (17,689) (17,689)
----------- -----------
$ 309,964 $ 309,964
----------- -----------
Long-Term Debt (Notes 8, 11 and 20):
First mortgage bonds:
Maturing through 1998--
6 1/8% due May 15, 1995........................ $ 103,000 $ 103,000
5 1/4% due April 1, 1996....................... 50,000 50,000
5 3/4% due November 1, 1996.................... 50,000 50,000
5 3/4% due December 1, 1996.................... 50,000 50,000
7% due February 1, 1997........................ 150,000 150,000
5 3/8% due April 1, 1997....................... 50,000 50,000
6 1/4% due October 1, 1997..................... 60,000 60,000
6 1/4% due February 1, 1998.................... 50,000 50,000
6% due March 15, 1998.......................... 130,000 130,000
6 3/4% due July 1, 1998........................ 50,000 50,000
6 3/8% due October 1, 1998..................... 75,000 75,000
Maturing 1999 through 2008--5.30% to 10 3/8%..... 2,204,600 2,230,600
Maturing 2009 through 2018--5.70% to 10 5/8%..... 956,000 996,000
Maturing 2019 through 2023--7 3/4% to 9 7/8%..... 2,020,000 2,020,000
----------- -----------
$ 5,998,600 $ 6,064,600
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%.................................. 120,185 114,873
Pollution control obligations, due 2004 through
2014--5 7/8% to 11 3/8%........................... 353,200 303,200
Other long-term debt............................... 1,598,625 1,598,586
Current maturities of long-term debt included in
current liabilities............................... (446,724) (589,601)
Unamortized net debt discount and premium (Note 1). (73,124) (71,663)
----------- -----------
$ 7,550,762 $ 7,419,995
----------- -----------
$13,724,064 $13,544,834
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
6
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
----------------- -------------------
1993 1994 1993 1994
-------- -------- ---------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at Beginning of Period............ $847,186 $549,152 $ 783,496 $822,419
Add--Net income........................... 77,212 51,565 523,939 86,794
-------- -------- ---------- --------
$924,398 $600,717 $1,307,435 $909,213
-------- -------- ---------- --------
Deduct--
Cash dividends declared on--
Common stock.......................... $ 85,343 $ 85,518 $ 415,603 $341,857
Preferred and preference stocks....... 16,636 15,544 68,785 64,597
Loss on reacquired preference stock.... -- -- 628 3,104
-------- -------- ---------- --------
$101,979 $101,062 $ 485,016 $409,558
-------- -------- ---------- --------
Balance at End of Period.................. $822,419 $499,655 $ 822,419 $499,655
======== ======== ========== ========
</TABLE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED PREMIUM ON COMMON STOCK
AND OTHER PAID-IN CAPITAL
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
--------------------- ---------------------
1993 1994 1993 1994
---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at Beginning of Period..... $2,210,524 $2,217,110 $2,203,767 $2,211,226
Add--Premium on issuance of common
stock and gain on reacquired
preference stock.................. 702 665 7,459 6,549
---------- ---------- ---------- ----------
Balance at End of Period........... $2,211,226 $2,217,775 $2,211,226 $2,217,775
========== ========== ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
7
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ------------------------
1993 1994 1993 1994
--------- --------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash Flow from Operating Activ-
ities:
Net income.................... $ 77,212 $ 51,565 $ 523,939 $ 86,794
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortiza-
tion....................... 224,555 232,733 881,015 919,318
Deferred income taxes and
investment tax credits--
net........................ (15,893) (4,711) 110,951 95,683
Cumulative effect of change
in accounting for income
taxes...................... (9,738) -- (9,738) --
Equity component of
allowance for funds used
during construction........ (2,726) (7,356) (18,388) (25,248)
Provisions for revenue
refunds and related
interest................... 60,757 16,770 67,033 1,310,210
Revenue refunds and related
interest................... (3,623) (346,552) (251,170) (533,651)
Recovery/(deferral) of regu-
latory assets/deferred car-
rying charges--net......... 800 3,999 3,297 (429,748)
Provisions/(payments) for
liability for early retire-
ment and separation costs--
net........................ (1,722) 15,607 26,092 15,513
Provisions/(payments) for
liabilities associated with
remediation costs and manu-
factured gas plants--net... -- 3,000 (478) 8,000
Net effect on cash flows of
changes in:
Receivables............... (53,580) 213,725 (8,137) 109,900
Coal and fuel oil......... 68,649 2,772 (35,801) 149,505
Materials and supplies.... (189) (2,993) (2,849) (970)
Accounts payable adjusted
for nuclear fuel lease
principal payments and
early retirement and
separation costs--net.... 28,391 (52,451) 339,185 198,104
Accrued interest and tax-
es....................... 52,613 50,724 (5,410) (41,123)
Other changes in certain
current assets and
liabilities.............. (21,202) 19,220 3,807 33,785
Other--net.................. 51,478 35,984 2,609 88,522
--------- --------- ----------- -----------
$ 455,782 $ 232,036 $ 1,625,957 $ 1,984,594
--------- --------- ----------- -----------
Cash Flow from Investing Activ-
ities:
Construction expenditures..... $(199,836) $(187,378) $ (953,996) $ (829,067)
Nuclear fuel expenditures..... (100,987) (48,749) (277,779) (209,131)
Equity component of allowance
for funds used during
construction................. 2,726 7,356 18,388 25,248
Contributions to nuclear
decommissioning funds........ (96,229) (96,229) (132,550) (132,550)
Investment in subsidiary com-
panies....................... -- -- (268) --
Other cash investments and
special deposits............. 627 71,649 (7,642) (548,326)
--------- --------- ----------- -----------
$(393,699) $(253,351) $(1,353,847) $(1,693,826)
--------- --------- ----------- -----------
Cash Flow from Financing Activ-
ities:
Issuance of securities--
Long-term debt............... $ 374,755 $ 65,538 $ 1,742,269 $ 1,618,079
Capital stock................ 1,342 1,035 15,161 80,278
Retirement and redemption of
securities--
Long-term debt............... (125,099) (55,307) (1,234,562) (1,830,749)
Capital stock................ (111) -- (50,180) (92,969)
Deposits and securities held
for retirement and
redemption of securities..... (234,133) (12,888) (240,761) 462,976
Premium paid on early redemp-
tion of long-term debt....... (9,000) (500) (16,019) (69,895)
Cash dividends paid on capi-
tal stock.................... (101,961) (101,047) (559,870) (407,371)
Proceeds from sale/leaseback
of nuclear fuel.............. 99,551 116,964 210,419 221,667
Nuclear fuel lease principal
payments..................... (59,269) (53,445) (246,063) (240,144)
Increase in short-term
borrowings................... -- 150 5,600 500
--------- --------- ----------- -----------
$ (53,925) $ (39,500) $ (374,006) $ (257,628)
--------- --------- ----------- -----------
Increase (Decrease) in Cash and
Temporary Cash Investments.... $ 8,158 $ (60,815) $ (101,896) $ 33,140
Cash and Temporary Cash
Investments at Beginning of
Period........................ 145,749 247,862 255,803 153,907
--------- --------- ----------- -----------
Cash and Temporary Cash Invest-
ments at End of Period........ $ 153,907 $ 187,047 $ 153,907 $ 187,047
========= ========= =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
8
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Regulation. Commonwealth Edison Company (Company) is subject to regulation as
to accounting and ratemaking policies and practices by the Illinois Commerce
Commission (ICC) and Federal Energy Regulatory Commission (FERC). The Company's
accounting policies and the accompanying consolidated financial statements
conform to generally accepted accounting principles applicable to rate-
regulated enterprises and reflect the effects of the ratemaking process. Such
effects concern mainly the time at which various items enter into the
determination of net income in order to follow the principle of matching costs
and revenues. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," subcaption "Liquidity and Capital Resources," for
information related to the Company's rates and financial condition.
Principles of Consolidation. The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Commonwealth
Edison Company of Indiana, Inc. (collectively, companies), the only subsidiary
engaged in the electric utility business. The consolidated financial statements
also include the accounts of the Company's wholly-owned subsidiary, CECo
Enterprises Inc., an unregulated subsidiary engaged in energy service
activities. All significant intercompany transactions have been eliminated. The
investments in other subsidiary companies, which are not material in relation
to the Company's financial position and results of operations, are accounted
for in accordance with the equity method of accounting.
Customer Receivables and Revenues. The Company is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of residential, commercial and industrial customers. The Company's
electric service territory has an area of approximately 11,540 square miles and
an estimated population of approximately 8.1 million as of December 31, 1993,
approximately 8.2 million as of December 31, 1992 and approximately 8.1 million
as of December 31, 1991. It includes the city of Chicago, an area of about 225
square miles with an estimated population of three million from which the
Company derived approximately one-third of its ultimate consumer revenues in
the twelve months ended March 31, 1994. The Company had approximately 3.3
million electric customers at March 31, 1994.
Depreciation and Decommissioning. Depreciation is provided on the straight-
line basis by amortizing the cost of depreciable plant and equipment over
estimated composite service lives. The ICC's March 8, 1991 rate order directs
the Company to depreciate non-nuclear plant and equipment at annual rates
developed for each class of plant based on their composite service lives. The
annual rate for nuclear plant and equipment is 2.88% which excludes
decommissioning costs. Provisions for depreciation were at average annual rates
of 3.14% and 3.15% for the three months ended March 31, 1993 and 1994,
respectively, and 3.12% and 3.13% for the twelve months ended March 31, 1993
and 1994, respectively, of average depreciable utility plant and equipment. The
provisions for chemical cleaning are reflected in the Statements of
Consolidated Income in maintenance expense and in the Consolidated Balance
Sheets in other noncurrent liabilities.
Nuclear plant decommissioning costs are accrued over the expected service
life of the related nuclear generating stations. The accrual is based on an
annual levelized cost of the unrecovered portion of estimated decommissioning
costs which are escalated for expected inflation to the expected time of
decommissioning and are net of expected earnings on the trust fund. See
"Decommissioning" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Results of Operations," for a
discussion of questions raised by the staff of the Securities and Exchange
Commission regarding the electric utility industry method of accounting for
decommissioning costs. Decommissioning is expected to occur relatively soon
after the end of the useful life of each related generating station. The
accrual for decommissioning is based on the prompt removal method authorized
9
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
by the Nuclear Regulatory Commission (NRC) guidelines. The Company's twelve
operating units have estimated remaining service lives ranging from 13 to 34
years. The Company's first nuclear unit is retired and will be dismantled with
the remaining operating units at that station, which is consistent with the
regulatory treatment for the related decommissioning costs.
The Company recently completed a study which determined that decommissioning
costs, including the costs of decontamination, dismantling and site
restoration, are estimated to aggregate $4.24 billion, in current-year (1994)
dollars. This amount compares to the estimate for decommissioning costs of
$2.45 billion, in current-year (1994) dollars, reflected in the Company's last
rate order of March 8, 1991. The $4.24 billion estimate is based on plant
location and cost characteristics for the Company's nuclear plants and reflects
additional low level waste burial costs, higher labor costs due to reduced
administrative radiation dose limit requirements and higher costs resulting
from an additional five-year period in the decommissioning process to allow
sufficient cooling of on-site spent nuclear fuel before it is removed from the
fuel pool.
On February 10, 1994, the Company filed a rate increase request with the ICC.
As part of that request, the Company proposed to increase its annual accrual of
decommissioning costs to approximately $170 million from the current level of
$127 million approved in the March 8, 1991 rate order. The assumptions used to
calculate the $43 million proposed increase in the annual accrual of
decommissioning costs (such as the decommissioning cost estimate of $4.06
billion, stated in 1993 dollars, after-tax earnings on the tax-qualified and
nontax-qualified decommissioning funds of 7.30% and 6.26%, respectively, as
well as a future escalation rate of 5.3% in decommissioning costs) reflect some
uncertainty. The rate filing is designed to provide greater assurance than
current rate levels that sufficient funds will be available in the external
decommissioning trusts for decommissioning expenditures when the nuclear plants
are retired. The current accrual of $127 million, coupled with accumulated
earnings on the trust fund assets, would provide approximately the same amount
of funds to pay estimated decommissioning costs if a 4.5% escalation rate is
assumed.
For the twelve operating nuclear units, decommissioning costs are recorded as
portions of depreciation expense and accumulated provision for depreciation on
the Statements of Consolidated Income and the Consolidated Balance Sheets,
respectively. As of March 31, 1994, the total decommissioning costs included in
the accumulated provision for depreciation were approximately $892 million. For
the retired nuclear unit, the total estimated liability at March 31, 1994 in
current-year (1994) dollars of approximately $228 million was recorded on the
Consolidated Balance Sheets as a noncurrent liability and the unrecovered
portion of the liability of approximately $144 million was recorded as a
regulatory asset. Illinois law requires the Company to establish external
trusts to hold decommissioning funds, and the ICC has approved the Company's
funding plan and requires annual contributions of current accruals and ratable
contributions of past accruals over the remaining service lives of the nuclear
plants. At March 31, 1994, the past accruals that are required to be
contributed to the external trusts aggregate $143 million. The fair value of
funds accumulated in the external trusts at March 31, 1994 was approximately
$833 million which includes pre-tax unrealized appreciation of $18 million. The
earnings on the external trusts accumulate in the fund balance and in the
accumulated provision for depreciation. Such earnings on the external trust
funds, which have been recorded as a component of depreciation expense in the
Company's Statements of Consolidated Income, were $8,782,000 and $12,527,000
for the three months ended March 31, 1993 and 1994, respectively, and
$33,888,000 and $44,573,000 for the twelve months ended March 31, 1993 and
1994, respectively.
Amortization of Nuclear Fuel. The cost of nuclear fuel is amortized to fuel
expense based on the quantity of heat produced using the unit of production
method. As authorized by the ICC, provisions for spent nuclear fuel disposal
costs have been recorded at a level required to recover the fee payable on
10
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
current nuclear-generated and sold electricity and the current interest accrual
on the one-time fee payable to the Department of Energy (DOE) for nuclear
generation prior to April 7, 1983. The one-time fee and interest thereon have
been recovered and the current fee and current interest on the one-time fee are
currently being recovered through the fuel adjustment clause. See Note 10 for
further information concerning the disposal of spent nuclear fuel, the one-time
fee and the current interest accrual on the one-time fee. Nuclear fuel
expenses, including leased fuel costs and provisions for spent nuclear fuel
disposal costs, for the three months ended March 31, 1993 and 1994 were
$88,855,000 and $89,243,000, respectively, and for the twelve months ended
March 31, 1993 and 1994 were $371,146,000 and $386,282,000, respectively.
Income Taxes. Deferred income taxes are provided for income and expense items
recognized for financial accounting purposes in periods that differ from those
for income tax purposes. Income taxes deferred in prior years are charged or
credited to income as the book/tax timing differences reverse. Prior years'
deferred investment tax credits are amortized through credits to income
generally over the lives of the related property. Income tax credits resulting
from interest charges applicable to nonoperating activities, principally
construction, are classified as other income.
For additional information relating to income taxes, including information
related to the Company's adoption in January 1993 of Statement of Financial
Accounting Standards (SFAS) No. 109 Accounting for Income Taxes, which requires
an asset and liability approach to accounting for income taxes, see Note 14. In
addition, see "Taxes" under the subcaption "Results of Operations," in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Allowance for Funds Used During Construction (AFUDC). In accordance with
uniform systems of accounts prescribed by regulatory authorities, the Company
capitalizes AFUDC, compounded semiannually, which represents the estimated cost
of funds used to finance its construction program. The equity component of
AFUDC is recorded on an after-tax basis and the borrowed funds component of
AFUDC is recorded on a pre-tax basis. The average annual capitalization rates
for the three months ended March 31, 1993 and 1994 were 10.23% and 9.84%,
respectively, and for the twelve months ended March 31, 1993 and 1994 were
10.22% and 9.95%, respectively.
For additional information regarding AFUDC, see Note 14 and "Other Items,"
under the subcaption "Results of Operations," in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Interest. Total interest costs incurred on debt, leases and other obligations
for the three months ended March 31, 1993 and 1994 were $181,230,000 and
$190,125,000, respectively, and for the twelve months ended March 31, 1993 and
1994 were $732,518,000 and $787,534,000, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt are being amortized over the lives of the respective issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from reacquisition of first mortgage bonds, sinking fund debentures and
pollution control obligations prior to their scheduled maturity dates is
deferred and amortized over the lives of the long-term debt or notes issued to
finance the reacquisition.
Deferred Unrecovered Energy Costs. The uniform fuel adjustment clause adopted
by the ICC provides for the recovery of changes in fossil and nuclear fuel
costs and the energy portion of purchased power costs as compared to the fuel
and purchased energy costs included in base rates. As authorized by the ICC,
the Company has recorded under or overrecoveries of allowable fuel and energy
costs which, under the clause, are recoverable or refundable in subsequent
months.
11
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
At December 31, 1993 and March 31, 1994, the Company had unrecovered fuel
costs in the form of coal reserves of approximately $517 million. In prior
years, the Company's commitments for the purchase of coal exceeded its
requirements. Rather than take all the coal it was required to take, the
Company agreed to purchase the coal in place in the form of coal reserves. The
Company has been allowed to recover from its customers the costs of the coal
reserves through its fuel adjustment clause as the coal is used for the
generation of electricity. The Company expects to recover the costs of the coal
reserves by the year 2007. However, the Company is not earning a return on the
expenditures for coal reserves prior to the coal reserves being used for the
generation of electricity by including the coal reserves in rate base.
Unrecovered fuel costs expected to be recovered in one year or less amounting
to approximately $24 million and $31 million at December 31, 1993 and March 31,
1994, respectively, have been included on the Consolidated Balance Sheets in
current assets as deferred unrecovered energy costs. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaptions "Liquidity and Capital Resources" and "Results of Operations," for
information concerning coal commitments and the Company's fuel supply,
respectively. See Note 19 for additional information concerning the Company's
coal commitments.
Under the Energy Policy Act of 1992, investor-owned electric utilities that
have purchased enrichment services from the DOE are being assessed amounts to
fund a portion of the cost for the decontamination and decommissioning of three
nuclear enrichment facilities previously operated by the DOE. The Company's
portion of such assessments is estimated to be approximately $15 million per
year (to be adjusted annually for inflation). The Act provides that such
assessments are to be treated as a cost of fuel. As of December 31, 1993 and
March 31, 1994, a liability of approximately $177 million in other noncurrent
liabilities and approximately $29 million in other current liabilities was
recorded. As of December 31, 1993 and March 31, 1994, a related asset of $202
million and $199 million, respectively, was recorded, of which the approximate
$15 million current portion has been included on the Consolidated Balance
Sheets in current assets as deferred unrecovered energy costs. Approximately
$3,800,000 and $3,681,000 for the three months ended March 31, 1993 and 1994,
respectively, and approximately $7,600,000 and $14,455,000 for the twelve
months ended March 31, 1993 and 1994, respectively, associated with such
assessments were amortized to fuel expense and were reflected in the fuel
adjustment clause.
Regulatory Assets and Liabilities. Regulatory assets include the unamortized
portions of certain rate case and consultant costs associated with the prudency
audits of Byron and Braidwood stations which the ICC allowed to be deferred and
amortized for ratemaking purposes, unamortized deferred depreciation related to
Byron Unit 1 which the ICC allowed to be deferred and amortized over the
remaining life of the unit, unamortized losses on reacquired debt, unamortized
deferred carrying charges associated with the Byron and Braidwood stations
which the ICC allowed to be deferred and amortized for ratemaking purposes, a
regulatory asset for the unrecovered portion of nuclear decommissioning costs
for Dresden Unit 1 and a regulatory asset related to income taxes recorded in
compliance with SFAS No. 109, which the Company adopted in January 1993. A
regulatory liability related to income taxes was also recorded in compliance
with SFAS No. 109. Regulatory liabilities also include a liability
corresponding to a noncurrent receivable included on the Consolidated Balance
Sheets under deferred charges and other noncurrent assets, subcaption other,
which represents the Company's contractual settlement option if it had
terminated its insurance coverages with Nuclear Mutual Limited (NML) as of the
balance sheet dates. See Note 19 for additional information regarding the
Company's insurance coverages with NML.
For additional information relating to deferred carrying charges, see
"Deferred Carrying Charges," under the subcaption "Results of Operations," in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
12
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Certain Investments. Effective January 1, 1994, the Company adopted SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, which
addresses the accounting and reporting for investments in equity securities
that have readily determinable fair values and for all investments in debt
securities. For additional information, see Note 11.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no effect
on net income.
Statements of Cash Flows. For purposes of the Statements of Consolidated Cash
Flows, temporary cash investments, generally investments maturing in three
months or less at the time of purchase, are considered to be cash equivalents.
Supplemental information required by SFAS No. 95 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------ -------------------
1993 1994 1993 1994
-------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Supplemental Cash Flow Infor-
mation:
Cash paid during the period
for:
Interest (net of amount
capitalized)............. $201,251 $ 172,947 $682,787 $649,365
Income taxes (net of re-
funds)................... $ 892 $(133,389) $169,968 $(31,267)
Supplemental Schedule of Non-
Cash Investing and Financing
Activities:
Capital lease obligations
incurred................... $108,177 $ 117,499 $220,535 $223,080
</TABLE>
(2) SETTLEMENTS RELATING TO CERTAIN RATE MATTERS. In November 1993, two
settlements related to various proceedings and matters concerning the Company's
rates and its fuel adjustment clause became final. One settlement (Rate Matters
Settlement), which became final on November 4, 1993, concerned the proceedings
relating to the Company's 1985 and 1991 ICC rate orders (which orders relate
to, among other things, the recovery of costs associated with the Company's
four most recently completed nuclear generating units, Byron Units 1 and 2 and
Braidwood Units 1 and 2), the proceedings relating to the reduction in the
difference between the Company's summer and non-summer residential rates that
was effected in the summer of 1988, outstanding issues relating to the
appropriate interest rate and rate design to be applied to a refund made by the
Company during 1990 relating to a December 1988 ICC rate order, and matters
related to a rider to the Company's rates that the Company was required to file
as a result of the change in the federal corporate income tax rate made by the
Tax Reform Act of 1986. The other settlement (Fuel Matters Settlement), which
became final on November 15, 1993, related to the ICC fuel reconciliation
proceedings involving the Company for the period from 1985 through 1988 and to
future challenges by the settling parties to the prudency of the Company's
western coal costs for the period from 1989 through 1992.
Under the Rate Matters Settlement, effective as of November 4, 1993, the
Company reduced its rates by approximately $339 million annually and commenced
refunding approximately $1.26 billion (including revenue taxes), plus interest
at five percent on the unpaid balance, through temporarily reduced rates over
an initial refund period scheduled to be twelve months (to be followed by a
reconciliation period of no more than five months). The Company had previously
deferred the recognition of revenues during 1993 as a result of developments in
the proceedings related to the March 1991 ICC rate order, which resulted in a
reduction to 1993 net income of approximately $160 million. The recording of
the effects of the Rate Matters Settlement in October 1993 reduced the
Company's 1993 net income and retained earnings by approximately $292 million
or $1.37 per common share, in addition to the effect of the deferred
recognition of revenues and after the partially offsetting effect of recording
approximately $269 million (or $1.26 per common share) in deferred carrying
charges, net of income taxes, authorized in the ICC rate order issued on
January 6, 1993 (as subsequently modified, the Remand Order). The deferred
13
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
recognition of revenues was eliminated in October 1993 at the time the
provisions for revenue refunds related to the Rate Matters Settlement, which
reflected those deferred revenues, were recorded. Consistent with such
treatment of the deferred recognition of revenues in 1993, the financial
statements presented herein for the three months and twelve months ended March
31, 1993 and the twelve months ended March 31, 1994 reflect the
reclassification of the deferred recognition of revenues from operating
revenues to provisions for revenue refunds. This reclassification had no effect
on net electric operating revenues. In January 1994, a purported class action
was filed in the Circuit Court of Cook County, Illinois (Circuit Court)
challenging the method in which the refunds are being made to residential
customers in the Rate Matters Settlement. The Company does not believe that the
complaint has any merit.
Under the Fuel Matters Settlement, effective as of December 2, 1993, the
Company commenced paying approximately $108 million (including revenue taxes)
to its customers through temporarily reduced collections under its fuel
adjustment clause over a twelve-month period. The Company recorded the effects
of the Fuel Matters Settlement in October 1993, which effects reduced the
Company's 1993 net income and retained earnings by approximately $62 million or
$0.29 per common share.
(3) OTHER RATE MATTERS. On February 10, 1994, the Company filed a request
with the ICC to increase electric operating revenues by approximately $460
million, or 7.9%, on an annual basis above the level of revenues approved in
the Rate Matters Settlement. This request principally reflects the inclusion of
Byron Unit 2 and Braidwood Units 1 and 2 (Units) in the Company's rate base as
fully "used and useful," increased operation and maintenance expenses over the
level reflected in the Remand Order, increased contributions to the external
trust funds which the Company is required to fund to cover the eventual
decommissioning of its nuclear power plants and lower debt and equity costs.
The ICC has suspended the rates, appointed hearing examiners and ordered an
investigation. Under the Illinois Public Utilities Act, the ICC must decide the
case by early January 1995.
In the Remand Order, the rate determination was based upon, among other
things, findings by the ICC with respect to the extent to which the Units were
"used and useful" during the 1991 test year period of the rate order. With
respect to the "used and useful" issue, the ICC applied a needs and economic
benefits methodology, using a twenty percent reserve margin and forecasted peak
demand, and found Byron Unit 2 and Braidwood Units 1 and 2 to be 93%, 21% and
0%, respectively, "used and useful." The Company has not recorded any
disallowances related to the "used and useful" issue. The Company considers the
"used and useful" disallowance in the Remand Order to be temporary. The ICC
concluded in the Remand Order that the forecasts in the record in that
proceeding indicate that Braidwood Units 1 and 2 will be fully "used and
useful" within the reasonably foreseeable future.
(4) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK. At March 31, 1994,
the authorized shares of capital stock were: common stock--250,000,000 shares;
preference stock--23,600,290 shares; $1.425 convertible preferred stock--
281,307 shares; and prior preferred stock--850,000 shares. The prior preferred
and preference stocks are issuable in series and may be issued with or without
mandatory redemption requirements. Holders of shares at any time outstanding,
regardless of class, are entitled to one vote for each share held on each
matter submitted to a vote at a meeting of stockholders, with the right to
cumulate votes in all elections for directors.
(5) COMMON STOCK. At March 31, 1994, shares of common stock were reserved for
the following purposes:
<TABLE>
<S> <C>
1993 Long-Term Incentive Plan................................... 4,000,000
Employe Stock Purchase Plan..................................... 1,422,368
Employe Savings and Investment Plan............................. 527,803
Conversion of $1.425 convertible preferred stock................ 286,933
Conversion of warrants.......................................... 42,690
---------
6,279,794
=========
</TABLE>
14
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
During the three months and twelve months ended March 31, 1993 and 1994,
shares of common stock were issued as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1993 1994 1993 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employe Stock Purchase Plan............ -- -- 374,815 268,594
Employe Savings and Investment Plan.... 52,700 38,000 241,800 138,700
Conversion of $1.425 convertible pre-
ferred stock.......................... 1,053 5,750 11,229 27,072
Conversion of warrants................. 161 198 1,107 1,411
--------- --------- --------- ---------
53,914 43,948 628,951 435,777
========= ========= ========= =========
</TABLE>
At December 31, 1993 and March 31, 1994, 128,699 and 128,071 common stock
purchase warrants, respectively, were outstanding. The warrants entitle the
holders to convert such warrants into common stock at a conversion rate of one
share of common stock for three warrants.
(6) PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION
REQUIREMENTS. No shares of preferred or preference stocks without mandatory
redemption requirements were issued or redeemed by the Company during the
twelve months ended March 31, 1993 and 1994. The series of preference stock
without mandatory redemption requirements outstanding at March 31, 1994 are
summarized as follows:
<TABLE>
<CAPTION>
INVOLUNTARY
SHARES AGGREGATE REDEMPTION LIQUIDATION
SERIES OUTSTANDING STATED VALUE PRICE(A) PRICE(A)
------ ----------- ------------ ---------- -----------
(THOUSANDS
OF DOLLARS)
<S> <C> <C> <C> <C>
$1.90 4,249,549 $106,239 $ 25.25 $25.00
$2.00 2,000,000 51,560 $ 26.04 $25.00
$1.96 2,000,000 52,440 $ 27.11 $25.00
$7.24 750,000 74,340 $101.00 $99.12
$8.40 750,000 74,175 $101.00 $98.90
$8.38 750,000 73,566 $100.16 $98.09
---------- --------
10,499,549 $432,320
========== ========
</TABLE>
- - --------
(a) Per share plus accrued and unpaid dividends, if any.
The outstanding shares of the $1.425 convertible preferred stock are
convertible at the option of the holders thereof, at any time, into common
stock at the rate of 1.02 shares of common stock for each share of convertible
preferred stock, subject to future adjustment. The convertible preferred stock
may be redeemed by the Company at $42 per share, plus accrued and unpaid
dividends, if any. The involuntary liquidation price of the $1.425 convertible
preferred stock is $31.80 per share, plus accrued and unpaid dividends, if any.
The number of shares of convertible preferred stock converted into common stock
for the three months ended March 31, 1993 and 1994 was 1,033 shares and 5,642
shares, respectively, and for the twelve months ended March 31, 1993 and 1994
was 11,016 shares and 26,551 shares, respectively.
(7) PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS. During the
twelve months ended March 31, 1993, no shares of preference stock subject to
mandatory redemption requirements were issued. During the twelve months ended
March 31, 1994, 700,000 shares of preference stock subject to mandatory
redemption requirements were issued. The series of preference
15
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
stock subject to mandatory redemption requirements outstanding at March 31,
1994 are summarized as follows:
<TABLE>
<CAPTION>
SHARES AGGREGATE
SERIES OUTSTANDING STATED VALUE OPTIONAL REDEMPTION PRICE(A)
-------------- ----------- ------------ -------------------------------------------------
(THOUSANDS
OF DOLLARS)
<C> <C> <C> <S>
$8.20 321,420 $ 32,142 $103 through October 31, 1997; and $101
thereafter
$8.40 Series B 418,870 41,605 $101
$8.85 375,000 37,500 $103 through July 31, 1998; and $101 thereafter
$9.25 825,000 82,500 $105 through July 31, 1994; $103 through July 31,
1999; and $101 thereafter
$9.00 650,000 64,431 Non-callable
$6.875 700,000 69,475 Non-callable
--------- --------
3,290,290 $327,653
========= ========
</TABLE>
- - --------
(a) Per share plus accrued and unpaid dividends, if any.
The annual sinking fund requirements and sinking fund and involuntary
liquidation prices per share of the outstanding series of preference stock
subject to mandatory redemption requirements are summarized as follows:
<TABLE>
<CAPTION>
SINKING INVOLUNTARY
FUND LIQUIDATION
SERIES ANNUAL SINKING FUND REQUIREMENT PRICE(A) PRICE(A)
-------------- ----------------------------------- -------- -----------
<S> <C> <C> <C>
$8.20 35,715 shares $100 $100.00
$8.40 Series B 30,000 shares(b) $100 $ 99.326
$8.85 37,500 shares $100 $100.00
$9.25 75,000 shares $100 $100.00
$9.00 130,000 shares beginning in 1996(b) $100 $ 99.125
$6.875 (c) $100 $ 99.25
</TABLE>
- - --------
(a) Per share plus accrued and unpaid dividends, if any.
(b) The Company has a non-cumulative option to increase the annual sinking
fund payment on each sinking fund redemption date to retire an additional
number of shares, not in excess of the sinking fund requirement, at the
applicable redemption price.
(c) All shares are required to be redeemed on May 1, 2000.
Annual remaining sinking fund requirements through 1998 on preference stock
outstanding at March 31, 1994 will aggregate $17,709,000 in 1994, $17,822,000
in 1995, $30,822,000 in 1996, $30,822,000 in 1997 and $30,822,000 in 1998.
During the twelve months ended March 31, 1993 and 1994, 794,262 shares and
1,834,025 shares, respectively, of preference stock subject to mandatory
redemption requirements were reacquired to meet sinking fund requirements.
Sinking fund requirements due within one year are included in current
liabilities.
On November 1, 1992, the Company redeemed 300,000 shares of its $2.875
Series of preference stock at the optional redemption price of $25 per share
and 75,000 shares of its $11.70 Series of preference stock at the optional
redemption price of $100 per share, plus accrued and unpaid dividends.
On June 28, 1993, the Company redeemed the remaining 170,810 shares of its
$2.875 Series of preference stock and all 1,050,000 shares of its $2.375
Series of preference stock, both at the optional redemption price of $25.25
per share, plus accrued and unpaid dividends.
On November 1, 1993, the Company redeemed the remaining 75,000 shares of its
$11.70 Series of preference stock (150,000 shares had been redeemed on August
1, 1993 at the optional redemption price of $105 per share, plus accrued and
unpaid dividends). Of the remaining 75,000 shares, 37,500 shares were redeemed
to meet the November 1, 1993 mandatory sinking fund requirement and 37,500
16
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
shares were redeemed as a permitted optional sinking fund payment, both at the
sinking fund redemption price of $100 per share, plus accrued and unpaid
dividends.
On November 1, 1993, the Company redeemed all 210,000 shares of its $9.30
Series of preference stock, of which 70,000 shares were redeemed at the
optional redemption price of $101.03 per share, plus accrued and unpaid
dividends, 70,000 shares were redeemed to meet the November 1, 1993 mandatory
sinking fund requirement and 70,000 shares were redeemed as a permitted
optional sinking fund payment, the latter two at the sinking fund redemption
price of $100 per share, plus accrued and unpaid dividends.
(8) LONG-TERM DEBT. Sinking fund requirements and scheduled maturities
remaining through 1998 for first mortgage bonds, debentures and other long-
term debt outstanding at March 31, 1994, after deducting debentures and first
mortgage bonds reacquired for satisfaction of future sinking fund
requirements, are summarized as follows: 1994--$460,014,000; 1995--
$494,027,000; 1996--$232,808,000; 1997--$395,038,000; and 1998--$350,027,000.
Other long-term debt outstanding at March 31, 1994 is summarized as follows:
<TABLE>
<CAPTION>
PRINCIPAL
DEBT SECURITY AMOUNT INTEREST RATE PROVISIONS
- - ------------------------ ----------- -----------------------------------------------------------
(THOUSANDS
OF DOLLARS)
<S> <C> <C>
Notes:
Medium Term Notes,
Series 1N due
various dates through
April 1, 1998 $ 82,500 Interest rates ranging from 9.27% to 10.48%
Medium Term Notes,
Series 2N due various
dates through July 1,
1996 56,300 Interest rates ranging from 9.57% to 9.874%
Medium Term Notes,
Series 3N due various
dates through October
15, 2004 399,000 Interest rates ranging from 8.77% to 9.20%
Medium Term Notes,
Series 4N due various
dates through May 15,
1997 195,000 Interest rates ranging from 7.90% to 8.875%
Notes due April 15,
1994 180,000 Fixed interest rate of 5.75%
Notes due July 15, 1995 100,000 Fixed interest rate of 5.50%
Notes due July 15, 1997 100,000 Fixed interest rate of 6.50%
Notes due October 15,
2005 235,000 Fixed interest rate of 6.40%
----------
$1,347,800
----------
Long-Term Notes Payable
to Banks:
Note due January 9,
1995 $ 100,000 Prevailing interest rate of 3.94% at March 31, 1994
Notes due July 31, 1995 150,000 Prevailing interest rates averaging 4.25% at March 31, 1994
----------
$ 250,000
----------
Purchase Contract Obli-
gations:
Woodstock due January
2, 1997 $ 273 Fixed interest rate of 4.50%
Hinsdale due April 30,
2005 513 Fixed interest rate of 3.00%
----------
$ 786
----------
$1,598,586
==========
</TABLE>
Long-term debt maturing within one year has been included in current
liabilities.
The Company's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by the Company.
(9) LINES OF CREDIT. The Company had total bank lines of credit of
approximately $981 million and unused bank lines of credit of approximately
$975 million at March 31, 1994. Of that amount, $975 million (of which $175
million expires October 3, 1994, $40 million expires in equal quarterly
installments
17
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
commencing on December 31, 1994 and ending on September 30, 1996, $188 million
expires in equal quarterly installments commencing on December 31, 1995 and
ending on September 30, 1997 and $572 million expires in equal quarterly
installments commencing on December 31, 1996 and ending on September 30, 1998)
may be borrowed on secured or unsecured notes of the Company at various
interest rates. The interest rate is set at the time of a borrowing and is
based on several floating rate bank indices plus a spread which is dependent
upon the Company's credit ratings, or on a prime interest rate. Amounts under
the remaining lines of credit may be borrowed at prevailing prime interest
rates on unsecured notes of the Company. Collateral, if required for the
borrowings, would consist of first mortgage bonds issued under and in
accordance with the provisions of the Company's mortgage. The Company is
obligated to pay commitment fees with respect to $975 million of such lines of
credit.
(10) DISPOSAL OF SPENT NUCLEAR FUEL. Under the Nuclear Waste Policy Act of
1982, the DOE is responsible for the selection and development of repositories
for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
The Company, as required by that Act, has signed a contract with the DOE to
provide for the disposal of spent nuclear fuel and high-level radioactive waste
from the Company's nuclear generating stations beginning not later than January
1998. The contract with the DOE requires the Company to pay the DOE a one-time
fee applicable to nuclear generation through April 6, 1983 of approximately
$277 million, with interest to date of payment, and a fee payable quarterly
equal to one mill per kilowatthour of nuclear-generated and sold electricity
after April 6, 1983. The Company has elected to pay the one-time fee, with
interest, just prior to the first scheduled delivery of spent nuclear fuel to
the DOE, which is scheduled to occur not later than January 1998; however, this
delivery schedule is expected to be delayed significantly. The Company has
recorded the liability for the one-time fee and the related interest in its
Consolidated Balance Sheets.
(11) FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used to estimate the fair value of financial instruments held
by or issued and outstanding by the companies. The disclosure of such
information does not purport to be a market valuation of the companies as a
whole. The impact of any realized or unrealized gains or losses related to such
financial instruments on the companies' financial position or results of
operations is dependent on the treatment authorized under future ratemaking
proceedings.
Investments. Securities included in Nuclear Decommissioning Funds have been
classified and accounted for as "available for sale" securities. The estimated
fair value of the Nuclear Decommissioning Funds, as determined by the Trustee,
is based on published market data. Financial instruments included in Other
Investments at a cost of approximately $4 million at December 31, 1993 and
approximately $5 million at March 31, 1994, are not material in relation to
other financial instruments of the companies; therefore, an estimate of the
fair value of these instruments has not been made. The net earnings of the
Nuclear Decommissioning Funds, which are recorded as increases to the
Accumulated Provision for Depreciation (only the realized portion prior to
January 1, 1994), for the three months and twelve months ended March 31, 1993
and 1994 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1993 1994 1993 1994
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Gross proceeds from sales of secu-
rities........................... $ 116,283 $ 177,660 $ 348,710 $ 450,061
Less cost based on specific iden-
tification....................... (114,553) (173,574) (341,206) (436,755)
--------- --------- --------- ---------
Realized gains on sales of securi-
ties............................. $ 1,730 $ 4,086 $ 7,504 $ 13,306
Other realized fund earnings net
of expenses...................... 7,052 8,441 26,384 31,267
--------- --------- --------- ---------
Total realized net earnings of the
funds............................ $ 8,782 $ 12,527 $ 33,888 $ 44,573
Unrealized gains (losses)......... 10,927 (44,210) 27,674 (24,168)
--------- --------- --------- ---------
Total net earnings (losses) of
the funds....................... $ 19,709 $ (31,683) $ 61,562 $ 20,405
========= ========= ========= =========
</TABLE>
18
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Current Assets. Cash, Temporary Cash Investments and Other Cash Investments,
which includes U.S. Government Obligations and other short-term marketable
securities, and Special Deposits, which primarily includes cash deposited for
the redemption, refund or discharge of debt securities, are stated at cost,
which approximates their fair value because of the short maturity of these
instruments. The securities included in these categories have been classified
as "available for sale" securities.
Capitalization. The estimated fair value of Preferred and Preference Stocks
(Without and Subject to Mandatory Redemption Requirements) and Long-Term Debt,
including the current portion thereof, has been obtained from an independent
consultant. Estimated fair values exclude accrued interest and preferred and
preference dividends. Purchase contract obligations included in Long-Term Debt
at a cost of approximately $1 million at December 31, 1993 and March 31, 1994,
are not material in relation to other financial instruments of the companies;
therefore, an estimate of the fair value of these instruments has not been
made. Long-Term Notes Payable to Banks in the amount of $250 million at
December 31, 1993 and March 31, 1994, for which interest is paid at prevailing
rates, are included in the financial statements at cost, which approximates
their fair value.
Current Liabilities. The carrying value of Notes Payable, which consists of
commercial paper and/or bank loans having a maturity of less than one year,
approximates their fair value because of the short maturity of these
instruments. See "Capitalization" above for a discussion of the fair value of
the current portion of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of Accrued Spent Nuclear
Fuel Disposal Fee and Related Interest represents the settlement value as of
December 31, 1993 and March 31, 1994; therefore, the carrying value is equal to
the fair value.
The estimated fair values of the companies' financial instruments other than
those instruments reflected in the financial statements at cost which
approximates fair value, as of January 1, 1994 and March 31, 1994, are as
follows:
<TABLE>
<CAPTION>
JANUARY 1, 1994 MARCH 31, 1994
-------------------------------- ------------------------------------
UNREALIZED UNREALIZED
COST BASIS GAINS FAIR VALUE COST BASIS GAINS (LOSSES) FAIR VALUE
---------- ---------- ---------- ---------- -------------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Nuclear Decommissioning
Funds:
Short-term investments. $ 22,030 $ 4 $ 22,034 $ 37,960 $ 14 $ 37,974
U.S. Treasury bonds.... 25,113 14 25,127 19,940 (1,468) 18,472
Municipal bonds........ 598,559 49,851 648,410 536,965 15,170 552,135
Common stock........... 48,282 10,974 59,256 206,858 (161) 206,697
Other.................. 12,857 1,139 13,996 13,874 4,217 18,091
---------- -------- ---------- ---------- -------- ----------
Total................ $ 706,841 $ 61,982 $ 768,823 $ 815,597 $ 17,772 $ 833,369
========== ======== ========== ========== ======== ==========
<CAPTION>
JANUARY 1, 1994 MARCH 31, 1994
-------------------------------- ------------------------------------
CARRYING UNREALIZED CARRYING UNREALIZED
VALUE LOSSES FAIR VALUE VALUE LOSSES (GAINS) FAIR VALUE
---------- ---------- ---------- ---------- -------------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Capitalization
(including current
portion):
Preferred and
Preference Stocks
(without and subject
to mandatory
redemption
requirements)......... $ 769,098 $ 7,015 $ 776,113 $ 768,918 $(17,789) $ 751,129
Long-Term Debt......... $7,746,734 $412,241 $8,158,975 $7,758,868 $104,290 $7,863,158
</TABLE>
At March 31, 1994, the debt securities held by the Nuclear Decommissioning
Funds had the following maturities:
<TABLE>
<CAPTION>
COST BASIS FAIR VALUE
------------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Within 1 year....................................... $ 37,960 $ 37,974
1 through 5 years................................... 23,384 24,068
5 through 10 years.................................. 177,999 185,493
Over 10 years....................................... 366,365 372,136
</TABLE>
19
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(12) PENSION BENEFITS. The companies have non-contributory defined benefit
pension plans which cover all regular employees. Benefits under these plans
reflect each employee's compensation, years of service and age at retirement.
Funding is based upon actuarially determined contributions that take into
account the amount deductible for income tax purposes and the minimum
contribution required under the Employee Retirement Income Security Act of
1974, as amended. The December 31, 1993 and March 31, 1994 pension disclosures
and related data were estimated pending completion of the January 1, 1994
actuarial valuation.
During 1992, the companies implemented a workforce reduction program designed
to reduce the management workforce. This program included an early retirement
program and voluntary and involuntary separation plans. The early retirement
program resulted in the recognition for the year 1992 of an additional $26
million of pension cost and an increase to the projected benefit obligation of
that $26 million plus an additional $39 million of unrecognized net loss. The
companies also recognized in 1992 a charge to expense of $11 million primarily
related to the cost of the separation plans. The total charge to income of $37
million in 1992 was approximately $23 million after reflecting income tax
effects.
During 1994, the companies implemented an early retirement program for
employees eligible to retire or who would become eligible to retire after
December 31, 1993 and before April 1, 1995. During the first quarter of 1994,
358 employees accepted the program, resulting in the recognition of an
additional $16 million of pension cost in the three months ended March 31, 1994
and an increase to the projected benefit obligation of that $16 million and an
additional $24 million of unrecognized net loss. The charge to income in the
three months ended March 31, 1994 was approximately $9 million after reflecting
income tax effects. By the end of April 1994, a total of 603 employees had
accepted the program, resulting in the recognition of an additional $14 million
of pension cost in April 1994. It is estimated that in total approximately 700
employees will accept the early retirement program, resulting in the
recognition of a total of $35 million of pension cost and a total increase to
the projected benefit obligation of that $35 million and an additional $42
million of unrecognized net loss.
The funded status of these plans at December 31, 1993 and March 31, 1994 was
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1993 1994
------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated pension plan
benefits:
Vested benefit obligation......................... $(2,350,000) $(2,429,000)
Nonvested benefit obligation...................... (118,000) (120,000)
----------- -----------
Accumulated benefit obligation.................... $(2,468,000) $(2,549,000)
Effect of projected future compensation levels.... (477,000) (478,000)
----------- -----------
Projected benefit obligation...................... $(2,945,000) $(3,027,000)
Fair value of plan assets, invested primarily in
equity index funds, other managed equity and fixed
income investments, U.S. Government, government-
sponsored corporation and agency securities and
listed corporate obligations...................... 2,741,000 2,625,000
----------- -----------
Plan assets less than projected benefit obligation. $ (204,000) $ (402,000)
Unrecognized prior service cost.................... 24,000 23,000
Unrecognized transition asset...................... (168,000) (165,000)
Unrecognized net loss.............................. 131,000 298,000
----------- -----------
Accrued pension liability......................... $ (217,000) $ (246,000)
=========== ===========
</TABLE>
At December 31, 1993 and March 31, 1994, the assumed discount rate was 7.5%
and the assumed annual rate of increase in future compensation levels was 4.0%.
These rates were used in determining the projected benefit obligations, the
accumulated benefit obligations and the vested benefit obligations.
20
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Pension costs were determined under the rules prescribed by SFAS No. 87,
including the use of the projected unit credit actuarial cost method and the
following actuarial assumptions for periods during 1992, 1993 and 1994:
<TABLE>
<CAPTION>
1992 1993 1994
----- ----- -----
<S> <C> <C> <C>
Annual discount rate.......................................... 7.50% 7.50% 7.50%
Annual rate of increase in future compensation levels......... 4.00% 4.00% 4.00%
Annual long-term rate of return on plan assets................ 9.50% 9.50% 9.50%
</TABLE>
The components of pension costs, portions of which were recorded as
components of construction costs, for the three months and twelve months ended
March 31, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
---------------------- ----------------------
1993 1994 1993 1994
---------- ---------- ----------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Service cost...................... $ 25,000 $ 25,000 $ 98,000 $ 96,000
Interest cost on projected benefit
obligation....................... 52,000 54,000 195,000 206,000
Actual loss/(return) on plan as-
sets............................. (125,000) 80,000 (350,000) (105,000)
Early retirement program cost..... -- 16,000 26,000 16,000
Net amortization and deferral..... 62,000 (147,000) 103,000 (148,000)
--------- --------- --------- ---------
$ 14,000 $ 28,000 $ 72,000 $ 65,000
========= ========= ========= =========
</TABLE>
In addition, the companies provide an employe savings and investment plan
available to all regular employees who have completed three months of service.
Each participating employee may contribute up to 20% of such employee's base
pay and the companies match such contribution equal to 70% of up to the first
5% of contributed base salary. The companies' contributions for the three
months ended March 31, 1993 and 1994 were $5,032,000 and $6,067,000,
respectively, and for the twelve months ended March 31, 1993 and 1994 were
$21,184,000 and $22,983,000, respectively.
(13) POSTRETIREMENT HEALTH CARE BENEFITS. The companies provide certain
postretirement health care benefits for retirees and their dependents and for
the surviving dependents of eligible employees and retirees. Substantially all
of the companies' employees become eligible for postretirement health care
benefits when they reach retirement age while working for the companies. In
1980, the companies began funding the liability for postretirement health care
benefits through a trust fund, and the estimated cost of postretirement health
care benefits has been accrued and funded over the working lives of the
employees. Funding is based upon actuarially determined contributions that take
into account the amount deductible for income tax purposes. The December 31,
1993 and March 31, 1994 postretirement health care disclosures and the related
disclosures for 1994 periods were estimated pending completion of the January
1, 1994 actuarial valuation.
For the years 1980 through 1992, the liability for postretirement health care
benefits and the related provisions for postretirement health care were
equivalent to actuarial normal costs attributed over participants' employment
periods from date of hire to the expected retirement date based on the
aggregate cost method. On January 1, 1993, the companies adopted SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, which
requires that postretirement benefits be determined based on the projected unit
credit actuarial cost method and attributed over employment periods of plan
participants to the date of eligibility for postretirement benefits rather than
over the entire employment period. The transition obligation shown in the
following schedule is being amortized over 20.6 years.
21
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The funded status of the plan at December 31, 1993 and March 31, 1994 was as
follows:
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1993 1994
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated
postretirement health care obligation:
Retirees........................................... $ (444,000) $ (453,000)
Active fully eligible participants................. (65,000) (66,000)
Other participants................................. (586,000) (599,000)
----------- -----------
Accumulated benefit obligation..................... $(1,095,000) $(1,118,000)
Fair value of plan assets, invested primarily in S&P
500 common stocks, equity and fixed income mutual
funds, and U.S. Government and listed corporate ob-
ligations.......................................... 458,000 435,000
----------- -----------
Plan assets less than accumulated postretirement
health care obligation............................. $ (637,000) $ (683,000)
Unrecognized transition obligation.................. 559,000 552,000
Unrecognized net (gain) or loss..................... (9,000) 15,000
----------- -----------
Accrued liability for postretirement health care.... $ (87,000) $ (116,000)
=========== ===========
</TABLE>
For 1993 and 1994, different health care cost trends are used for pre-
Medicare and post-Medicare expenses. Pre-Medicare trend rates are 14.5% for
1993 grading down in 0.5% annual increments to 5%. Post-Medicare trend rates
are 12% for 1993 grading down in 0.5% annual increments to 5%. The effect of a
1% increase in the assumed health care cost trend rates for each future year
would increase the accumulated postretirement health care obligation at January
1, 1994 by approximately $211 million and increase the aggregate of the service
and interest cost components of plan costs by approximately $7 million for the
three months ended March 31, 1994 and $27 million for the twelve months ended
March 31, 1994. The annual discount rate used was 7.5% and the annual long-term
rate of return on plan assets was 9.5%, or 9.1% after including income tax
effects.
The components of postretirement health care costs, portions of which were
recorded as components of construction costs, for the three months ended March
31, 1993 and 1994, and the twelve months ended March 31, 1994 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
---------------- -------------------
1993 1994 1994
------- ------- -------------------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost............................. $12,000 $12,000 $ 45,000
Interest cost on accumulated benefit ob-
ligation................................ 19,000 20,000 75,000
Actual return on plan assets............. (19,000) 15,000 (8,000)
Amortization of transition obligation.... 8,000 7,000 28,000
Other net deferral....................... 11,000 (25,000) (26,000)
------- ------- --------
$31,000 $29,000 $114,000
======= ======= ========
</TABLE>
By adopting the new standard in January 1993, the companies estimate that for
the year ended December 31, 1993, postretirement costs increased $20 million,
resulting in a decrease in net income of $10 million or $0.05 per common share,
net of income taxes and the portion of the costs charged to construction. The
ultimate effects on income are dependent on the treatment authorized in future
ratemaking proceedings. As indicated above, the companies have accounted for
postretirement health care benefits on an accrual basis since 1980 and accrual
basis costs have been reflected in rates in ratemaking proceedings.
22
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(14) INCOME TAXES. The components of the net deferred income tax liability at
December 31, 1993 and March 31, 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER
31, MARCH 31,
1993 1994
---------- ----------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Deferred tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs........................... $3,095,855 $3,134,307
Overheads capitalized................................. 286,287 280,859
Repair allowance...................................... 210,302 206,843
Regulatory assets recoverable through future rates.... 1,863,873 1,842,314
Deferred tax assets:
Postretirement benefits............................... (134,590) (145,799)
Unbilled revenues..................................... (98,164) (97,806)
Loss carryforward..................................... (175,197) (134,774)
Alternative minimum tax............................... (137,328) (171,954)
Unamortized investment tax credits to be settled
through future rates................................. (490,047) (485,146)
Other regulatory liabilities to be settled through fu-
ture rates........................................... (236,366) (233,108)
Other--net............................................ (80,751) (102,571)
---------- ----------
Net deferred income tax liability...................... $4,103,874 $4,093,165
========== ==========
</TABLE>
The $11 million decrease in the net deferred income tax liability from December
31, 1993 to March 31, 1994 is comprised of a $2 million net increase to
deferred income tax expense and a $13 million decrease in regulatory assets net
of regulatory liabilities pertaining to income taxes for the period.
The components of net income tax expense charged to continuing operations are
as follows:
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED MARCH 31 ENDED MARCH 31
---------------- ------------------
1993 1994 1993 1994
------- ------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Electric operating income:
Current income taxes................... $51,446 $35,360 $168,920 $(43,639)
Deferred income taxes.................. (4,390) 393 141,173 127,587
Investment tax credits deferred--net... (7,314) (7,224) (29,130) (29,333)
Other (income) and deductions........... (5,512) 2,627 (6,528) (22,614)
------- ------- -------- --------
Net income taxes charged to continuing
operations............................. $34,230 $31,156 $274,435 $ 32,001
======= ======= ======== ========
</TABLE>
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted in the following effective
income tax rates for the three months and twelve months ended March 31, 1993
and 1994:
<TABLE>
<CAPTION>
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
-------------------- ------------------
1993 1994 1993 1994
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Pre-tax book income (in thousands)..... $101,704 $82,721 $788,636 $118,795
Effective income tax rate.............. 33.7% 37.7% 34.8% 26.9%
</TABLE>
The principal differences between these rates and the federal statutory
corporate income tax rate of 34% for the three months and twelve months ended
March 31, 1993 and 35% for the three months and twelve months ended March 31,
1994, were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1993 1994 1993 1994
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Federal statutory corporate income
tax rate......................... 34.0% 35.0% 34.0% 35.0%
Equity component of AFUDC which
was excluded from taxable income. (0.9) (3.1) (0.8) (7.4)
Amortization of investment tax
credits.......................... (7.2) (8.7) (3.4) (24.7)
State income tax, net of federal
income tax....................... 7.0 6.0 5.5 9.4
Differences between book and tax
accounting primarily for property
related deductions............... (1.1) 7.6 (0.2) 10.3
Other--net........................ 1.9 0.9 (0.3) 4.3
--------- --------- --------- ----------
Effective income tax rate......... 33.7% 37.7% 34.8% 26.9%
========= ========= ========= ==========
</TABLE>
23
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The Company has recorded current federal income tax liabilities that include
excess amounts of alternative minimum tax (AMT) over the regular federal income
tax, which amounts were also recorded as decreases to deferred federal income
taxes. As shown in the first table, the cumulative excess amounts of AMT so
recorded in the amount of approximately $172 million as of March 31, 1994 can
be carried forward indefinitely as a credit against future years' regular
federal income tax liabilities. In 1993, the Company recorded a loss for income
tax purposes which may be carried forward through 2008. It is currently
expected that the income tax effect of the loss carryforward in the amount of
$135 million, as shown in the first table, will be utilized by the expiration
date.
The Company adopted SFAS No. 109, effective January 1, 1993. SFAS No. 109
requires an asset and liability approach to accounting for income taxes which
replaces the deferred method formerly used. Under the asset and liability
approach, the deferred income tax liability represents the income tax effect of
temporary differences between financial accounting and income tax bases of
assets and liabilities and is determined at the presently enacted income tax
rates. The SFAS No. 109 adjustments to the Company's deferred income tax
liability related to utility operations represents income taxes recoverable or
returnable through future rates and have been recorded as regulatory assets and
regulatory liabilities on the balance sheet. The cumulative effect of the change
in the method of accounting for income taxes resulted in an increase to net
income for the three months and twelve months ended March 31, 1993 of $9.7
million or $0.05 per common share, due primarily to the reduction of deferred
income taxes on nonregulated activities (primarily nonconsolidated subsidiaries)
accrued in prior years at income tax rates in excess of the presently enacted
income tax rates. The effect of the implementation entry on regulated activities
was to record regulatory assets of $1,546 million primarily related to the
equity component of AFUDC which was recorded on an after-tax basis, the borrowed
funds component of AFUDC which was previously recorded net of tax and other
temporary differences for which the related tax effects were not previously
recorded; regulatory liabilities of $577 million primarily related to
recognition of the deferred income tax effects of unamortized investment tax
credits and to the changes in prior years' income tax rates; and a net increase
to the deferred income tax liability of $969 million.
(15) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1993 and 1994 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1993 1994 1993 1994
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Illinois public utility revenue......... $ 55,052 $ 52,543 $210,730 $196,988
Illinois invested capital............... 28,284 27,412 110,543 110,254
Municipal utility gross receipts........ 32,419 35,339 132,956 110,152
Real estate............................. 41,490 44,631 164,623 165,701
Municipal compensation.................. 18,037 17,725 74,968 56,565
Other--net.............................. 14,587 22,423 64,883 72,457
-------- -------- --------- --------
$189,869 $200,073 $758,703 $712,117
======== ======== ========= ========
</TABLE>
(16) LEASE OBLIGATIONS. On November 23, 1993, the Company consolidated its
nuclear fuel lease arrangements into a new arrangement. Under the new
arrangement, the Company may sell and lease back nuclear fuel from a lessor who
may borrow an aggregate of $700 million (consisting of $300 million of
commercial paper or bank borrowings and $400 million of intermediate term
notes) to finance the transactions. The commercial paper/bank borrowing portion
currently will expire on November 23, 1996, but the Company plans to ask for an
extension of the expiration date. At March 31, 1994, the Company's obligation
to the lessor for leased nuclear fuel amounted to $580 million. The Company has
agreed to make lease payments which cover the amortization of the nuclear fuel
used in the Company's reactors plus the lessor's related financing costs. The
Company has an obligation for spent nuclear fuel disposal costs of leased
nuclear fuel.
24
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Future minimum rental payments, net of executory costs, at March 31, 1994 for
capital leases, are estimated to aggregate $644 million, including $192 million
in 1994 (after deducting $62 million for the first three months of 1994), $178
million in 1995, $127 million in 1996, $74 million in 1997, $41 million in 1998
and $32 million in 1999-2001. The estimated interest component of such rental
payments aggregates $60 million. The estimated portions of obligations due
within one year under capital leases are included in current liabilities and
approximated $166 million and $184 million at December 31, 1993 and March 31,
1994, respectively.
The Company has operating leases for coal railcars. Future minimum rental
payments at March 31, 1994 for these operating leases are estimated to
aggregate $133 million, including $3 million in 1994, $6 million in each of the
years 1995 through 1998 and $106 million in 1999-2024.
(17) INVESTMENTS IN URANIUM-RELATED PROPERTIES. At March 31, 1994, the
Company and its subsidiaries had investments of approximately $135 million in
uranium-related properties, equipment and activities. Production of uranium
from all of the uranium properties has been deferred due to depressed market
prices for uranium. The Company currently expects ultimately to recover through
rates charged to customers the carrying value of the uranium properties in all
material respects in relation to the Company's financial position and its
results of operations, but doing so depends on substantially improved market
conditions. However, the Company is conducting an overall review of various
operating, regulatory and investment alternatives as part of the continuing
evaluation of its uranium properties and, as a result, will be reassessing its
ultimate ability to recover their carrying value. If it is determined that any
portion of the carrying value is not recoverable, such amount will have to be
charged to income.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against the Company and its subsidiary, Cotter Corporation (Cotter),
alleging that Cotter has permitted radioactive and other hazardous material to
be released from its mill into areas owned or occupied by the plaintiffs
resulting in property damage and potential adverse health effects. The
plaintiffs seek from Cotter and the Company unspecified compensatory, exemplary
and medical monitoring fund damages, unspecified response costs under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA), and temporary and permanent injunctive relief. In February 1994, a
federal jury returned a verdict in favor of eight bellwether plaintiffs in the
total amount of $76,400 in property damages, rejecting any award for exemplary
or medical monitoring damages. Plaintiffs have appealed. The remaining cases
are not yet scheduled for trial. Although the cases will necessarily involve
the resolution of numerous contested issues of fact and law, the Company's
determination is that these actions will not have a material adverse impact on
the Company's financial statements. See "Part II. Other Information, Item 1.
Legal Proceedings," subcaption "Litigation," for additional information.
(18) JOINT PLANT OWNERSHIP. The Company has a 75% undivided ownership
interest in the Quad-Cities nuclear generating station. Further, the Company is
responsible for 75% of all costs which are charged to appropriate investment,
operation or maintenance accounts and provides its own financing. At March 31,
1994, for its share of ownership in the station, the Company had an investment
of $536 million in production and transmission plant in service (before
reduction of $162 million for the related accumulated provision for
depreciation) and $59 million in construction work in progress.
(19) COMMITMENTS, CONTINGENT LIABILITIES AND THE CONSTRUCTION PROGRAM.
Purchase commitments, principally related to construction and nuclear fuel,
approximated $1,184 million at March 31, 1994. In addition, the Company has
substantial commitments for the purchase of coal under long-term contracts. The
Company's coal costs are high compared to those of other utilities. The
Company's western coal contracts and its rail contracts for delivery of the
western coal were renegotiated during
25
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
1992 effective as of January 1, 1993, to provide, among other things, for
significant reductions in the delivered price of the coal over the duration of
the contracts. However, the renegotiated contracts provide for the purchase of
certain coal at prices substantially above currently prevailing market prices
and the Company has significant purchase commitments under its contracts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Liquidity and Capital Resources," for additional
information regarding the Company's purchase commitments.
The Company is a member of Nuclear Mutual Limited (NML), established to
provide insurance coverage against property damage to members' nuclear
generating facilities. The members are subject
to a retrospective premium adjustment in the event losses exceed accumulated
reserve funds. Capital has been accumulated in the reserve funds of NML to the
extent that the Company would have no exposure in the event of a single
incident. However, the Company could be subject to a maximum assessment of
approximately $67 million in any policy year, in the event losses exceed
accumulated reserve funds.
If the Company had terminated its insurance coverages with NML as of March
31, 1994, it would have had a right to receive approximately $126 million,
payable over a twenty-year period commencing in 1996. Any unpaid amounts,
however, are subject to forfeiture in the event that, among other factors,
NML's aggregate losses in any subsequent two-year period exceed $300 million or
fifty percent of its surplus. The Company has recorded a noncurrent receivable
in its Consolidated Balance Sheets under deferred charges and other noncurrent
assets, subcaption other, representing its contractual settlement option of
approximately $53 million, which reflects the $126 million discounted at an
eight percent rate over a twenty-year period beginning in 1996. The Company has
also recorded the $53 million as a regulatory liability.
The Company also is a member of Nuclear Electric Insurance Limited (NEIL),
which provides insurance coverage against the cost of replacement power
obtained during certain prolonged accidental outages of nuclear generating
units and coverage for property losses in excess of $500 million occurring at
nuclear stations. All companies insured with NEIL are subject to retrospective
premium adjustments if losses exceed accumulated reserve funds. Capital has
been accumulated in the reserve funds of NEIL to the extent that the Company
would have no exposure in the event of a single incident under the replacement
power coverage and the property damage coverage. However, the Company could be
subject to maximum assessments, in any policy year, of approximately $27
million and $88 million in the event losses exceed accumulated reserve funds
under the replacement power and property damage coverages, respectively.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses, the
Company would currently be subject to a maximum assessment of $991 million in
the event of an incident, limited to a maximum of $125 million in any calendar
year.
In addition, the Company participates in the American Nuclear Insurers and
Mutual Atomic Energy Liability Underwriters Master Worker Program which
provides coverage for worker tort claims filed for bodily injury caused by the
nuclear energy hazard. The coverage applies to workers whose "nuclear related
employment" began after January 1, 1988. The Company would currently be subject
to a maximum assessment of approximately $37 million in the event losses exceed
accumulated reserve funds.
26
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," subcaption "Liquidity and Capital Resources," for information
relating to the Company's construction program and rates and financial
condition.
Shareholder derivative lawsuits were filed on October 1, 1992 and on April
14, 1993 in the Circuit Court against current and former directors of the
Company alleging that they breached their fiduciary duty and duty of care to
the Company in connection with the management of the activities associated with
the construction of the Company's four most recently completed nuclear
generating units. The lawsuits sought restitution to the Company by the
defendants for unquantified and undefined losses and costs alleged to have been
incurred by the Company. Both lawsuits were dismissed by the Circuit Court;
however, appeals are pending before the Illinois Appellate Court.
The Company is involved in administrative and legal proceedings concerning
air quality, water quality and other matters. The outcome of these proceedings
may require increases in the Company's future construction expenditures and
operating expenses. The Company and its subsidiaries are or are likely to
become parties to proceedings initiated by the United States Environmental
Protection Agency (Federal Agency), state agencies and/or other responsible
parties under CERCLA with respect to a number of sites, including manufactured
gas plant (MGP) sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. While there is a
possibility that in the aggregate the cost of MGP site investigation and
remediation will be substantial over time, the Company is not able to determine
the most probable liability for MGPs. In accordance with accounting standards,
the Company recorded a provision of $25 million in 1991 which reflects the low
end of the range of its estimate of the liability associated with former MGPs.
In 1993, the Company recorded a provision of $5 million which reflects the low
end of the range of its estimate of the liability associated with cleanup costs
of remediation sites other than former MGP sites. The Company presently
estimates that its costs of investigating and remediating the former MGP and
other remediation sites pursuant to CERCLA and state environmental laws will
not in the aggregate be material to the financial position or results of
operations of the Company. These cost estimates are based on currently
available information regarding the responsible parties likely to share in the
costs of responding to site contamination, the extent of contamination at sites
for which the investigation has not yet been completed and the cleanup levels
to which sites are expected to have to be remediated.
The Clean Air Act Amendments of 1990 (Amendments) will require reductions in
sulfur dioxide emissions from the Company's Kincaid station. The Amendments
also bar future utility sulfur dioxide emissions except to the extent utilities
hold allowances for their emissions. Allowances which authorize their holder to
emit sulfur dioxide will be issued by the Federal Agency based largely on
historical levels of sulfur dioxide emissions. These allowances will be
transferable and marketable. The Company's ability to increase generation in
the future to meet expected increased demand for electricity will depend in
part on the Company's ability to acquire additional allowances or to reduce
emissions below otherwise allowable levels from its existing generating plants.
In addition, the Amendments require studies to determine what controls, if any,
should be imposed on utilities to control air toxic emissions, including
mercury. The Company's Clean Air Compliance Plan for Kincaid station was
approved by the ICC on July 8, 1993. In late 1993, however, a federal court
declared the Illinois law under which the approval was received to be
unconstitutional and compliance plans prepared and approved in reliance on the
law to be void. Under the Plan approved by the ICC, the Company would have been
allowed to burn low sulfur Illinois coal at Kincaid station without the
installation of pollution control equipment for the years 1995 through 1999,
and to purchase any necessary emission allowances that are expected to be
available under the Amendments during this period. Also, under the Plan, the
Company expected to install pollution control equipment for Kincaid station by
the year 2000. When the final outcome of the federal litigation is known, the
Company will determine whether any changes are required.
27
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
The Amendments also will require reductions in nitrogen oxide emissions from
the Company's fossil fuel generating units. The Illinois Environmental
Protection Agency has proposed rules with respect to such emissions which would
require modifications to certain of the Company's boilers. The Company's
construction program for the three-year period 1994-96 includes $25 million for
such modifications.
(20) SUBSEQUENT EVENTS. On April 1, 1994, the Company redeemed $16 million of
9 3/4% Illinois Environmental Facilities Financing Authority Pollution Control
Revenue Bonds, Series 1983, due April 1, 2013.
On April 12, 1994, the Company issued $150 million of 7% Notes due February
15, 1997.
On May 10, 1994, the Company's shareholders approved the corporate
restructuring plan in which the Company would become a subsidiary of a new
parent holding company named Unicom Corporation.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Capital Budgets. Commonwealth Edison Company (Company) and its electric
utility subsidiary, Commonwealth Edison Company of Indiana, Inc. (collectively,
companies), have a construction program for the three-year period 1994-96 which
consists principally of improvements to the companies' existing nuclear and
other electric production, transmission and distribution facilities. It does
not include funds (other than for planning) to add new generating capacity to
the Company's system. The program, as approved by the Company in January 1994,
calls for electric plant and equipment expenditures of approximately $2,450
million (excluding nuclear fuel expenditures of approximately $780 million).
This amount reflects a decrease of approximately $200 million compared with the
common years (1994-95) of the previously approved construction program. In
part, the decrease reflects a reduction in capital spending announced by the
Company in July 1992 due to adverse financial circumstances. For additional
information concerning the cost reduction plan, see "Rates and Financial
Condition" below. It is estimated that such construction expenditures, with
cost escalation computed at 4% annually, will be as follows:
<TABLE>
<CAPTION>
THREE-YEAR
1994 1995 1996 TOTAL
---- ---- ---- ----------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Production......................................... $295 $310 $250 $ 855
Transmission and Distribution...................... 340 445 505 1,290
General............................................ 115 95 95 305
---- ---- ---- ------
Total.......................................... $750 $850 $850 $2,450
==== ==== ==== ======
</TABLE>
The Company's forecasts of peak load indicate a need for additional resources
to meet demand, either through generating capacity or through equivalent
purchased power or demand-side management resources, in 1997 and each year
thereafter through the year 2000. The projected resource needs reflect the
current planning reserve margin recommendations of the Mid-America
Interconnected Network (MAIN), the reliability council of which the Company is
a member. The Company's forecasts indicate that the need for additional
resources during this period would exist only during the summer months. The
Company does not expect to make expenditures for additional capacity to the
extent the need for capacity can be met through cost-effective demand-side
management resources, non-utility generation or other power purchases. To
assess the market potential to provide such cost-effective resources, the
Company solicited proposals to supply it with cost-effective demand-side
management resources, non-utility generation resources and other-utility power
purchases sufficient to meet forecasted requirements through the year 2000. The
responses to the solicitation suggest that adequate resources to meet the
Company's needs could be obtained from those sources but the Company has not
yet determined whether those sources represent the most economical alternative.
If the Company were to build additional capacity to meet its needs, it would
need to make additional expenditures during the 1994-96 period.
The Company has not budgeted for a number of projects, particularly at
generating stations, which could be required, but which the Company does not
expect to be required during the budget period. In particular, the Company has
not budgeted for the construction of scrubbers at its Kincaid generating
station, for the replacement of major amounts of piping at its boiling water
reactor nuclear stations or for the replacement of steam generators at its
pressurized water reactor nuclear stations. See "Regulation" below and "Part
II. Other Information, Item 1. Legal Proceedings," subcaption "Nuclear
Matters," herein for additional information.
29
<PAGE>
Purchase commitments, principally related to construction and nuclear fuel,
approximated $1,184 million at March 31, 1994. In addition, the Company has
substantial commitments for the purchase of coal under the long-term contracts
indicated in the following table as well as various short-term commitments.
<TABLE>
<CAPTION>
CONTRACT PERIOD COMMITMENT(1)
-------- --------- -------------
<S> <C> <C>
Black Butte Coal Co. ............................. 1994-2007 $1,180
Decker Coal Co. .................................. 1994-2015 $ 888
Big Horn Coal Co. ................................ 1998 $ 21
Various short-term................................ 1994 $ 31
</TABLE>
--------
(1) Estimated costs in millions of dollars FOB mine. No estimate of
future escalation has been made.
For additional information concerning these coal contracts and the Company's
fuel supply, see "Results of Operations" below and Notes 1 and 19 of Notes to
Financial Statements.
The construction program will be reviewed and modified as necessary to adapt
to changing economic conditions, rate levels and other relevant factors
including changing business and legal needs and requirements. The Company
cannot anticipate all such possible needs and requirements. While regulatory
needs in particular are more likely, on balance, to require increases in
construction expenditures than decreases, the Company's financial condition may
require compensating or greater reductions in other construction expenditures.
See "Rates and Financial Condition" below and "Part II. Other Information, Item
1. Legal Proceedings" for additional information concerning the construction
program.
Capital Resources. The Company has forecast that internal sources will
provide approximately one-half of the funds required for its construction
program and other capital requirements, including nuclear fuel expenditures,
contributions to nuclear decommissioning trusts, sinking fund obligations and
refinancing of scheduled debt maturities (the annual sinking fund requirements
for preference stock and long-term debt are summarized in Notes 7 and 8 of
Notes to Financial Statements). The forecast assumes the rate levels reflected
in the Rate Matters Settlement (described below), and reflects the payments
required to be made to customers under the Rate Matters Settlement and the Fuel
Matters Settlement (described below).
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of the Company at the time of
such financing. The Company's new money financing requirements have increased
in recent years due to higher expenditures and lower operating cash flows
resulting from reduced revenues due to customer refunds and rate level
adjustments ordered in various proceedings related to the level of the
Company's rates and the effect of the Rate Matters Settlement and the Fuel
Matters Settlement. See "Rates and Financial Condition" below regarding the
Company's actions to reduce operation and maintenance expenses and its
construction program expenditures in response to adverse regulatory and
judicial decisions. A portion of the Company's financing is expected to be
provided through the continued sale and leaseback of nuclear fuel. The Company
has $975 million of unused bank lines of credit at March 31, 1994 which may be
borrowed at various interest rates and which may be secured or unsecured. The
interest rate is set at the time of a borrowing and is based on several
floating rate bank indices plus a spread which is dependent upon the Company's
credit ratings or on a prime interest rate. Collateral, if required for the
borrowings, would consist of first mortgage bonds issued under and in
accordance with the provisions of the Company's mortgage. See Note 9 of Notes
to Financial Statements for information concerning lines of credit. See the
Statements of Consolidated Cash Flows for the construction expenditures and
cash flow from operating activities for the three months and twelve months
ended March 31, 1994.
During the first three months of 1994, the Company issued an aggregate of
38,000 shares of common stock for approximately $1,035,000 under its employe
stock plans; sold and leased back an aggregate of approximately $116,964,000 of
nuclear fuel; and issued $66,000,000 aggregate principal
30
<PAGE>
amount of first mortgage bonds in connection with the refinancing of certain
outstanding pollution control bonds. On April 12, 1994, the Company issued
$150,000,000 of 7% Notes due February 15, 1997, the proceeds of which were used
to discharge outstanding debt securities.
As of May 11, 1994, the Company has an effective "shelf" registration
statement with the Securities and Exchange Commission for the future sale of up
to an additional $880 million of debt securities and cumulative preference
stock for general corporate purposes of the Company, including the discharge or
refund of other outstanding securities.
Rates and Financial Condition. The Company's financial condition is dependent
upon its ability to generate revenues to cover its costs. To maintain a
satisfactory financial condition, the Company must recover the costs of and a
return on completed construction projects, including its three most recently
completed generating units, and maintain adequate debt and preferred and
preference stock coverages and common stock equity earnings. The Company has no
significant revenues other than from the sale of electricity. Under the
economic and political conditions prevailing in Illinois, the Company's
management recognizes that competitive and regulatory circumstances may limit
the Company's ability to raise its rates. Therefore, the Company's financial
condition will depend in large measure on the Company's levels of sales,
expenses and capital expenditures. See "Business and Competition" below.
In response to the adverse regulatory and judicial decisions in the
proceedings relating to the level of the Company's rates, the Company
implemented a cost reduction plan in 1992 involving various management
workforce reductions through early retirement and voluntary and involuntary
separations. Such reductions, when combined with other actions, are estimated
by the Company to have saved approximately $130 million in operation and
maintenance expenses during 1993. The management workforce reduction resulted
in a charge to income of approximately $23 million (net of income tax effects)
in 1992. In addition, the Company reached agreement in August 1993 with its
unions regarding certain cost reduction actions. The agreement provided for a
wage freeze until April 1, 1994, changes to reduce health care plan cost,
increased use of part-time employment and changes in holiday provisions. The
agreement also included a continuation of negotiations relative to other
issues. Further, the Company has reduced planned construction program
expenditures by approximately $200 million compared with the common years
(1994-95) of the previously approved construction program. See "Rate
Proceedings" below and Note 12 of Notes to Financial Statements.
The Company and union representatives reached agreement in February 1994 and
announced an offer of a voluntary early retirement program. This program is
available to management, non-union and union employees eligible to retire or
who would become eligible to retire after December 31, 1993 and before April 1,
1995. The period for eligible employees to elect to participate in the program
expired on April 20, 1994. The charge to income related to the program in the
first quarter of 1994 of approximately $9 million (net of income tax effects)
related to employees who accepted the program during the first quarter. The
Company estimates that, in total, approximately $21 million (net of income tax
effects) will be charged to income as a result of the program. See Note 12 of
Notes to Financial Statements.
In addition, the quarterly common stock dividends, payable on and since
November 1, 1992 were reduced by 47% from the seventy-five cents per share
amount paid quarterly since 1982 to forty cents per share. Dividends have been
declared on the outstanding shares of the Company's preferred and preference
stocks at their regular quarterly rates. The Company's Board of Directors will
continue to review quarterly the payment of dividends.
The current ratings of the Company's securities by three principal securities
rating agencies are as follows:
<TABLE>
<CAPTION>
STANDARD DUFF &
MOODY'S & POOR'S PHELPS
------- -------- ------
<S> <C> <C> <C>
First mortgage and secured pollution control
bonds........................................... Baa2 BBB BBB
Publicly-held debentures and unsecured pollution
control obligations............................. Baa3 BBB- BBB-
Convertible preferred stock...................... baa3 BBB- BB+
Preference stock................................. baa3 BBB- BB+
Commercial paper................................. P-2 A-2 Duff 2
</TABLE>
31
<PAGE>
The foregoing ratings reflect downgradings during 1992 and in January 1993 as
a result of developments in the proceedings leading to, and the issuance of,
the ICC rate order issued on January 6, 1993 (as subsequently modified, the
Remand Order). In December 1993, Standard & Poor's affirmed its ratings of the
Company's debt, although on October 27, 1993, it changed its "outlook" on the
Company's ratings from stable to negative as part of its larger assessment of
the electric utility industry. In December 1993, Moody's and Duff & Phelps
affirmed their ratings of the Company's securities, and Moody's rating outlook
on the Company remained stable. See "Part II, Item 5. Market for Registrant's
Common Equity and Related Stockholder Matters" in the Company's Annual Report
on Form 10-K for the year ended December 31, 1993, for additional information
regarding the Company's securities ratings.
Business and Competition. The electric utility business has historically been
characterized by retail service monopolies in state or locally franchised
service territories. Investor-owned electric utilities have tended to be
vertically integrated with all aspects of their business subject to pervasive
regulation. Although customers have normally been free to supply their electric
power needs through self-generation, they have not had a choice of electric
suppliers and self-generation has not generally been economical.
The market in which electric utilities like the Company operate has become
more competitive and many observers believe competition will intensify. Self-
generation can be economical for certain customers, depending on how and when
they use electricity and other customer-specific considerations. A number of
competitors are currently seeking to identify and do business with those
customers. In addition, suppliers of other forms of energy are increasingly
competing to supply energy needs which historically were supplied primarily or
exclusively by electricity.
The Energy Policy Act of 1992 will likely have a significant effect on
companies engaged in the generation, transmission, distribution, purchase and
sale of electricity. This Act, among other things, expands the authority of the
Federal Energy Regulatory Commission to order electric utilities to transmit or
"wheel" wholesale power for others, and facilitates the creation of non-utility
electric generating companies. Although the Company cannot now predict the full
impact of this Act, it will likely create and increase competition affecting
the Company.
The Company is facing increased competition from several non-utility
businesses which seek to provide energy services to users of electricity,
especially larger customers such as industrial, commercial and wholesale
customers. Such suppliers include independent power producers and unregulated
energy services companies. In this regard, natural gas utilities operating in
the Company's service area have established subsidiary ventures to provide
heating, ventilating and air conditioning services, attempting to attract the
Company's customers. Also, several utilities in the United States have
established unregulated energy services subsidiaries which pursue business
opportunities wherever they exist. In addition, cogeneration and energy
services companies have begun soliciting the Company's customers to provide
alternatives to using the Company's electricity.
On July 13, 1993, legislation became effective in Illinois which permits the
Company to create certain unregulated subsidiaries, and to form a holding
company, without being required to obtain the approval of the ICC. The
legislation gives the Company and its affiliates flexibility to compete with
unregulated competitors to provide energy services. The Company has created an
unregulated subsidiary to engage in energy service activities and is in the
process of obtaining necessary federal regulatory approvals to create a holding
company structure for its operations. At the Company's annual meeting of
shareholders on May 10, 1994, shareholders approved the creation of the holding
company structure.
Regulation. The companies are subject to state and federal regulation in the
conduct of their respective businesses, including the operations of Cotter
Corporation. Such regulation includes rates, securities issuance, nuclear
operations, environmental and other matters. Particularly in the cases of
nuclear operations and environmental matters, such regulation can and does
affect the companies' operational and capital expenditures.
32
<PAGE>
During the past several years, the Nuclear Regulatory Commission (NRC) has
placed two of the Company's nuclear generating stations, Zion station and
Dresden station, on its list of plants to be monitored closely. Generally, such
status can be expected to result, and has resulted, in increased expenditures
to address deficiencies in station management and/or operations. The Company
has restructured its management of its nuclear stations and committed
additional resources to their operations. In February 1993, the Company was
notified by the NRC that the Company's Zion station, which was placed on the
NRC's list of plants to be monitored closely in early 1991, was removed from
that list. In January 1994, the Company was notified by the NRC that the
Company's Dresden station, which was placed on the NRC's list of plants to be
monitored closely in early 1992, would remain on that list. Also in January
1994, the NRC noted adverse performance trends at Quad-Cities station as well
as at LaSalle County station. The Company had already identified and was
working to correct most of the problems cited. As a consequence, the Company
anticipates continued increased expenditures in connection with those stations.
See "Part II. Other Information, Item 1. Legal Proceedings," subcaption
"Nuclear Matters," for additional information.
The Company estimates that it will expend approximately $15 billion for
decommissioning costs primarily during the period from 2007 through 2032. Such
costs, which are estimated to aggregate approximately $4.24 billion in current-
year (1994) dollars, are expected to be funded by the external decommissioning
trust funds which the Company established in compliance with Illinois law and
into which the Company has been making annual contributions. See Note 1 of
Notes to Financial Statements under "Depreciation and Decommissioning" for
additional information regarding decommissioning costs.
The Clean Air Act Amendments of 1990 (Amendments) will require reductions in
sulfur dioxide emissions from the Company's Kincaid station. The Amendments
also bar future utility sulfur dioxide emissions except to the extent utilities
hold allowances for their emissions. Allowances which authorize their holder to
emit sulfur dioxide will be issued by the United States Environmental
Protection Agency (Federal Agency) based largely on historical levels of sulfur
dioxide emissions. These allowances will be transferable and marketable. The
Company's ability to increase generation in the future to meet expected
increased demand for electricity will depend in part on the Company's ability
to acquire additional allowances or to reduce emissions below otherwise
allowable levels from its existing generating plants. In addition, the
Amendments require studies to determine what controls, if any, should be
imposed on utilities to control air toxic emissions, including mercury. The
Company's Clean Air Compliance Plan for Kincaid station was approved by the ICC
on July 8, 1993. In late 1993, however, a federal court declared the Illinois
law under which the approval was received to be unconstitutional and compliance
plans prepared and approved in reliance on the law to be void. Under the Plan
approved by the ICC, the Company would have been allowed to burn low sulfur
Illinois coal at Kincaid station without the installation of pollution control
equipment for the years 1995 through 1999, and to purchase any necessary
emission allowances that are expected to be available under the Amendments
during this period. Also, under the Plan, the Company expected to install
pollution control equipment for Kincaid station by the year 2000. When the
final outcome of the federal litigation is known, the Company will determine
whether any changes are required.
The Amendments also will require reductions in nitrogen oxide emissions from
the Company's fossil fuel generating units. The Illinois Environmental
Protection Agency has proposed rules with respect to such emissions which would
require modifications to certain of the Company's boilers. The Company's
construction program for the three-year period 1994-1996 includes $25 million
for such modifications.
Capital Structure. The Company's ratio of long-term debt to total
capitalization has decreased to 54.8% at March 31, 1994 from 55.0% at December
31, 1993. This decrease is related primarily to the increase in the amount of
current maturities of long-term debt reclassified to current liabilities.
RATE PROCEEDINGS
The Company's revenues, net income, cash flows and plant carrying costs have
been affected directly by various rate-related proceedings. During the periods
presented in the financial statements, the
33
<PAGE>
Company was involved in proceedings concerning its October 1985 ICC rate order
(which related principally to the recovery of costs associated with its Byron
Unit 1 nuclear generating unit), proceedings concerning its March 1991 ICC rate
order (which related principally to the recovery of costs associated with its
Byron Unit 2 and Braidwood Units 1 and 2 nuclear generating units (Units)),
proceedings concerning the reduction in the difference between the Company's
summer and non-summer residential rates that was effected in the summer of
1988, and ICC fuel reconciliation proceedings principally concerning the
recoverability of the costs of the Company's western coal. In addition, there
were outstanding issues related to the appropriate interest rate and rate
design to be applied to a refund that was made in 1990 following the reversal
of a December 1988 ICC rate order and a rider to the Company's rates that the
Company was required to file as a result of the change in the federal corporate
income tax rate made by the Tax Reform Act of 1986. The uncertainties
associated with such proceedings and issues, among other things, led to the
Rate Matters Settlement and the Fuel Matters Settlement (which are discussed
below).
The effects of the aforementioned rate proceedings during the periods
presented are discussed below under "Results of Operations."
Settlements Relating to Certain Rate Matters
In November 1993, two settlements related to various proceedings and matters
concerning the Company's rates and its fuel adjustment clause became final. One
settlement (Rate Matters Settlement), which became final on November 4, 1993,
concerned the proceedings relating to the Company's 1985 and 1991 ICC rate
orders, the proceedings relating to the reduction in the difference between the
Company's summer and non-summer residential rates, the outstanding interest
rate and rate design issues, and a rider related to the change in the federal
corporate income tax rate made by the Tax Reform Act of 1986. The other
settlement (Fuel Matters Settlement), which became final on November 15, 1993,
related to the ICC fuel reconciliation proceedings involving the Company for
the period from 1985 through 1988 and to future challenges by the settling
parties to the prudency of the Company's western coal costs for the period from
1989 through 1992.
Under the Rate Matters Settlement, effective as of November 4, 1993, the
Company reduced its rates by approximately $339 million annually and commenced
refunding approximately $1.26 billion (including revenue taxes), plus interest
at five percent on the unpaid balance, through temporarily reduced rates over
an initial refund period scheduled to be twelve months (to be followed by a
reconciliation period of no more than five months). The Company had previously
deferred the recognition of revenues during 1993 as a result of developments in
the proceedings related to the March 1991 ICC rate order, which resulted in a
reduction to 1993 net income of approximately $160 million. The recording of
the effects of the Rate Matters Settlement in October 1993 reduced the
Company's 1993 net income and retained earnings by approximately $292 million
or $1.37 per common share, in addition to the effect of the deferred
recognition of revenues and after the partially offsetting effect of recording
approximately $269 million (or $1.26 per common share) in deferred carrying
charges, net of income taxes, authorized in the ICC rate order issued on
January 6, 1993 (as subsequently modified, the Remand Order). The deferred
recognition of revenues was eliminated in October 1993 at the time the
provisions for revenue refunds related to the Rate Matters Settlement, which
reflected those deferred revenues, were recorded. Consistent with such
treatment of the deferred recognition of revenues in 1993, the financial
statements presented herein for the three months and twelve months ended March
31, 1993 and the twelve months ended March 31, 1994 reflect the
reclassification of the deferred recognition of revenues from operating
revenues to provisions for revenue refunds. This reclassification had no effect
on net electric operating revenues. In January 1994, a purported class action
was filed in the Circuit Court of Cook County, Illinois (Circuit Court)
challenging the making of refunds to current rather than to historical
residential customers in the Rate Matters Settlement. The Company does not
believe that the complaint has any merit.
Under the Fuel Matters Settlement, effective as of December 2, 1993, the
Company commenced paying approximately $108 million (including revenue taxes)
to its customers through temporarily
34
<PAGE>
reduced collections under its fuel adjustment clause over a twelve-month
period. The Company recorded the effects of the Fuel Matters Settlement in
October 1993, which effects reduced the Company's net income and retained
earnings by approximately $62 million or $0.29 per common share.
The settlements will reduce the Company's cash flows from operations during
1994 and future periods by amounts corresponding to the rate reductions and
refunds. See Note 9 of Notes to Financial Statements for information regarding
unused lines of credit available to the Company.
Other Rate Matters
On February 10, 1994, the Company filed a request with the ICC to increase
electric operating revenues by approximately $460 million, or 7.9%, on an
annual basis above the level of revenues approved in the Rate Matters
Settlement. This request principally reflects the inclusion of the Units in the
Company's rate base as fully "used and useful," increased operation and
maintenance expenses over the level reflected in the Remand Order, increased
contributions to the external trust funds which the Company is required to fund
to cover the eventual decommissioning of its nuclear power plants and lower
debt and equity costs. The ICC has suspended the rates, appointed hearing
examiners and ordered an investigation. Under the Illinois Public Utilities
Act, the ICC must decide the case by early January 1995.
In the Remand Order, the rate determination was based upon, among other
things, findings by the ICC with respect to the extent to which the Units were
"used and useful" during the 1991 test year period of the rate order. With
respect to the "used and useful" issue, the ICC applied a needs and economic
benefits methodology, using a twenty percent reserve margin and forecasted peak
demand, and found Byron Unit 2 and Braidwood Units 1 and 2 to be 93%, 21% and
0%, respectively, "used and useful." The Company has not recorded any
disallowances related to the "used and useful" issue. The Company considers the
"used and useful" disallowance in the Remand Order to be temporary. The ICC
concluded in the Remand Order that the forecasts in the record in that
proceeding indicate that Braidwood Units 1 and 2 will be fully "used and
useful" within the reasonably foreseeable future.
RESULTS OF OPERATIONS
Three Months and Twelve Months Ended March 31, 1994
Compared to Three Months and Twelve Months Ended March 31, 1993
Earnings Per Common Share. The Company's earnings per common share for the
three months ended March 31, 1994 were $0.17 compared to $0.28 for the three
months ended March 31, 1993 and $0.10 for the twelve months ended March 31,
1994 compared to $2.13 for the twelve months ended March 31, 1993. The decrease
in the recent three-month period principally reflects higher operation and
maintenance expenses, which include a non-recurring after-tax charge of $9
million (or $0.04 per common share) for additional pension costs related to an
early retirement program. The decrease in the recent three-month period was
partially offset by higher revenues as a result of increased kilowatthour
sales. Earnings per share in the recent twelve-month period were significantly
affected by the recording of the effects of the Rate Matters Settlement and
Fuel Matters Settlement in October 1993, which reduced net income by
approximately $354 million or $1.66 per common share, in addition to the effect
of the deferred recognition of revenues which the Company had recorded during
1993 (approximately $160 million or $0.75 per common share), and after the
partially offsetting effect of recording approximately $269 million or $1.26
per common share in deferred carrying charges, net of income taxes, as
authorized in the Remand Order. This negative effect was partially offset by
higher revenues resulting from an increase in kilowatthour sales in the recent
twelve-month period. The prior three-month and twelve-month periods also
reflect the favorable cumulative effect ($9.7 million or $0.05 per common
share) of the Company's adoption of Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income Taxes, in January 1993.
35
<PAGE>
See "Rate Proceedings" above for information relating to various rate
proceedings which have affected the Company's earnings per common share and
"Rate Proceedings," subcaption "Settlements Relating to Certain Rate Matters"
above for information regarding a reclassification of the deferred recognition
of revenues from operating revenues to provisions for revenue refunds for the
three months and twelve months ended March 31, 1993 and the twelve months ended
March 31, 1994.
Kilowatthour Sales. Kilowatthour sales to ultimate consumers for the three
months and twelve months ended March 31, 1994 increased 3.8% and 4.4% compared
to the three months and twelve months ended March 31, 1993, respectively. The
increase in the three-month period reflects higher kilowatthour sales to all
classes of customers due primarily to colder than normal winter weather as
compared to the same period ended March 31, 1993. The increase in the twelve-
month period reflects higher kilowatthour sales to all classes of customers due
primarily to more normal summer weather and colder than normal winter weather
as compared to the same period ended March 31, 1993. Kilowatthour sales
including sales for resale increased 3.8% and 14.6% during the three-month and
twelve-month periods ended March 31, 1994 compared to the same periods ended
March 31, 1993, respectively.
Electric Operating Revenues. Operating revenues increased in the three months
ended March 31, 1994 compared to the three months ended March 31, 1993. The
increase in the recent three-month period principally reflects the increased
level of kilowatthour sales described above. The prior three-month period
reflected higher rate levels recognized prior to January 15, 1993, the
effective date on which the Company began deferring recognition of revenues for
amounts over the $144 million rate increase level provided in the Remand Order.
Operating revenues decreased in the twelve months ended March 31, 1994 as
compared to the prior twelve-month period, principally reflecting the recording
of the effects of the Rate Matters Settlement and the Fuel Matters Settlement,
which reduced operating revenues by approximately $1,288 million in the period.
This reduction was partially offset by the effects of the previously described
higher kilowatthour sales. The decrease in operating revenues for the recent
period was also partially offset by the increase in fuel costs recovered under
the fuel adjustment provision.
Operating revenues for 1994 will be affected by the Rate Matters Settlement
(discussed above), which lowered the level of the Company's rates.
Fuel Costs. Changes in fuel expense for the three months and twelve months
ended March 31, 1994 as compared to the same periods ended March 31, 1993
primarily result from changes in the average cost of fuel consumed, changes in
the mix of fuel sources of electric energy generated and changes in net
generation of electric energy. Fuel mix is determined primarily by system load,
the costs of fuel consumed and the availability of nuclear generating units.
The cost of fuel consumed, net generation of electric energy and fuel sources
of kilowatthour generation were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1993 1994 1993 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cost of fuel consumed (per mil-
lion Btu):
Nuclear....................... $0.52 $0.54 $0.52 $0.52
Coal.......................... $3.14 $2.28 $3.15 $2.68
Oil........................... $3.05 $2.78 $3.04 $2.92
Natural gas................... $3.06 $2.77 $2.55 $2.70
Average all fuels............. $1.22 $1.10 $1.02 $1.12
Net generation of electric
energy (millions of
kilowatthours)................ 21,781 22,213 81,959 94,697
Fuel sources of kilowatthour
generation:
Nuclear....................... 74% 70% 82% 74%
Coal.......................... 24 26 16 24
Oil........................... 1 2 1 1
Natural gas................... 1 2 1 1
--------- --------- --------- ---------
100% 100% 100% 100%
========= ========= ========= =========
</TABLE>
36
<PAGE>
Under the Energy Policy Act of 1992, investor-owned electric utilities that
have purchased enrichment services from the Department of Energy (DOE) are
being assessed amounts to fund a portion of the cost for the decontamination
and decommissioning of three nuclear enrichment facilities previously operated
by the DOE. The Company's portion of such assessments is estimated to be
approximately $15 million per year (to be adjusted annually for inflation). The
Act provides that such assessments are to be treated as a cost of fuel. See
Note 1 of Notes to Financial Statements for information related to the
accounting for such costs.
Fuel Supply. Compared to other utilities, the Company has relatively low
average fuel costs. This results from the Company's reliance predominantly on
lower cost nuclear generation. The Company's coal costs, however, are high
compared to those of other utilities. The Company's western coal contracts and
its rail contracts for delivery of the western coal were renegotiated during
1992 effective as of January 1, 1993, to provide, among other things, for
significant reductions in the delivered price of the coal over the duration of
the contracts. However, the renegotiated contracts provide for the purchase of
certain coal at prices substantially above currently prevailing market prices
and the Company has significant purchase commitments under its contracts. In
addition, as of March 31, 1994, the Company had unrecovered fuel costs in the
form of coal reserves of approximately $517 million. In prior years, the
Company's commitments for the purchase of coal exceeded its requirements.
Rather than take all the coal it was required to take, the Company agreed to
purchase the coal in place in the form of coal reserves. For additional
information concerning the Company's coal purchase commitments, fuel
reconciliation proceedings and coal reserves, see "Liquidity and Capital
Resources" above and Notes 1, 2 and 19 of Notes to Financial Statements.
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of the Company's generating units and the availability
and cost of power from other utilities.
The number and average cost of kilowatthours purchased were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
--------------------- ---------------------
1993 1994 1993 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Kilowatthours (millions)..... 271 657 1,982 1,030
Cost per kilowatthour........ 1.89c 2.61c 1.81c 2.36c
</TABLE>
Deferred Under or Overrecovered Energy Costs--Net. Electric operating
expenses for the three months and twelve months ended March 31, 1994 and 1993
reflect the net change in under or overrecovered allowable energy costs under
the Company's fuel adjustment clause. See "Fuel Costs" and "Fuel Supply" above
and Note 1 of Notes to Financial Statements.
Operation and Maintenance Expenses. Total operation and maintenance expenses
increased 9% for the three months ended March 31, 1994 and decreased 1% for the
twelve months ended March 31, 1994, respectively, compared to the same periods
ended March 31, 1993. The increase in the current three-month period primarily
reflects higher operation and maintenance expenses associated with fossil
generating stations, distribution facilities, employee pension costs and
certain administrative and general costs. The decrease in the twelve months
ended March 31, 1994 reflects lower operation and maintenance expenses
associated with fossil and nuclear generating stations, partially offset by
higher expenses associated with distribution facilities, the 1993 special pay
incentive program and costs of pension and other employee benefits, including
postretirement health care benefits. The effects of inflation are reflected in
the increases and decreases discussed below and have increased operation and
maintenance costs for the three months and twelve months ended March 31, 1994.
Operation and maintenance expenses associated with the nuclear generating
stations decreased $4 million and $65 million in the three months and twelve
months ended March 31, 1994, respectively, compared to the same periods ended
March 31, 1993. The decrease in both periods is due primarily to the effects of
the Company's cost reduction efforts. However, for the year 1994 the Company
has budgeted an increase in nuclear operation and maintenance expenses of
approximately 4.5% over 1993 actual and currently expects to complete the year
near to budget. Future operation and maintenance
37
<PAGE>
expenses associated with nuclear generating stations may be significantly
affected by regulatory, operational and other requirements. See "Regulation"
under "Liquidity and Capital Resources" above. Operation and maintenance
expenses associated with the fossil generating stations increased $10 million
and decreased $7 million in the three months and twelve months ended March 31,
1994, respectively, compared to the same periods ended March 31, 1993. The
increase in the three-month period reflects, in part, increased scheduled
overhauls.
The twelve-month period ended March 31, 1994 reflects a $36 million special
incentive plan cost for employees related to a sharing of operation and
maintenance savings below 1993 budgeted levels.
Operation and maintenance expenses associated with the Company's distribution
system increased $7 million and $14 million in the three months and twelve
months ended March 31, 1994, respectively, compared to the same periods ended
March 31, 1993. The increases in both periods reflect costs related to unusual
service restoration and repair costs associated with severe weather during
January 1994 and a system safety and reliability improvement program. Expenses
associated with the Company's distribution system may increase in future years
due, in part, to the effect of increased customer expectations regarding
service reliability.
The costs of pension and other employee benefits, including postretirement
health care benefits, increased $15 million and $2 million in the three months
and twelve months ended March 31, 1994, respectively, compared to the same
periods ended March 31, 1993. The increases in the current three-month and
twelve-month periods reflect $16 million of non-recurring costs related to
employees who elected in the first quarter to take early retirement under a
1994 early retirement program. It is estimated that, in total, the program will
result in the recognition of approximately $35 million of pension cost, of
which approximately $30 million was recorded through April 1994. The current
twelve-month period also includes an increase of approximately $12 million in
postretirement health care benefits related to the Company's adoption on
January 1, 1993 of SFAS No. 106, Employers' Accounting for Postretirement
Benefits Other Than Pensions. The comparison with the prior twelve-month period
is also affected by $26 million of additional pension costs recorded in the
third quarter of 1992 related to the Company's 1992 workforce reduction
program. See Notes 12 and 13 of Notes to Financial Statements for additional
information.
Certain administrative and general costs increased $17 million for the three
months ended March 31, 1994 compared to the same period ended March 31, 1993,
of which $7 million was due to an increase in the provision for injuries and
damages and $10 million related to increases in a number of other items, none
of which was significant.
For further information regarding a cost reduction plan and its effect on
operation and maintenance expenses, see "Liquidity and Capital Resources,"
subcaption "Rates and Financial Condition" above.
Depreciation. Depreciation expense for the three months and twelve months
ended March 31, 1994 increased over the same periods a year ago as a result of
additions to plant in service. See Note 1 of Notes to Financial Statements for
information concerning depreciation rates and decommissioning costs.
Interest on Debt. Changes in interest on long-term debt and notes payable for
the three months and twelve months ended March 31, 1994 as compared to the same
periods ended March 31, 1993 were due to changes in average interest rates and
in the amounts of long-term debt and notes payable outstanding. Changes in
interest on long-term debt reflect new issues of debt and the retirement and
redemption of issues which were refinanced at generally lower rates of
interest. The average amounts of long-term debt and notes payable outstanding
and average interest rates thereon were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
--------------------- ---------------------
1993 1994 1993 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term debt outstand-
ing--
Average amount (mil-
lions)................. $8,076 $8,032 $7,862 $8,107
Average interest rate... 8.25% 7.83% 8.41% 7.92%
Notes payable outstand-
ing--
Average amount (mil-
lions)................. $ 6 $ 6 $ 19 $ 6
Average interest rate... 5.83% 5.87% 4.49% 5.84%
</TABLE>
38
<PAGE>
Deferred Carrying Charges. In the Remand Order, the ICC provided that, for
ratemaking purposes, deferred carrying charges on the reasonable and "used and
useful" plant costs of the Units for the period April 1, 1989 until
approximately March 20, 1991, the date the Units were reflected in rates, could
be deferred and amortized. Approximately $438 million of such costs were
capitalized as a regulatory asset in October 1993 and resulted in an increase
to net income for the twelve months ended March 31, 1994 of approximately $265
million or $1.24 per common share. Amortization of deferred carrying charges
for the three months and twelve months ended March 31, 1994 amounted to
approximately $3 million and $5 million, respectively.
Taxes. In the third quarter of 1993, the President of the United States
signed into law a deficit-reduction plan that included, among other things, an
increase in the federal statutory corporate income tax rate from 34% to 35%,
effective January 1, 1993. The estimated effect of the higher rate would be to
increase the Company's costs by approximately $12 million per year. The Company
began recording the effects of the increased taxes in the third quarter of
1993. In addition to the effects on income discussed above, the Company
recorded in the third quarter of 1993 a net increase in the deferred income tax
liability which was primarily offset by regulatory assets net of regulatory
liabilities, reflecting the increase in taxes recoverable in rates to settle
net income tax liabilities recorded in prior years.
Further, the Company recorded in the third quarter of 1993 the effects of the
elimination of a scheduled reduction in a component of the statutory Illinois
income tax rate which was to have declined to 4.4% from 4.8%, effective July 1,
1993.
In 1993, the Company recorded a loss for income tax purposes. Income tax
overpayments resulting from such loss and other income tax refunds,
approximating $187 million and $47 million at December 31, 1993 and March 31,
1994, respectively, are included in the Consolidated Balance Sheets in
receivables.
See Note 14 of Notes to Financial Statements for information concerning the
accounting standard adopted by the Company in January 1993 which requires the
Company to use an asset and liability approach for financial accounting and
reporting for income taxes rather than the deferred method.
Decommissioning. The staff of the Securities and Exchange Commission has
questioned certain of the current accounting practices of the electric utility
industry, including the Company, regarding the recognition, measurement and
classification of decommissioning costs for nuclear generating stations in
financial statements of electric utilities. In response to these questions, the
electric utility industry has requested the Financial Accounting Standards
Board to review the accounting for removal costs, including decommissioning. If
current electric utility industry accounting practices for such decommissioning
are changed: (1) annual provisions for decommissioning could increase; (2) the
estimated cost for decommissioning could be recorded as a liability rather than
as accumulated depreciation; and (3) trust fund income from the external
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense. The Company does not believe that such
changes, if required, would have an adverse effect on results of operations due
to its current and future ability to recover decommissioning costs through
rates.
Investments in Uranium-Related Properties. At March 31, 1994, the Company and
its subsidiaries had investments of approximately $135 million in uranium-
related properties, equipment and activities. Production of uranium from all of
the uranium properties has been deferred due to depressed market prices for
uranium. The Company currently expects ultimately to recover through rates
charged to customers the carrying value of the uranium properties in all
material respects in relation to the Company's financial position and its
results of operations, but doing so depends on substantially improved market
conditions. However, the Company is conducting an overall review of various
operating, regulatory and investment alternatives as part of the continuing
evaluation of its uranium properties and, as a result, will be reassessing its
ultimate ability to recover their carrying value. If it is determined that any
portion of the carrying value is not recoverable, such amount will have to be
charged to income.
39
<PAGE>
Other Items. The amounts of allowance for funds used during construction
(AFUDC) reflect changes in the average levels of investment subject to AFUDC
and changes in the average annual rates as discussed in Note 1 of Notes to
Financial Statements. AFUDC does not contribute to the current cash flow of
the Company.
The ratios of earnings to fixed charges for the twelve months ended December
31, 1993 and March 31, 1994 were 1.19 and 1.17, respectively. The ratios of
earnings to fixed charges and preferred and preference stock dividend
requirements for the twelve months ended December 31, 1993 and March 31, 1994
were 1.03 and 1.01, respectively.
Business corporations in general have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate
to replace, at increased costs, the productive assets consumed. Electric
utilities in particular have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental requirements. Because the
regulatory process limits the amount of depreciation expense included in the
Company's revenue allowance to the original cost of utility plant investment,
the resulting cash flows are inadequate to provide for replacement of that
investment in future years or preserve the purchasing power of common equity
capital previously invested.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ELECTRIC RATES. The following table summarizes rate increases granted in the
Company's major rate proceedings before the ICC since January 1, 1985.
Revenues actually realized as a result of the rate increases may vary
depending on levels of kilowatthour sales to each class of customers. See
Notes 2 and 3 of Notes to Financial Statements.
<TABLE>
<CAPTION>
AUTHORIZED
---------------------------------------------------------
END OF
TWELVE-MONTH
ANNUAL AMOUNT PERCENT TEST PERIOD
REQUESTED (IN ANNUAL INCREASE CITED IN
MILLIONS) AND AMOUNT (IN OVER PREVIOUS FINAL RATE
DATE OF FILING EFFECTIVE DATE MILLIONS)(A) REVENUES(A) ORDER
- - ----------------- ---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
$583
November 29, 1984 October 29, 1985 $495(b) 11.0 December 1984
$1,415
August 21, 1987 January 1, 1989 $235(c) 4.5(c) December 1987
$1,231
April 12, 1990 March 20, 1991 $750(d) 14.0(d) December 1991
</TABLE>
- - --------
(a) The amounts granted and the related percent increases are based on the
test periods cited in the rate orders and exclude add-on revenue taxes.
(b) Includes approximately $81 million of revenue included in rates effective
January 1, 1987 pursuant to a phase-in plan. The phase-in plan reflects
the recovery of the $81 million postponed portion of the increase and an
additional recovery ($56 million) of a full return on the postponed
portion over a two-year period.
(c) Represents the first step of a rate increase relating to the Units
authorized by a December 1988 rate order which was reversed by the
Illinois Supreme Court on December 21, 1989 and excludes a $56 million
decrease resulting from completion of the recovery period referred to in
note (b). This rate increase was rolled back, effective July 1, 1990.
(d) Represents the aggregate amount of the rate increase, which was to be
phased-in over a three-year period. As a result of subsequent proceedings
and the Rate Matters Settlement, only an increase of approximately $144
million in annual electric operating revenues remains effective. See "Rate
Proceedings," subcaption "Settlements Relating to Certain Rate Matters" in
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Note 2 of Notes to Financial Statements.
CERTAIN REGULATORY MATTERS. Through its fuel adjustment clause, the Company
recovers from its customers the cost of the fuel used to generate electricity
and of purchased power as compared to fuel costs included in base rates. The
amounts collected under the fuel adjustment clause are subject to review by
the ICC, which, under the Illinois Public Utilities Act, is required to hold
annual public hearings
40
<PAGE>
to reconcile the collected amounts with the actual cost of fuel and power
prudently purchased. In the event that the collected amounts exceed such actual
cost, then the ICC can order that the excess be refunded. For additional
information concerning the Company's fuel reconciliation proceedings and coal
reserves, see Notes 1, 2 and 19 of Notes to Financial Statements.
Currently, the ICC is conducting a focused management audit of the Company's
fuel procurement process, which began in December 1993 and is scheduled to be
completed in midyear 1994.
LITIGATION. During 1989 and 1991, actions were brought in federal and state
courts in Colorado against the Company and its subsidiary, Cotter Corporation
(Cotter), alleging that Cotter has permitted radioactive and other hazardous
material to be released from its mill into areas owned or occupied by the
plaintiffs resulting in property damage and potential adverse health effects.
The plaintiffs seek from Cotter and the Company unspecified compensatory,
exemplary and medical monitoring fund damages, unspecified response costs under
the Comprehensive Environmental Response, Compensation and Liability Act of
1980 (CERCLA), and temporary and permanent injunctive relief. In February 1994,
a federal jury returned a verdict in favor of eight bellwether plaintiffs in
the total amount of $76,400 in property damages, rejecting any award for
exemplary or medical monitoring damages. Plaintiffs have appealed. The
remaining cases are not yet scheduled for trial. Although the cases will
necessarily involve the resolution of numerous contested issues of fact and
law, the Company's determination is that these actions will not have a material
adverse impact on the Company's financial statements.
In October 1990, the Company filed a complaint in the Circuit Court against
Westinghouse Electric Corporation (Westinghouse) and certain of its employees.
The complaint alleges that the defendants knowingly concealed information
regarding the durability of the metal used in the steam generators (a major
component of the nuclear steam supply systems) at the Zion, Byron and Braidwood
stations. The complaint further alleges that the defects in the steam
generators will prevent the plants from maintaining their full power output
through their forty-year design life without costly remanufacture or
replacement of the steam generators. Damages, including punitive damages, in an
unspecified amount are claimed. Westinghouse has filed a counterclaim against
the Company which seeks recovery of Westinghouse's costs of defense and damages
of approximately $13 million.
Shareholder derivative lawsuits were filed on October 1, 1992 and on April
14, 1993 in the Circuit Court against current and former directors of the
Company alleging that they breached their fiduciary duty and duty of care to
the Company in connection with the management of the activities associated with
the construction of the Company's four most recently completed nuclear
generating units. The lawsuits sought restitution to the Company by the
defendants for unquantified and undefined losses and costs alleged to have been
incurred by the Company. Both lawsuits were dismissed by the Circuit Court;
however, appeals are pending before the Illinois Appellate Court.
A number of complaints have been filed by former employees with the Equal
Employment Opportunity Commission, and several lawsuits have been filed by
former employees in the United States District Court, alleging that the
employees' terminations (which occurred as part of the Company's management
workforce reductions that were implemented in the second half of 1992) involved
discrimination on the basis of age, race, sex, national origin and/or
disabilities, in violation of applicable law. One case alleges that the
Company's calculation of vacation pay owed to terminated employees violated
Illinois law. The complainants in these various cases are seeking, among other
things, awards of back pay and lost benefits, reinstatement, pecuniary damages,
and costs and attorneys' fees.
NUCLEAR MATTERS. Under the Nuclear Waste Policy Act of 1982, the DOE is
responsible for the selection and development of repositories for, and the
disposal of, spent nuclear fuel and high-level radioactive waste. The Company,
as required by that Act, has signed a contract with the DOE to provide for the
disposal of spent nuclear fuel and high-level radioactive waste from the
Company's nuclear generating stations beginning not later than January 1998.
The contract with the DOE requires the
41
<PAGE>
Company to pay the DOE a one-time fee applicable to nuclear generation through
April 6, 1983 of approximately $277 million, with interest to date of payment,
and a fee payable quarterly equal to one mill per kilowatthour of nuclear-
generated and sold electricity after April 6, 1983. The Company has elected to
pay the one-time fee, with interest, just prior to the first scheduled delivery
of spent nuclear fuel to the DOE, which is scheduled to occur not later than
January 1998; however, this delivery schedule is expected to be delayed
significantly. The costs incurred by the DOE for disposal activities will be
paid out of fees charged to owners and generators of spent nuclear fuel and
high-level radioactive waste. The Company has primary responsibility for the
interim storage of its spent nuclear fuel. The Company anticipates the
possibility of serious difficulties in disposing of high-level radioactive
waste.
The Company currently disposes of its low-level radioactive waste at a site
in the state of South Carolina. There are no other commercial operating sites
in the United States for the disposal of low-level radioactive waste available
to the Company. The federal Low-Level Radioactive Waste Policy Act of 1980
provides that states may enter into compacts to provide for regional disposal
facilities for such waste, subject to approval by the United States Congress
(Congress) of each such compact. Under the 1985 amendments to that Act, a
compact could restrict the use of a region's disposal facilities after January
1, 1993 to waste generated within the region. South Carolina belongs to a
regional compact. South Carolina has granted the Company access to its waste
disposal site for an 18-month period which began January 1, 1993. Illinois has
entered into a compact with the state of Kentucky, which has been approved by
Congress. The Illinois Department of Nuclear Safety had estimated that a low-
level radioactive waste disposal facility would be operational in Illinois by
March 31, 1994 at the earliest. However, based on actions in 1992 of an
independent panel which rejected the only site in Illinois then being
considered for a low-level waste disposal facility, a site is currently not
expected to be operational until after the year 2000. The Company has temporary
on-site storage capacity at its nuclear generating stations for a limited
amount of low-level radioactive waste and is planning additional such capacity
pending development of disposal facilities by the state of Illinois. The
Company anticipates the possibility of serious difficulties in disposing of
low-level radioactive waste. The continuing viability of commercial nuclear
power is subject to resolution of the issues of spent nuclear fuel storage and
disposal of radioactive waste.
In February 1993, the Company was notified by the NRC that the Company's Zion
station, which was placed on the NRC's list of plants to be monitored closely
in early 1991, was removed from that list. In January 1994, the Company was
notified by the NRC that the Company's Dresden station, which was placed on the
NRC's list of plants to be monitored closely in early 1992, would remain on
that list. Also in January 1994, the NRC noted adverse performance trends at
Quad-Cities station as well as at LaSalle County station. The Company had
already identified and was working to correct most of the problems cited. As a
consequence, the Company anticipates continued increased expenditures in
connection with those stations. See "Liquidity and Capital Resources,"
subcaption "Regulation" in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for additional information.
In accordance with a commitment to the NRC, the Company examined its
operating boiling water nuclear generating units in 1983 to determine the
existence or extent of inter-granular stress corrosion in certain of the large
diameter piping in those units. Inter-granular stress corrosion was discovered
in the Dresden and Quad-Cities units. The Company replaced the stainless steel
piping susceptible to stress corrosion at Dresden Unit 3 and is taking
alternative remedial actions which are intended to minimize the need to replace
such piping at Dresden Unit 2, Quad-Cities Units 1 and 2 and LaSalle County
Units 1 and 2. If the Company is required to replace all of such piping, the
estimated construction expenditures, in current-year dollars, would be
approximately $520 million.
The Company has studied the possibility of having to replace the steam
generators at its Zion nuclear generating plant. The initial studies were
completed in early June 1991 and additional follow-up studies are continuing.
Based on the findings of these studies, the Company plans to replace the Zion
Unit 1 steam generators, for service in the year 2000, at an estimated cost of
approximately $225 million. The
42
<PAGE>
Company is also studying the replacement of the steam generators at Byron Unit
1 and Braidwood Unit 1 and expects such replacement may be needed. Initial and
on-going studies indicate possible replacements as early as the year 2000 for
Byron Unit 1 and 2002 for Braidwood Unit 1; however, alternative remedial
actions are also being explored. If required, the replacement cost of the steam
generators at Byron Unit 1 and Braidwood Unit 1 would be comparable to Zion
Unit 1. Approximately $3 million of preliminary engineering expenditures are
included in the 1994-96 construction program. See "Litigation" herein
concerning litigation by the Company against Westinghouse concerning steam
generators.
During the year 1993, civil penalties were imposed on the Company by the NRC
on seven occasions for violations of NRC regulations in amounts aggregating
$562,500. Since January 1, 1994, the NRC has imposed on the Company one civil
penalty in the amount of $75,000 for violations of NRC regulations. In
addition, there are several potentially enforceable issues currently
outstanding and under review by the NRC.
ENVIRONMENTAL MATTERS. Air quality regulations, promulgated by the Illinois
Pollution Control Board (IPCB) as well as the Indiana and Hammond Departments
of Environmental Management in accordance with federal standards, impose
restrictions on the emission of particulates, sulfur dioxide, nitrogen oxides
and other air pollutants and require permits from the respective state and
local environmental protection agencies for the operation of emission sources.
Permits authorizing operation of the Company's fossil-fueled generating
facilities subject to this requirement have been obtained and, where such
permits are due to expire, the Company has, in a timely manner, filed
applications for renewal or requested extensions of the existing permits.
Under the Federal Clean Water Act, National Pollutant Discharge Elimination
System (NPDES) permits for discharges into waterways are required to be
obtained from the Federal Agency or from the state environmental agency to
which the permit program has been delegated. Those permits must be renewed
periodically. The companies either have NPDES permits for all of their
generating stations or have filed applications for renewals of such permits
under the current delegation of the program to the Illinois Environmental
Protection Agency (Illinois Agency) or the Indiana Department of Environmental
Management. The Company is also subject to the jurisdiction of certain
pollution control agencies of the state of Iowa with respect to the discharge
into the Mississippi River from the Quad-Cities station. Reissued NPDES permits
for several generating facilities establish schedules by which the facilities
must meet tighter discharge limits when using certain biocides in condenser
cooling water systems. The Company has embarked on a program to obtain
compliance with the new permit requirements by the April 1995 compliance date.
On August 10, 1990, the Sierra Club filed suit in the U.S. District Court
under Section 505 of the Federal Clean Water Act alleging violations of state
of Illinois water quality standards with respect to thermal effluents at the
Company's Fisk, Crawford, Will County, Joliet and Dresden generating stations.
In July 1991, the Sierra Club and the Company reached a settlement of this suit
which was approved by the Court on November 1, 1991. Under the settlement, the
Company has agreed to perform an ecological study of the thermal effluents
discharged from the generating stations. Ultimately, this study, which is
currently underway, may determine whether the installation of closed cycle
cooling facilities or operational restrictions are necessary at one or more of
these stations.
The Great Lakes Critical Programs Act of 1990 requires that, following the
issuance of guidance by the Federal Agency, the states of Illinois and Indiana,
among others, adopt water quality standards, policies and procedures to assure
protection of the water quality of the Great Lakes. Water quality standards and
procedures that the states would be required to adopt under the current version
of the Federal Agency's draft guidance ultimately could require that the
Company install additional pollution control equipment or restrict operations
at its facilities that discharge, either directly or indirectly, into Lake
Michigan. The Federal Agency is expected to issue final guidance in 1995.
43
<PAGE>
The Clean Air Act Amendments of 1990 (Amendments) will require reductions in
sulfur dioxide emissions from the Company's Kincaid station. The Amendments
also bar future utility sulfur dioxide emissions except to the extent utilities
hold allowances for their emissions. Allowances which authorize their holder to
emit sulfur dioxide will be issued by the Federal Agency based largely on
historical levels of sulfur dioxide emissions. These allowances will be
transferable and marketable. The Company's ability to increase generation in
the future to meet expected increased demand for electricity will depend in
part on the Company's ability to acquire additional allowances or to reduce
emissions below otherwise allowable levels from its existing generating plants.
In addition, the Amendments require studies to determine what controls, if any,
should be imposed on utilities to control air toxic emissions, including
mercury. The Company's Clean Air Compliance Plan for Kincaid station was
approved by the ICC on July 8, 1993. In late 1993, however, a federal court
declared the Illinois law under which the approval was received to be
unconstitutional and compliance plans prepared and approved in reliance on the
law to be void. Under the Plan approved by the ICC, the Company would have been
allowed to burn low sulfur Illinois coal at Kincaid station without the
installation of pollution control equipment for the years 1995 through 1999,
and to purchase any necessary emission allowances that are expected to be
available under the Amendments during this period. Also, under the Plan, the
Company expected to install pollution control equipment for Kincaid station by
the year 2000. When the final outcome of the federal litigation is known, the
Company will determine whether any changes are required.
The Amendments also will require reductions in nitrogen oxide emissions from
the Company's fossil fuel generating units. The Illinois Agency has proposed
rules with respect to such emissions which would require modifications to
certain of the Company's boilers. The Company's construction program for the
three-year period 1994-96 includes $25 million for such modifications.
CERCLA provides for immediate response and removal actions coordinated by the
Federal Agency to releases of hazardous substances into the environment and
authorizes the federal government 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 made strictly, jointly and severally
liable for the clean-up costs of waste at sites, most of which are listed by
the Federal Agency on the National Priorities List (NPL). These responsible
parties can be ordered to perform a clean-up, can be sued for costs associated
with a Federal Agency directed clean-up, or may voluntarily settle with the
federal government concerning their liability for cleanup costs, or may
voluntarily begin a site investigation and site remediation prior to listing on
the NPL under state oversight. Various states, including Illinois, have enacted
statutes which contain provisions substantially similar to CERCLA. The Company
and its subsidiaries are or are likely to become parties to proceedings
initiated by the Federal Agency, state agencies and/or other responsible
parties under CERCLA with respect to a number of sites, including manufactured
gas plant (MGP) sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. MGPs manufactured
gas in Illinois from approximately 1850 to 1950. The Company generally did not
operate MGPs as a corporate entity but did, however, acquire MGP sites as part
of the absorption of smaller utilities. Approximately half of these sites were
transferred to Northern Illinois Gas Company as part of a general conveyance in
1954. The Company also acquired former MGP sites as vacant real estate on which
Company facilities have been constructed. While there is a possibility that in
the aggregate the cost of MGP site investigation and remediation will be
substantial over time, the Company is not able to determine the most probable
liability for MGPs. In accordance with accounting standards, the Company
recorded a provision of $25 million in 1991 which reflects the low end of the
range of its estimate of the liability associated with former MGPs. In 1993,
the Company recorded a provision of $5 million which reflects the low end of
the range of its estimate of the liability associated with cleanup costs of
remediation sites other than former MGP sites. The Company presently estimates
that its costs of investigating and remediating the former MGP and other
remediation sites pursuant to CERCLA and state environmental laws will not in
the aggregate be material to the financial position or results of operations of
the Company. These cost estimates are based
44
<PAGE>
on currently available information regarding the responsible parties likely to
share in the costs of responding to site contamination, the extent of
contamination at sites for which the investigation has not yet been completed
and the cleanup levels to which sites are expected to have to be remediated.
On July 17, 1991, the United States Government (Government) filed a complaint
in U.S. District Court alleging that the Company and four other defendants are
"potentially responsible parties" (PRPs) under CERCLA for remediation costs
associated with surface, soil and groundwater contamination alleged to have
occurred from the disposal by other persons of hazardous wastes at a site
located near the Company's Byron station in Byron, Illinois. The Government
alleges that a portion of the site is owned by the Company. The Government is
presently seeking reimbursement from the PRPs for study and response costs
associated with the site. The Company presently expects such costs to total
approximately $10 million. The Company is currently pursuing cost recovery from
other PRPs that have been identified at this site.
On October 16, 1992, the Federal Agency notified the Company and four other
companies, including the site operator, that they were PRPs under CERCLA for
the costs associated with the investigation and removal of contaminated soil at
the Elgin Salvage and Supply site in Elgin, Illinois. On April 19, 1993, the
Federal Agency issued an order under Section 106 of CERCLA to the Company and
the other parties to investigate and remove the contamination from the site.
The Company sent substantial amounts of scrap cable and other scrap metal to
the site. The site investigation and remediation is currently estimated to be
approximately $8 to $10 million. The site operator claims to be unable to fund
more than a small share of the removal costs. Consequently, the other parties
are attempting to agree to an interim allocation of the removal costs. The
other PRPs are seeking to impose at least 50% of those costs on the Company. In
February 1994, the Company recorded a provision of $3 million which reflects
the low end of the range of its estimate of this additional liability, and also
recorded a receivable of $3 million as this additional $3 million is probable
of recovery from insurance companies and/or other PRPs. In addition, the
Company and the other PRPs have filed a cost recovery action against the site
operator and the site owner to require that they provide their share of the
remediation costs.
In the operation of its electric distribution system, the Company has
utilized equipment containing polychlorinated biphenyls (PCBs). Such equipment
included transformers located in customer-owned buildings and in sidewalk
vaults. Under regulations adopted by the Federal Agency, these transformers
containing PCBs were required to be modified (with non-PCB fluid) or be
replaced. The Company has completed the replacement of over 2,000 PCB fluid
transformers that were located in or near commercial buildings and were subject
to the federal regulations. The estimated cost to the Company of replacing or
modifying these transformers and disposing of the PCB fluid was approximately
$120 million, which had been expended through the end of 1993. Some of the
Company's electrical equipment containing PCBs was sent to scrap and salvage
facilities and, as a result, the Company may be liable for penalties and for
the costs of cleanup of those facilities. An accident or spill involving PCB
oil filled electrical equipment, resulting in exposure of persons or property
to PCBs or their by-products, could result in material liability claims against
the Company.
In September 1990, the IPCB replaced existing landfill regulations with new,
more stringent design and performance standards. These regulations are expected
to increase the cost to the Company for disposal of coal combustion by-products
at its Joliet station. At Joliet, an existing landfill utilized for disposal of
coal ash may require the installation by 1997 of engineered retrofits designed
to protect groundwater. The Company intends to request exemptions from certain
of the new regulations from the IPCB. If its request is denied, then
alternative landfill siting, commercial disposal, or retrofitting of the
existing facility could result in significant increases in disposal
expenditures.
The outcome of many of the regulatory proceedings referred to above, if not
favorable, could have a material adverse effect on the Company's future
business and operating results.
45
<PAGE>
An unresolved issue is whether exposure to electric and magnetic fields
(EMFs) may result in adverse health effects or damage to the environment. EMFs
are produced by virtually all devices carrying or utilizing electricity,
including transmission and distribution lines as well as home appliances. If
regulations are adopted related to EMFs, they could affect the construction and
operation of electrical equipment, including transmission and distribution
lines and the cost of such equipment. The Company cannot predict the effect on
the cost of such equipment or operations if new regulations related to EMFs are
adopted. In the absence of such regulations, EMFs have nonetheless become an
issue in siting facilities and in other land use contexts. Litigation has been
filed in a variety of locations against a variety of defendants (including the
Company) alleging that the presence or use of electrical equipment has had an
adverse effect on the health of persons. If plaintiffs are successful in
litigation of this type and it becomes widespread, the impact on the Company
and on the electric utility industry is not predictable, but could be severe.
From time to time, the companies are, or are claimed to be, in violation of
or in default under orders, statutes, rules or regulations relating to
environmental controls and other matters, compliance plans imposed upon or
agreed to by them or permits issued by various state and federal agencies for
the construction or operation of the companies' facilities. The Company does
not believe, so far as it now foresees, that such violations or defaults will
have a material adverse effect on its future business and operating results,
except for events otherwise described in the Company's Annual Report on Form
10-K for the year ended December 31, 1993 or in this Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1994, which could have such an
effect.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------------
<C> <S>
(4)-1 Supplemental Indenture to Indenture dated September 1, 1987 dated
April 1, 1994.
(12) Statement computing ratios of earnings to fixed charges and ratios
of earnings to fixed charges and preferred and preference stock
dividend requirements.
(23) Consent of independent public accountants.
</TABLE>
(b) Reports on Form 8-K
A Current Report on Form 8-K dated January 28, 1994 was filed containing
the Company's financial statements as of, and for the year ended, December
31, 1993.
A Current Report on Form 8-K/A-1 dated January 28, 1994 was filed to
amend the Current Report on Form 8-K by refiling the Company's financial
statements as of, and for the year ended, December 31, 1993 in their
entirety.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 11th day of May, 1994.
Commonwealth Edison Company
Registrant
Roger F. Kovack
By __________________________________
Roger F. Kovack
Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
47
<PAGE>
COMMONWEALTH EDISON COMPANY
---------------------------
EXHIBIT INDEX
-------------
Exhibits filed with or incorporated by reference in Form 10-Q for the quarterly
period ended March 31, 1994:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ------------------------------------------
<C> <S>
(4)-1 Supplemental Indenture to Indenture
dated September 1, 1987 dated
April 1, 1994.
(12) Statement computing ratios of earnings
to fixed charges and ratios of earnings to
fixed charges and preferred and preference
stock dividend requirements.
(23) Consent of independent public accountants.
</TABLE>
<PAGE>
Exhibit (4)-1
Commonwealth Edison Company
Form 10-Q File No. 1-1839
COMMONWEALTH EDISON COMPANY
AND
CITIBANK, N.A.
Trustee Under Indenture Dated as of September 1, 1987
as amended and supplemented
Supplemental Indenture
Dated as of April 1, 1994
Providing for issuance of 7% Notes due February 15, 1997
THIS SUPPLEMENTAL INDENTURE, dated as of the 1st day of April, 1994,
between COMMONWEALTH EDISON COMPANY, a corporation duly organized and validly
existing under the laws of the State of Illinois (hereinafter called the
"Company"), and CITIBANK, N.A., a national banking association incorporated and
existing under the laws of the United States of America (hereinafter called the
"Trustee"), Trustee under the Indenture dated as of September 1, 1987, as
amended and supplemented, between the Company and the Trustee (hereinafter
called the "Original Indenture").
W I T N E S S E T H:
WHEREAS, the Original Indenture provides for the issuance from time to
time thereunder, in series, of Notes of the Company to provide funds for its
corporate purposes; and
WHEREAS, the Company desires, by this Supplemental Indenture, to
create a series of 7% Notes to be issuable under the Original Indenture and to
be known as the Company's 7% Notes due February 15, 1997 (hereinafter called the
"7% Notes"), and the terms and provisions thereof to be as hereinafter set
forth; and
WHEREAS, the general forms of the 7% Notes and the Trustee's
certificate of authentication to be borne by the 7% Notes are to be in the
respective forms established pursuant to or set forth in the Original Indenture,
with such insertions, omissions and variations as the Board of Directors of the
Company may determine in accordance with the provisions of this Supplemental
Indenture; and
WHEREAS, all things necessary to make the 7% Notes, when executed by
the Company and authenticated and delivered by the Trustee and duly issued by
the Company, the valid obligations of the Company, and to make this Supplemental
Indenture a valid agreement of the Company, in accordance with their and its
terms, have been done.
<PAGE>
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the 7%
Notes by the Holders thereof, it is mutually covenanted and agreed, for the
equal and proportionate benefit of such Holders, as follows:
SECTION 1. DEFINED TERMS. All terms used in this Supplemental
Indenture that are defined in the Original Indenture have the meanings assigned
to them in the Original Indenture.
SECTION 2. DESIGNATION AND TERMS OF THE 7% NOTES. The series of
Notes created by this Supplemental Indenture shall be known and designated as
the "7% Notes due February 15, 1997" of the Company and shall be limited in
aggregate principal amount to $150,000,000.00.
The Stated Maturity of the 7% Notes shall be February 15, 1997. The
7% Notes shall bear interest from April 12, 1994, or from the most recent
Interest Payment Date to which interest on the 7% Notes then Outstanding has
been paid or duly provided for, at the rate of 7% per annum. Interest shall be
payable semi-annually on February 15 and August 15 of each year, commencing
August 15, 1994, until the principal amount thereof is paid or duly provided
for.
Payment of principal of the 7% Notes and, unless otherwise paid as
hereinafter provided, the interest thereon will be made at the office or agency
of the Company in the Borough of Manhattan, City and State of New York,
provided, however, that payment of interest may be made at the option of the
Company by check or draft mailed to the person entitled thereto at his address
appearing in the Note Register.
The Regular Record Date referred to in Section 1.01 of the Original
Indenture for the payment of the interest on the 7% Notes payable, and
punctually paid or duly provided for, on any Interest Payment Date shall be the
first day (whether or not a Business Day) of the month in which such Interest
Payment Date occurs.
The 7% Notes may be issued in denominations of $1,000 and any integral
multiple thereof authorized by the Company, such authorization to be
conclusively evidenced by the execution thereof.
Upon the execution of this Supplemental Indenture, the 7% Notes may be
executed by the Company and delivered to the Trustee for authentication, and the
Trustee shall, upon receipt of the documents specified in Section 2.02 of the
Original Indenture, thereupon authenticate and deliver said 7% Notes to or upon
a Company Order.
SECTION 3. DEPOSITORY SYSTEM. It is intended that the 7% Notes be
registered so as to participate in the securities depository system (the "DTC
System") with The Depository Trust Company ("DTC"), as set forth herein. The 7%
Notes shall be initially issued in the form of a fully registered note or notes
in the name of Cede & Co., or any successor thereto, as nominee for DTC. The
Company and the Trustee are
-2-
<PAGE>
authorized to execute and deliver such letters to or agreements with DTC as
shall be necessary to effectuate the DTC System, including the Letter of
Representations from the Company and the Trustee to DTC relating to the 7% Notes
(the "Representation Letter"). In the event of any conflict between the terms
of the Representation Letter and the Original Indenture, the terms of the
Original Indenture shall control. DTC may exercise the rights of a noteholder
only in accordance with the terms hereof applicable to the exercise of such
rights.
With respect to 7% Notes registered in the name of DTC or its nominee,
the Company and the Trustee shall have no responsibility or obligation to any
broker-dealer, bank or other financial institution for which DTC holds such
notes from time to time as securities depository (each such broker-dealer, bank
or other financial institution being referred to herein as a "Depository
Participant") or to any person on behalf of whom such a Depository Participant
holds an interest in such notes (each such person being herein referred to as an
"Indirect Participant"). Without limiting the immediately preceding sentence,
the Company and the Trustee shall have no responsibility or obligation with
respect to (a) the accuracy of the records of DTC, its nominee or any Depository
Participant with respect to any ownership interest in the 7% Notes, (b) the
delivery to any Depository Participant or any Indirect Participant or any other
person, other than a registered owner of a 7% Note, of any notice with respect
to the 7% Notes, (c) the payment to any Depository Participant or Indirect
Participant or any other person, other than a registered owner of a 7% Note, of
any amount with respect to principal of, or interest on, the 7% Notes, or (d)
any consent given by DTC as registered owner. So long as certificates for the
notes are not issued as provided in Section 2.11(c) or (d) of the Original
Indenture, the Company and the Trustee may treat DTC or any successor securities
depository as, and deem DTC or any successor securities depository to be, the
absolute owner of such notes for all purposes whatsoever, including without
limitation (i) the payment of principal and interest on such notes, (ii) giving
notice of matters with respect to such notes and (iii) registering transfers
with respect to such notes. While a note is in the DTC System, no person other
than DTC or its nominee shall receive a certificate with respect to such note.
Notwithstanding any other provision of the Original Indenture to the
contrary, so long as any 7% Note is registered in the name of DTC or its
nominee, all payments with respect to principal of and interest on such note and
all notices with respect to such note shall be made and given, respectively, in
the manner provided in the Representation Letter.
SECTION 4. REDEMPTION OF 7% NOTES. The 7% Notes shall not be
redeemable prior to their Stated Maturity.
-3-
<PAGE>
T E S T I M O N I U M
This Supplemental Indenture may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original, but
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
COMMONWEALTH EDISON COMPANY
By: /s/ Dennis F. O'Brien
-----------------------
Dennis F. O'Brien
Treasurer
ATTEST:
/s/ David A. Scholz
- - ---------------------
David A. Scholz
Secretary
(Corporate Seal)
CITIBANK, N.A.
By: /s/ John J. Byrnes
--------------------
Name: JOHN J. BYRNES
Title: VICE PRESIDENT
ATTEST:
/s/ Carol Ng
- - --------------
Name: CAROL NG
Title: ASSISTANT VICE PRESIDENT
(Corporate Seal)
-4-
<PAGE>
Exhibit (12)
Commonwealth Edison Company
Form 10-Q File No. 1-1839
Commonwealth Edison Company and Subsidiary Companies Consolidated
-----------------------------------------------------------------
Computation of Ratios of Earnings to Fixed Charges
and Ratios of Earnings to Fixed Charges and
Preferred and Preference Stock Dividend Requirements
--------------------------------------------------------
- Thousands of Dollars -
<TABLE>
<CAPTION>
Twelve Months Ended
-----------------------
Line December 31, March 31,
No. 1993 1994
- - ---- ------------ ---------
<S> <C> <C>
1 Net income $112,440 $ 86,794
-------- --------
2 Net provisions for income taxes and investment tax credits deferred
3 charged to-
4 Operations $ 65,827 $ 54,615
5 Cumulative effect of change in accounting for income taxes (9,738) -
6 Other income (30,753) (22,614)
-------- --------
7 $ 25,336 $ 32,001
-------- --------
8 Fixed charges-
9 Interest on debt $651,639 $642,291
10 Estimated interest component of nuclear fuel and
11 other lease payments, rentals and other interest 49,021 51,936
12 Amortization of debt discount, premium and expense 20,966 22,081
-------- --------
13 $721,626 $716,308
-------- --------
14 Preferred and preference stock dividend requirements-
15 Provisions for preferred and preference stock dividends $ 66,052 $ 64,961
16 Taxes on income required to meet provisions for
17 preferred and preference stock dividends 43,596 42,855
-------- --------
18 $109,648 $107,816
-------- --------
19 Fixed charges and preferred and preference stock
20 dividend requirements $831,274 $824,124
-------- --------
21 Earned for fixed charges and preferred and preference stock
22 dividend requirements $859,402 $835,103
-------- --------
23 Ratios of earnings to fixed charges (line 22 divided by line 13) 1.19 1.17
==== ====
24 Ratios of earnings to fixed charges and preferred and preference
25 stock dividend requirements (line 22 divided by line 20) 1.03 1.01
==== ====
</TABLE>
<PAGE>
Exhibit (23)
Commonwealth Edison Company
Form 10-Q File No. 1-1839
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Form 10-Q for the quarterly period
ended March 31, 1994, into Commonwealth Edison Company's previously filed
prospectuses as follows: (1) prospectus dated June 1, 1988, constituting part
of Form S-8 Registration Statement File No. 2-76921 (relating to the Company's
Employe Stock Purchase Plan); (2) prospectus dated August 1, 1992, constituting
part of Form S-8 Registration Statement File Nos. 2-81592 and 33-5061, as
amended (relating to the Company's Employe Savings and Investment Plan); (3)
prospectus dated August 21, 1986, constituting part of Form S-3 Registration
Statement File No. 33-6879, as amended (relating to the Company's Debt
Securities and Common Stock); (4) prospectus dated January 7, 1994, constituting
part of Form S-3 Registration Statement File No. 33-51379 (relating to the
Company's Debt Securities and Cumulative Preference Stock); and (5) prospectus
dated March 18, 1994, constituting part of Form S-4 Registration Statement File
No. 33-52109, as amended (relating to Common Stock of CECo Holding Company). We
also consent to the application of our report to the ratios of earnings to fixed
charges and the ratios of earnings to fixed charges and preferred and preference
stock dividend requirements for each of the twelve months ended December 31,
1993 and March 31, 1994 appearing on page 40 of this Form 10-Q.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
May 11, 1994
