<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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
<TABLE>
<CAPTION>
COMMISSION
FILE REGISTRANT; STATE OF INCORPORATION; IRS EMPLOYER
NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
---------- ----------------------------------- ------------------
<C> <S> <C>
1-11375 UNICOM CORPORATION 36-3961038
(an Illinois corporation)
37th Floor, 10 South Dearborn Street
Post Office Box A-3005
Chicago, Illinois 60690-3005
312/394-7399
1-1839 COMMONWEALTH EDISON COMPANY 36-0938600
(an Illinois corporation)
37th Floor, 10 South Dearborn Street
Post Office Box 767
Chicago, Illinois 60690-0767
312/394-4321
</TABLE>
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
Common Stock outstanding at April 30, 1998:
Unicom Corporation 216,906,113 shares
Commonwealth Edison Company 214,234,975 shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
UNICOM CORPORATION
AND
COMMONWEALTH EDISON COMPANY
QUARTERLY REPORTS ON FORM 10-Q
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
This document contains the Quarterly Reports on Form 10-Q for the quarterly
period ended March 31, 1998 for each of Unicom Corporation and Commonwealth
Edison Company. Information contained herein relating to an individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, Commonwealth Edison Company makes no representation as
to information relating to Unicom Corporation or to any other companies
affiliated with Unicom Corporation. In addition, several portions of these
Quarterly Reports contain forward looking statements; and reference is made to
page 67-68 for the location and character of such statements.
INDEX
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Definitions.............................................................. 3
PART I. FINANCIAL INFORMATION
Unicom Corporation and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 4
Statements of Consolidated Operations for the three months and twelve
months ended March 31, 1998 and 1997................................ 5
Consolidated Balance Sheets--March 31, 1998 and December 31, 1997.... 6-7
Statements of Consolidated Capitalization--March 31, 1998 and
December 31, 1997 .................................................. 8
Statements of Consolidated Retained Earnings (Deficit) for the three
months and twelve months ended March 31, 1998 and 1997.............. 9
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1998 and 1997................................ 10
Notes to Financial Statements........................................ 11-36
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 37-52
Commonwealth Edison Company and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 54
Statements of Consolidated Operations for the three months and twelve
months ended March 31, 1998 and 1997................................ 55
Consolidated Balance Sheets--March 31, 1998 and December 31, 1997.... 56-57
Statements of Consolidated Capitalization--March 31, 1998 and
December 31, 1997................................................... 58
Statements of Consolidated Retained Earnings (Deficit) for the three
months and twelve months ended March 31, 1998 and 1997.............. 59
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1998 and 1997................................ 60
Notes to Financial Statements........................................ 61-65
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 66
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 67-68
Item 6. Exhibits and Reports on Form 8-K............................... 68-69
SIGNATURES............................................................... 70
</TABLE>
2
<PAGE>
DEFINITIONS
The following terms are used in this document with the following meanings:
<TABLE>
<CAPTION>
TERM MEANING
---------------------- -------------------------------------------------------
<C> <S>
1997 Act Illinois Electric Service Customer Choice and Rate
Relief Law of 1997
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
CERCLA Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended
CFC Chlorofluorocarbon
Clean Air Amendments Clean Air Act Amendments of 1990
ComEd Commonwealth Edison Company
Cotter Cotter Corporation, a ComEd subsidiary
CTC Non-bypassable "competitive transition charge"
DOE U.S. Department of Energy
EPS Earnings per Share
ESPP Employee Stock Purchase Plan
FAC Fuel adjustment clause
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FERC Order FERC Open Access Order No. 888 issued in April 1996
GAAP Generally Accepted Accounting Principles
ICC Illinois Commerce Commission
IDR Illinois Department of Revenue
Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd
subsidiary
INPO Institute of Nuclear Power Operations
ISO Independent System Operator
MGP Manufactured gas plant
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NML Nuclear Mutual Limited
NPL National Priorities List
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
Rate Order ICC rate order issued in January 1995, as subsequently
modified
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
S&P Standard & Poor's
Trusts ComEd Financing I and ComEd Financing II, ComEd
subsidiaries
Trust Securities ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely ComEd's
subordinated debt securities
Unicom Unicom Corporation
Unicom Energy Services Unicom Energy Services Inc., a Unicom subsidiary
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
U.S. EPA U.S. Environmental Protection Agency
UT Holdings UT Holdings Inc., a Unicom subsidiary
</TABLE>
3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unicom Corporation:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Unicom Corporation (an Illinois corporation)
and subsidiary companies as of March 31, 1998 and December 31, 1997, and the
related statements of consolidated operations, retained earnings (deficit) and
cash flows for the three-month and twelve-month periods ended March 31, 1998
and 1997. 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 Unicom Corporation and
subsidiary companies as of March 31, 1998 and December 31, 1997, and the
results of their operations and their cash flows for the three-month and
twelve-month periods ended March 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 3, effective January 1, 1997, the Company changed its
method of accounting for revenue recognition.
Arthur Andersen LLP
Chicago, Illinois
May 11, 1998
4
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months and
twelve months ended March 31, 1998 and 1997 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 prices, regulation, population, business activity, competition,
taxes, environmental control, energy use, fuel, cost of labor, 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
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating Revenues............ $1,712,235 $1,670,812 $ 7,124,445 $6,923,908
---------- ---------- ----------- ----------
Operating Expenses and Taxes:
Fuel......................... $ 231,376 $ 309,068 $ 1,161,746 $1,182,948
Purchased power.............. 220,730 64,307 556,478 178,167
Operation and maintenance.... 568,996 570,246 2,437,138 2,218,437
Depreciation................. 248,902 249,860 988,859 972,636
Recovery of regulatory
assets...................... -- 3,818 11,454 15,272
Taxes (except income)........ 207,426 201,198 807,114 766,490
Income taxes................. 51,551 65,253 304,076 443,327
Investment tax credits
deferred--net .............. (7,160) (7,897) (30,278) (34,109)
---------- ---------- ----------- ----------
$1,521,821 $1,455,853 $ 6,236,587 $5,743,168
---------- ---------- ----------- ----------
Operating Income.............. $ 190,414 $ 214,959 $ 887,858 $1,180,740
---------- ---------- ----------- ----------
Other Income and (Deductions):
Interest on long-term debt... $ (112,754) $ (126,968) $ (473,819) $ (511,392)
Interest on notes payable.... (5,809) (1,951) (12,992) (11,007)
Allowance for funds used
during construction--
Borrowed funds............. 1,576 4,052 16,079 18,580
Equity funds............... 1,584 5,080 20,274 21,158
Income taxes applicable to
nonoperating activities..... 2,884 366 13,748 3,902
Provision for dividends--
Preferred and preference
stocks of ComEd........... (14,547) (15,527) (59,506) (63,437)
ComEd-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
ComEd's subordinated debt
securities................ (7,428) (6,648) (29,640) (19,368)
Loss on nuclear plant
closure..................... -- -- (885,611) --
Income tax effect of nuclear
plant closure............... -- -- 362,952 --
Miscellaneous--net........... (2,205) (7,646) (90,559) (24,291)
---------- ---------- ----------- ----------
$ (136,699) $ (149,242) $(1,139,074) $ (585,855)
---------- ---------- ----------- ----------
Net Income (Loss) Before
Extraordinary Item and
Cumulative Effect of Change
in Accounting Principle...... $ 53,715 $ 65,717 $ (251,216) $ 594,885
Extraordinary Loss Less
Applicable Income Taxes...... -- -- (810,335) --
Cumulative Effect of Change in
Accounting Principle......... -- 196,700 -- 196,700
---------- ---------- ----------- ----------
Net Income (Loss)............. $ 53,715 $ 262,417 $(1,061,551) $ 791,585
========== ========== =========== ==========
Average Number of Common
Shares Outstanding........... 216,707 216,053 216,493 215,701
Basic and Diluted Earnings
(Loss) Per Common Share:
Earnings (Loss) Per Common
Share Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle.................. $ 0.25 $ 0.30 $ (1.15) $ 2.76
Extraordinary Loss Less
Applicable Income Taxes.... -- -- (3.75) --
Cumulative Effect of Change
in Accounting Principle.... -- 0.91 -- 0.91
---------- ---------- ----------- ----------
Earnings (Loss) Per Common
Share...................... $ 0.25 $ 1.21 $ (4.90) $ 3.67
========== ========== =========== ==========
Cash Dividends Declared per
Common Share................. $ 0.40 $ 0.40 $ 1.60 $ 1.60
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
5
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $1,086 million
and $1,131 million, respectively)................. $27,264,888 $27,519,365
Less--Accumulated provision for depreciation....... 11,737,771 11,645,985
----------- -----------
$15,527,117 $15,873,380
Nuclear fuel, at amortized cost.................... 929,631 906,043
----------- -----------
$16,456,748 $16,779,423
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 2,087,093 $ 1,855,697
Subsidiary companies............................... 41,259 41,830
Other, at cost..................................... 240,043 216,243
----------- -----------
$ 2,368,395 $ 2,113,770
----------- -----------
Current Assets:
Cash............................................... $ 23,674 $ 18,519
Temporary cash investments......................... 89,714 102,702
Other cash investments............................. 13,350 --
Special deposits................................... 271 271
Receivables--
Customers........................................ 882,114 873,418
Other............................................ 62,190 132,449
Provisions for uncollectible accounts............ (17,432) (17,544)
Coal and fuel oil, at average cost................. 156,850 120,664
Materials and supplies, at average cost............ 257,272 255,338
Deferred income taxes related to current assets and
liabilities....................................... 64,134 179,553
Prepayments and other.............................. 135,929 126,088
----------- -----------
$ 1,668,066 $ 1,791,458
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 1,452,013 $ 1,685,235
Coal reserves...................................... 167,524 194,769
Other.............................................. 76,273 135,095
----------- -----------
$ 1,695,810 $ 2,015,099
----------- -----------
$22,189,019 $22,699,750
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
6
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity................................. $ 4,887,890 $ 4,918,687
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements......... 506,920 507,053
Subject to mandatory redemption requirements...... 174,328 174,328
ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
ComEd's subordinated debt securities*.............. 350,000 350,000
Long-term debt...................................... 5,757,279 5,737,348
----------- -----------
$11,676,417 $11,687,416
----------- -----------
Current Liabilities:
Notes payable....................................... $ 379,650 $ 158,150
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations of
subsidiary companies............................... 410,996 775,296
Accounts payable.................................... 474,692 505,444
Accrued interest.................................... 141,077 169,559
Accrued taxes....................................... 205,974 175,758
Dividends payable................................... 103,942 107,001
Customer deposits................................... 54,023 55,214
Accrued plant closing costs......................... 119,641 135,000
Other............................................... 135,585 165,177
----------- -----------
$ 2,025,580 $ 2,246,599
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,772,503 $ 3,850,308
Nuclear decommissioning liability for retired
plants............................................. 1,202,600 1,301,000
Accumulated deferred investment tax credits......... 587,490 602,122
Accrued spent nuclear fuel disposal fee and related
interest........................................... 701,756 692,673
Obligations under capital leases of subsidiary com-
panies............................................. 424,343 437,950
Regulatory liabilities.............................. 607,623 698,750
Other............................................... 1,190,707 1,182,932
----------- -----------
$ 8,487,022 $ 8,765,735
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$22,189,019 $22,699,750
=========== ===========
</TABLE>
*As described in Note 11 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
7
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER
1998 31, 1997
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Stock Equity:
Common stock, without par value--
Outstanding--216,841,318 shares and 216,659,480
shares, respectively (excludes $9 million and $7
million as of March 31, 1998 and December 31,
1997, respectively, held by trustee for Unicom
Stock Bonus Deferral Plan)....................... $ 4,945,437 $ 4,943,211
Preference stock expense of ComEd.................. (3,340) (3,340)
Retained earnings (deficit)........................ (54,207) (21,184)
----------- -----------
$ 4,887,890 $ 4,918,687
----------- -----------
Preferred and Preference Stocks of ComEd--
Without Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--13,499,549 shares.................. $ 504,957 $ 504,957
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--61,724 shares and 65,912 shares,
respectively................................... 1,963 2,096
Prior preferred stock, cumulative, $100 par value
per share-- No shares outstanding............... -- --
----------- -----------
$ 506,920 $ 507,053
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--2,058,560 shares................... $ 205,016 $ 205,016
Current redemption requirements for preference
stock included in current liabilities........... (30,688) (30,688)
----------- -----------
$ 174,328 $ 174,328
----------- -----------
ComEd-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
ComEd's Subordinated Debt Securities................ $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1998 through 2002--6.00% to 9 3/8%...... $ 880,000 $ 1,060,000
Maturing 2003 through 2012--3.70% to 8 3/8%...... 1,440,400 1,440,400
Maturing 2013 through 2022--5.85% to 9 7/8%...... 1,791,000 1,791,000
Maturing 2023--7 3/4% to 8 3/8%.................. 560,000 560,000
----------- -----------
$ 4,671,400 $ 4,851,400
Sinking fund debentures, due 1999 through 2011--2
3/4% to 7 5/8%.................................... 98,298 100,298
Pollution control obligations, due 2007 through
2014--3.65% to 5 7/8%............................. 142,200 142,200
Other long-term debt............................... 1,034,310 1,193,818
Deposit for retirement of long-term debt........... (4,064) --
Current maturities of long-term debt included in
current liabilities............................... (139,413) (503,909)
Unamortized net debt discount and premium.......... (45,452) (46,459)
----------- -----------
$ 5,757,279 $ 5,737,348
----------- -----------
$11,676,417 $11,687,416
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
8
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- -----------------------
1998 1997 1998 1997
-------- ---------- ----------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at Beginning of Period.. $(21,184) $1,177,997 $ 1,353,931 $ 907,723
Add--Net income (loss).......... 53,715 262,417 (1,061,551) 791,585
-------- ---------- ----------- ----------
$ 32,531 $1,440,414 $ 292,380 $1,699,308
-------- ---------- ----------- ----------
Deduct--
Cash dividends declared on
common stock................ $ 86,739 $ 86,484 $ 346,479 $ 345,274
Other capital stock transac-
tions--net.................. (1) (1) 108 103
-------- ---------- ----------- ----------
$ 86,738 $ 86,483 $ 346,587 $ 345,377
-------- ---------- ----------- ----------
Balance at End of Period (In-
cludes $298 million of appro-
priated retained earnings at
March 31, 1998)................ $(54,207) $1,353,931 $ (54,207) $1,353,931
======== ========== =========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
9
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash Flow From Operating Activ-
ities:
Net income (loss)............. $ 53,715 $ 262,417 $(1,061,551) $ 791,585
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortiza-
tion....................... 262,010 259,455 1,038,826 1,009,045
Deferred income taxes and
investment tax credits--
net........................ 26,681 (7,972) (310,389) 105,465
Extraordinary loss related
to write-off of certain net
regulatory assets.......... -- -- 810,335 --
Cumulative effect of a
change in accounting prin-
ciple...................... -- (196,700) -- (196,700)
Loss on nuclear plant clo-
sure....................... -- -- 885,611 --
Provisions/(payments) for
revenue refunds............ (34,504) -- 10,966 --
Equity component of
allowance for funds used
during construction........ (1,584) (5,080) (20,274) (21,158)
Recovery of regulatory as-
sets....................... -- 3,818 11,454 15,272
Provisions/(payments) for
liability for separation
costs--net................. 7,425 (626) 24,037 1,790
Net effect on cash flows of
changes in:
Receivables............... 61,451 101,676 (16,142) 54,338
Coal and fuel oil......... (36,186) (32,275) 15,787 (27,970)
Materials and supplies.... (5,221) (30) 36,468 10,627
Accounts payable excluding
separation costs--net.... (37,367) (41,348) 8,752 (16,410)
Accrued interest and tax-
es....................... 1,734 55,365 (71,534) (32,922)
Other changes in certain
current assets and
liabilities.............. 18,790 36,421 276,415 194,468
Other--net.................. 49,495 83,783 136,546 146,601
--------- --------- ----------- -----------
$ 366,439 $ 518,904 $ 1,775,307 $ 2,034,031
--------- --------- ----------- -----------
Cash Flow From Investing Activ-
ities:
Construction expenditures..... $(172,951) $(234,481) $ (981,782) $ (928,199)
Nuclear fuel expenditures..... (60,549) (48,773) (197,149) (296,187)
Sale of generating plants..... 177,454 -- 238,245 --
Equity component of allowance
for funds used during
construction................. 1,584 5,080 20,274 21,158
Contributions to nuclear
decommissioning funds........ (80,077) (80,181) (114,721) (116,284)
Other investments and special
deposits..................... (17,519) (29,939) (827) (31,756)
--------- --------- ----------- -----------
$(152,058) $(388,294) $(1,035,960) $(1,351,268)
--------- --------- ----------- -----------
Cash Flow From Financing Activ-
ities:
Issuance of securities--
Long-term debt............... $ 25,000 $ 297,663 $ 90,000 $ 549,565
ComEd-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
ComEd's subordinated debt
securities.................. -- 150,000 -- 150,000
Capital stock................ 4,223 5,777 14,223 22,896
Retirement and redemption of
securities--
Long-term debt............... (366,509) (503,883) (599,366) (935,827)
Capital stock................ (133) (199) (44,045) (44,687)
Deposits and securities held
for retirement and
redemption of securities..... (4,064) (2,331) (1,733) 1,287
Premium paid on early redemp-
tion of long-term debt....... -- (9,500) -- (9,500)
Cash dividends paid on common
stock........................ (86,610) (86,321) (346,225) (344,892)
Proceeds from sale/leaseback
of nuclear fuel.............. 16,565 44,470 122,049 236,875
Nuclear fuel lease principal
payments..................... (32,186) (49,550) (149,048) (205,241)
Increase (Decrease) in short-
term borrowings.............. 221,500 1,000 249,900 (105,800)
--------- --------- ----------- -----------
$(222,214) $(152,874) $ (664,245) $ (685,324)
--------- --------- ----------- -----------
Increase (Decrease) in Cash and
Temporary Cash Investments.... $ (7,833) $ (22,264) $ 75,102 $ (2,561)
Cash and Temporary Cash
Investments at Beginning of
Period........................ 121,221 60,550 38,286 40,847
--------- --------- ----------- -----------
Cash and Temporary Cash Invest-
ments at End of Period........ $ 113,388 $ 38,286 $ 113,388 $ 38,286
========= ========= =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
10
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Corporate Structure and Basis of Presentation. Unicom is the parent holding
company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility,
is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated
subsidiary of Unicom and is engaged, through its subsidiaries, in energy
service activities.
The consolidated financial statements include the accounts of Unicom, ComEd,
the Indiana Company, the Trusts and Unicom's unregulated subsidiaries. All
significant intercompany transactions have been eliminated. ComEd's
investments in other subsidiary companies, which are not material in relation
to ComEd's financial position or results of operations, are accounted for in
accordance with the equity method of accounting.
Use of Estimates. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Regulation. ComEd is subject to regulation as to accounting and ratemaking
policies and practices by the ICC and FERC. ComEd's accounting policies and
the accompanying consolidated financial statements conform to GAAP applicable
to rate-regulated enterprises for the non-generation portion of its business,
including the effects of the ratemaking process in accordance with SFAS No.
71, Accounting for the Effects of Certain Types of Regulation. Such effects on
the non-generation portion of its business concern mainly the time at which
various items enter into the determination of operating results in order to
follow the principle of matching costs with the applicable revenues collected
from or returned to customers through future rates. See Note 2 for information
regarding the write-off of generation-related regulatory assets and
liabilities in December 1997.
ComEd's investment in generation-related net utility plant, including
construction work in progress and nuclear fuel and excluding the
decommissioning costs included in the accumulated provision for depreciation,
not subject to cost-based rate regulation, was $12.2 billion and $12.4 billion
at March 31, 1998 and December 31, 1997, respectively.
11
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Regulatory Assets and Liabilities. Regulatory assets are incurred costs
which have been deferred and are amortized for ratemaking and accounting
purposes. Regulatory liabilities represent amounts to be settled with
customers through future rates. Regulatory assets and liabilities reflected on
the Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Regulatory assets:
Deferred income taxes (1)............................ $ 690,442 $ 785,354
Nuclear decommissioning costs--Dresden Unit 1 (2).... 263,955 268,369
Nuclear decommissioning costs--Zion Units 1 and 2
(3)................................................. 447,231 579,777
Unamortized loss on reacquired debt (4).............. 50,385 51,735
---------- ----------
$1,452,013 $1,685,235
========== ==========
Regulatory liabilities:
Deferred income taxes (1)............................ $ 607,623 $ 698,750
========== ==========
</TABLE>
- --------
(1) Recorded in compliance with SFAS No. 109, Accounting For Income Taxes, for
non-generation related timing differences.
(2) Amortized over the period 1998 to 2011. See "Depreciation and
Decommissioning" below for additional information.
(3) Amortized over the period 1998 to 2013. See "Depreciation and
Decommissioning" below for additional information.
(4) Amortized over the remaining lives of the non-generation related long-term
debt issued to finance the reacquisition. See "Loss on Reacquired Debt"
below for additional information.
Fuel Adjustment Clause. Pursuant to an option contained in the 1997 Act,
ComEd filed a tariff on December 16, 1997 to eliminate its FAC as of January
1, 1997. The FAC provided 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 ComEd's base rates. As authorized
by the ICC, ComEd had recorded under or overrecoveries of allowable fuel and
energy costs which, under the FAC, were recoverable or refundable in
subsequent months. See Note 2 for additional information regarding the effects
of eliminating the FAC. See Note 4 for information concerning FAC
reconciliation proceedings for the years 1994 and 1996.
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 the current
nuclear-generated and sold electricity and the current interest accrual on the
one-time fee payable to the 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 presently being recovered through
base rates. See Note 14 for additional information concerning the disposal of
spent nuclear fuel, one-time fee and interest accrual on the one-time fee.
Nuclear fuel expenses, including leased fuel costs and provisions for spent
nuclear fuel disposal costs, were $67 million and $80 million for the three
months ended March 31, 1998 and 1997, respectively, and $285 million and $338
million for the twelve months ended March 31, 1998 and 1997, respectively.
The balance of nuclear fuel, at amortized cost, on the Consolidated Balance
Sheets includes amounts to be recovered for assessments by the DOE to fund a
portion of the cost for the decontamination and decommissioning of uranium
enrichment facilities owned and previously operated by the DOE. As of March
31, 1998 and December 31, 1997, an asset related to the assessments of $152
million and $156 million, respectively, was recorded. As of March 31, 1998 and
December 31, 1997, a corresponding liability of $144 million was recorded, of
which $16 million was included in other current liabilities on the
Consolidated Balance Sheets for each period.
12
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Coal Reserves. At March 31, 1998 and December 31, 1997, ComEd had coal
reserves of $263 million and $282 million, respectively. In prior years,
ComEd's commitments for the purchase of coal exceeded its requirements. Rather
than take all the coal it was required to take, ComEd agreed to purchase the
coal in place in the form of coal reserves. ComEd expects to recover from its
customers the costs of the coal reserves, as coal is used for the generation
of electricity, through base rates. Such fuel costs expected to be recovered
within one year, amounting to $96 million and $87 million at March 31, 1998
and December 31, 1997, respectively, have been included in current assets as
prepayments and other on the Consolidated Balance Sheets. ComEd expects to
recover fully the costs of the coal reserves before the year 2001. See Note 22
for additional information concerning ComEd's coal commitments.
Customer Receivables and Revenues. ComEd is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of residential, commercial, industrial and wholesale customers.
ComEd's electric service territory has an area of approximately 11,300 square
miles and an estimated population of approximately 8 million as of March 31,
1998. It includes the city of Chicago, an area of about 225 square miles with
an estimated population of approximately 3 million from which ComEd derived
approximately one-third of its ultimate consumer revenues in the twelve months
ended March 31, 1998. ComEd had 3.4 million electric customers at March 31,
1998.
Depreciation and Decommissioning. ComEd's depreciation is provided on the
straight-line basis by amortizing the cost of depreciable plant and equipment
over estimated composite service lives. Non-nuclear plant and equipment is
depreciated at annual rates developed for each class of plant based on their
composite service lives. Provisions for depreciation were at average annual
rates of 3.40% and 3.37% for the three months and twelve months ended March
31, 1998, respectively, of average depreciable utility plant and equipment,
including the effects of additional depreciation on ComEd's nuclear generating
units. Provisions for depreciation were at average annual rates of 3.36% and
3.31% for the three months and twelve months ended March 31, 1997,
respectively, of average depreciable utility plant and equipment, including
the effects of additional depreciation on ComEd's nuclear generating units.
The annual rate for nuclear plant and equipment, excluding separately
collected decommissioning costs and additional depreciation, is 2.88%. The
additional depreciation on ComEd's nuclear generating units primarily relates
to its steam generators at Byron Unit 1 and Braidwood Unit 1, which are
expected to be replaced prior to year-end 1998. ComEd recorded additional
depreciation charges relating to its nuclear generating units of $17 million
and $61 million for the three months and twelve months ended March 31, 1998,
respectively, and $15 million and $45 million for the three months and twelve
months ended March 31, 1997, respectively.
Nuclear plant decommissioning costs generally are accrued over the current
NRC license lives of the related nuclear generating units. 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
funds. 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 SEC and
a FASB review regarding the electric utility industry's method of accounting
for decommissioning costs. Dismantling is expected to occur relatively soon
after the end of the current NRC license life of each generating station
currently operating. The accrual for decommissioning is based on the prompt
removal method authorized by NRC guidelines. ComEd's 10 operating units have
remaining current NRC license lives ranging from 8 to 30 years. ComEd's
13
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Zion Station and its first nuclear unit, Dresden Unit 1, are retired and are
expected to be dismantled beginning in the years 2014 and 2012, respectively,
which is consistent with the regulatory treatment for the related
decommissioning costs.
Based on ComEd's most recent study approved by the ICC, decommissioning
costs, including the cost of decontamination and dismantling, are estimated to
aggregate $4.4 billion in current-year (1998) dollars, including a contingency
allowance. ComEd estimates that it will expend approximately $11.6 billion,
including a contingency allowance, for decommissioning costs primarily during
the period from 2007 through 2034. Additionally, ComEd estimates that it will
expend an aggregate of approximately $217 million in current-year (1998)
dollars during the period 2000 through 2014 to maintain Zion Station in a
secured mode until decommissioning begins. All such costs are expected to be
funded by the external decommissioning trusts, which ComEd established in
compliance with Illinois law and into which ComEd has been making annual
contributions. Future decommissioning cost estimates may be significantly
affected by the adoption of or changes to NRC regulations, as well as changes
in the assumptions used in making such estimates, including changes in
technology, available alternatives for the disposal of nuclear waste and
inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider. The rider allows annual adjustments to
decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. The current estimated
decommissioning costs include a contingency allowance, but, except at Dresden
Unit 1, exclude amounts for spent fuel storage installations, which may be
necessary to store spent fuel during the period beginning at the end of the
NRC license life of the plants to the date when the DOE accepts the spent fuel
for permanent storage. Contingency allowances used in decommissioning cost
estimates provide for currently unspecifiable costs that are likely to occur
after decommissioning begins and generally range from 20% to 25% of the
currently specifiable costs.
In February 1998, the ICC approved a reduction in the annual decommissioning
cost accrual from $109 million to $84 million. The reduction primarily
reflects stronger than expected after-tax returns on the external trust funds
in 1996 and lower than expected escalation in low level waste disposal costs,
partially offset by the higher current-year cost estimates, including a
contingency allowance.
The approved annual decommissioning cost accrual of $84 million was
determined using the following assumptions: the decommissioning cost estimate
of $4.4 billion in current-year (1998) dollars, after-tax earnings on the tax-
qualified and nontax-qualified decommissioning funds of 7.30% and 6.26%,
respectively, and an escalation rate for future decommissioning costs of 4.1%.
The annual accrual of $84 million provided over the current NRC license lives
of the nuclear plants, coupled with the expected fund earnings and amounts
previously recovered in rates, is expected to aggregate approximately $11.6
billion.
For the 10 operating nuclear units, decommissioning costs are recorded as
portions of depreciation expense and accumulated provision for depreciation on
the Statements of Consolidated Operations and the Consolidated Balance Sheets,
respectively. As of March 31, 1998, the total decommissioning costs included
in the accumulated provision for depreciation were $1,710 million. For ComEd's
retired nuclear unit, Dresden Unit 1, the total estimated liability at March
31, 1998 in current-year (1998) dollars of $369 million was recorded under
nuclear decommissioning liability for
14
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
retired plants and the unrecovered portion of the liability of $264 million
was recorded as a regulatory asset on the Consolidated Balance Sheets. For
ComEd's retired Zion nuclear station, the total estimated liability at March
31, 1998 in current-year (1998) dollars of $834 million was recorded under
nuclear decommissioning liability for retired plants and the unrecovered
portion of the liability of $447 million was recorded as a regulatory asset on
the Consolidated Balance Sheets. The total estimated liability related to Zion
nuclear station, and the unrecovered portion of that liability, decreased from
December 31, 1997 to March 31, 1998 due to the exclusion of estimated dry cask
storage costs.
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts; and, consequently, such collections do not add
to the cash flows available for general corporate purposes. The ICC has
approved ComEd's funding plan, which provides for annual contributions of
current accruals and ratable contributions of past accruals over the remaining
current NRC license lives of the nuclear plants. At March 31, 1998, the past
accruals that are required to be contributed to the external trusts aggregate
$115 million. The fair value of funds accumulated in the external trusts at
March 31, 1998 was $2,087 million, which includes pre-tax unrealized
appreciation of $543 million. The earnings on the external trusts accumulate
in the fund balance and accumulated provision for depreciation.
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.
AFUDC and Interest Capitalized. In accordance with the uniform systems of
accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC,
compounded semiannually, which represents the estimated cost of funds used to
finance its construction program for the non-generation portion of its
business. 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 were 8.96% and 9.34% for the three months
ended March 31, 1998 and 1997, respectively, and 9.29% and 9.15% for the
twelve months ended March 31, 1998 and 1997, respectively. ComEd discontinued
SFAS No. 71 regulatory accounting practices in December 1997 for the
generation portion of its business. As a result, beginning in 1998, ComEd
capitalizes interest costs on its generation-related construction work in
progress and nuclear fuel in process. Interest costs capitalized were $2
million for the three months and twelve months ended March 31, 1998. AFUDC and
interest capitalized do not contribute to the current cash flow of Unicom or
ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations were $140 million and $154 million for the three months ended
March 31, 1998 and 1997, respectively, and $584 million and $621 million for
the twelve months ended March 31, 1998 and 1997, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt of ComEd are being amortized over the lives of the respective
issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from ComEd's reacquisition in connection with the refinancing of first
mortgage bonds, sinking fund debentures and pollution control obligations
prior to their scheduled maturity dates is deferred and amortized over the
15
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
lives of the long-term debt issued to finance the reacquisition for non-
generation related financings. See "Regulatory Assets and Liabilities" above
and Note 2 for additional information.
Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to
adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure
purposes only. Unicom accounts for its stock option awards and ESPP under APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 8 for
additional information.
Earnings per Share. Unicom has presented basic EPS on the Statements of
Consolidated Operations for the three months and twelve months ended March 31,
1998 and 1997. Basic EPS and diluted EPS for the periods presented are the
same. The diluted average number of common shares outstanding was 217,372,000
and 216,157,000 for the three months ended March 31, 1998 and 1997,
respectively, and 216,493,000 and 215,805,000 for the twelve months ended
March 31, 1998 and 1997, respectively.
Energy Risk Management Contracts. In the normal course of business ComEd
utilizes contracts for the forward sale and purchase of energy to manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap arrangements to limit
the market price risk associated with the forward commodity contracts. As
ComEd does not currently utilize financial or commodity instruments for
trading or speculative purposes, any gains or losses on forward commodity
contracts are recognized when the underlying transactions affect earnings.
Revenues and expenses associated with market price risk management contracts
are amortized over the terms of such contracts.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on operating results. See Note 3 for information regarding the
restatement of 1997 interim financial statements for a change in accounting
principle.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months and
twelve months ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Supplemental Cash Flow Infor-
mation:
Cash paid during the period
for:
Interest (net of amount
capitalized).............. $ 154,881 $ 160,928 $ 506,003 $541,435
Income taxes (net of re-
funds).................... $ -- $ 6,998 $ 258,803 $ 241,741
Supplemental Schedule of Non-
Cash Investing and Financing
Activities:
Capital lease obligations
incurred by subsidiary com-
panies...................... $ 17,996 $ 46,397 $ 130,011 $ 241,879
</TABLE>
(2) ACCOUNTING EFFECTS RELATED TO THE 1997 ACT. On December 16, 1997, the
Governor of Illinois signed into law the 1997 Act, which established a phased-
process to introduce competition into the electric industry in Illinois under
a less regulated structure. The 1997 Act, as it applies to ComEd, provides
for, among other things, a 15% residential base rate reduction commencing on
August 1, 1998, an additional 5% residential base rate reduction commencing on
May 1, 2002, and customer access to other electric suppliers in a phased-in
process. Access for commercial and industrial customers will occur over a
period from October 1999 to December 2000, and access for residential
16
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
customers will occur after May 1, 2002. The 15% residential base rate
reduction, commencing on August 1, 1998, is expected to reduce ComEd's
operating revenues by approximately $160 million and $375 million in 1998 and
1999, respectively, compared to 1997 rate levels. ComEd is engaged in certain
pricing experiments contemplated by the 1997 Act, which are expected to reduce
ComEd's operating revenues by approximately $30 million and $60 million in
1998 and 1999, respectively, compared to 1997 rate levels; however, such
reductions are expected to be offset by the effects of customer growth.
The 1997 Act also provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006, and can be extended through 2008 with ICC approval if
certain factors are met. The CTC will be established in accordance with a
formula defined in the 1997 Act. The CTC, which will be applied on a cents per
kilowatthour basis, considers the revenue which would have been collected from
a customer under tariffed rates, reduced by the revenue the utility will
receive for providing delivery services to the customer, the market price for
electricity and a defined mitigation factor which represents the utility's
opportunity to develop new revenue sources and achieve cost savings.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. Under the earnings
provision of the 1997 Act, if the earned return on common equity of a utility
during this period exceeds an established threshold, a portion of the excess
earnings must be refunded to customers. A utility may request a rate increase
during the rate freeze period when necessary to ensure the utility's financial
viability, but not before January 1, 2000.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based
regulated rates. The 1997 Act also requires utilities to establish or join an
ISO that will independently manage and control utility transmission systems.
Additionally, the 1997 Act includes the leveling of certain regulatory
requirements to permit operational flexibility, the leveling of certain
regulatory and tax provisions as applied to various electric suppliers and a
new, more stringent, liability standard applicable to ComEd in the event of a
major outage.
The 1997 Act also allows a portion of ComEd's future revenues, including
tariffed rates and CTC revenues, to be segregated and used to support the
issuance of securities by ComEd or a special purpose financing entity. The
proceeds from such security issuances must be used to refinance outstanding
debt or equity or for certain other limited purposes. The total amount of such
securities that may be issued is approximately $6.8 billion; approximately
one-half of that amount can be issued in the twelve-month period commencing on
August 1, 1998. On April 22, 1998, ComEd filed an application with the ICC
seeking certain actions and approvals of the ICC under the 1997 Act in
connection with the proposed issuance of up to $3.4 billion of such
securities. ComEd plans to use the proceeds of the sale of such securities to
refinance its debt and equity, and anticipates using between $750 million and
$1.14 billion to repurchase shares of ComEd common stock held by Unicom.
Unicom in turn will use the funds it receives from ComEd's share repurchase to
repurchase publicly held shares of Unicom's common stock. At current market
prices, this repurchase would involve between 22 million and 33 million
shares, or 10 to 15 percent of Unicom's outstanding
17
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
common stock. The Boards of Directors of Unicom and ComEd have each approved
the repurchase of up to 33 million shares of common stock. ComEd plans to use
the remaining proceeds, net of transaction costs, to redeem preference stock
and debt.
As a result of the 1997 Act, prices for the supply of electric energy are
expected to transition from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover a portion of any of
its costs which might otherwise be unrecoverable under market-based rates.
Nonetheless, ComEd will need to take steps to address the portion of such
costs which are not recoverable through the CTC. Such steps may include cost
control efforts, developing new sources of revenue and potential asset
dispositions.
Because the 1997 Act is expected ultimately to lead to market-based pricing
of electric generation services, ComEd discontinued SFAS No. 71 regulatory
accounting practices for the generation portion of its business in December
1997. ComEd evaluated the regulatory assets and liabilities related to the
generation portion of its business and determined that it was not probable
that such costs would be recovered through the cash flows from the regulated
portion of its business. Accordingly, the generation-related regulatory assets
and liabilities were written off in the fourth quarter of 1997, resulting in
an extraordinary charge of $810 million (after-tax), or $3.75 per common
share. These write-offs related principally to previously incurred costs
originally expected to be collected through future revenues, including income
tax benefits previously flowed through to customers, deferred carrying charges
on the Byron Unit 2 and Braidwood Units 1 and 2 nuclear generating plants,
generation-related unamortized loss on reacquired debt and other miscellaneous
generation-related costs. The regulatory asset for the unrecovered nuclear
decommissioning costs of currently retired nuclear plants was not written off,
as the 1997 Act provides for the ongoing recovery of decommissioning costs
through regulated rates. See "Regulatory Assets and Liabilities" and
"Depreciation and Decommissioning" in Note 1.
Pursuant to an option contained in the 1997 Act, ComEd filed a tariff on
December 16, 1997 to eliminate its FAC as of January 1, 1997. Under ComEd's
regulated rates, the FAC provided 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 ComEd's base
rates. Elimination of the FAC required ComEd to refund to customers the net
FAC charges billed during the calendar year 1997 of $25 million (after-tax),
or $0.12 per common share. These costs, as well as deferred underrecovered
energy costs of $19 million (after-tax), or $0.08 per common share which ComEd
would have been entitled to recover if the FAC had remained in effect, were
recorded as a reduction to operating results in the fourth quarter of 1997.
As of March 31, 1998, ComEd's liability for revenue refunds was $11 million.
Additionally, elimination of the FAC and a transition to market-based
pricing for generation-related costs required ComEd to write down its
investment in uranium-related properties. Projections of the market price for
uranium indicate that the expected incremental costs of mining and milling
uranium at such properties would exceed the expected market price for uranium.
Such costs are not expected to be recoverable in a competitive market. A write
down of ComEd's investment in uranium-related properties to realizable value
resulted in a charge of $60 million (after-tax), or $0.28 per common share in
December 1997.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, establishes accounting standards for the
impairment of long-lived assets, i.e., determining whether the costs of such
assets are recoverable through future revenues. SFAS No. 121
18
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
also requires that regulatory assets, which are no longer probable of recovery
through future revenue, be charged to operations. ComEd evaluated whether the
recoverability of the costs of its generating stations has been impaired, as
defined in SFAS No. 121. This evaluation was conducted to determine whether
future revenues, including the collection of the CTC, expected to be recovered
from electric supply services will be sufficient to cover the costs of its
generating assets. Notwithstanding the retirement and write-off of Zion
Station, as discussed in Note 5, ComEd has concluded, as a result of these
studies, that impairment, as defined in SFAS No. 121, does not exist and that
asset write downs are not necessary at this time. However, ComEd is engaged in
an ongoing examination of its assets and operations. If ComEd retires or
closes one or more additional generating plants prior to expected retirement
dates, further write-offs will be required.
(3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In the fourth
quarter of 1997, ComEd changed its accounting method for revenue recognition
to record revenues associated with service which has been provided to
customers but has not yet been billed at the end of each accounting period,
retroactive to January 1, 1997. This change in accounting method increased
operating results for the three months and twelve months ended March 31, 1997
to reflect the one-time cumulative effect of the change for years prior to
1997 of $197 million (after-tax), or $0.91 per common share. The results per
common share for the first, second, third and fourth quarters of 1997,
reflecting the results of restatement for the effect of the change in
accounting principle, were $1.21, $0.03, $1.11 and $(6.29), respectively. The
following pro forma information reflects the financial results for the twelve
months ended March 31, 1997 as if the new accounting method had been in effect
for the full twelve-month period, excluding the cumulative effect of a change
in accounting principle (unaudited):
<TABLE>
<CAPTION>
(THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C>
Net Income.................................................... $653,282
Earnings Per Common Share..................................... $ 3.03
</TABLE>
(4) RATE MATTERS. In January 1995, the ICC issued its Rate Order in the
proceedings relating to ComEd's February 1994 rate increase request. The Rate
Order provided, among other things, for an increase in ComEd's total revenues
of approximately $302 million (excluding add-on revenue taxes) on an annual
basis. The rates provided in the Rate Order became effective on January 14,
1995; however, they are being collected subject to refund as a result of
subsequent judicial action. The Rate Order was appealed by intervenors and
ComEd to the Illinois Appellate Court, which issued a decision on May 30, 1997
affirming the Rate Order in all respects with the exception of two issues,
which it remanded to the ICC for the purpose of providing further analysis.
Those issues related to: (i) the manner in which certain costs were recovered
and which customers should pay those costs, and (ii) the proper rate of return
on common equity for ComEd. As of March 31, 1998, electric operating revenues
of approximately $215 million would be subject to refund in connection with
the remanded issues. On April 6, 1998, the ICC entered an order providing the
analysis required by the Appellate Court and affirming the Rate Order and the
associated $302 million revenue increase on an annual basis. The order is
subject to a pending petition for rehearing and to appeal.
Final ICC orders have been issued in fuel reconciliation proceedings for
years prior to 1994 and for the year 1995. In 1996, an intervenor filed
testimony in the fuel reconciliation proceeding for 1994 seeking a refund of
approximately $90 million relating to nuclear station performance. In March
1998, the ICC staff also filed testimony in the fuel reconciliation proceeding
for 1994 proposing a refund of $36 million. The 1997 Act provides that the
fuel reconciliation proceedings for 1994 and 1996 must be concluded by the end
of 1998. If refunds are required in these proceedings, the refunds could
19
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
have a material adverse effect on results of operations. The 1997 Act also
provides that, because ComEd eliminated its FAC effective January 1, 1997, the
ICC shall not conduct a fuel reconciliation proceeding for the year 1997 or
any subsequent years.
See Note 2 for information regarding the 1997 Act and the elimination of
ComEd's FAC.
(5) CLOSURE AND SALE OF PLANTS. On January 14, 1998, the Boards of Directors
of Unicom and ComEd authorized the permanent cessation of nuclear generation
operations and retirement of facilities at ComEd's 2,080 megawatt Zion nuclear
generating station. Such retirement resulted in a charge in the fourth quarter
of 1997 of $523 million (after-tax), or $2.42 per common share. The decision
to close Zion Station was a result of an ongoing analysis, which ComEd
performed regarding the economic value of its generating assets in light of
the expected changes in the manner in which electric energy is marketed and
sold. The passage of the 1997 Act provided a clearer basis for evaluating the
costs and benefits of alternative courses of action. In reaching the decision
to cease nuclear generation operations at Zion Station, the Boards also
considered the significant uncertainty associated with continued operation of
the station due to the degradation of the steam generators and the expected
operating costs associated with continued station operation.
ComEd's fourth quarter 1997 financial results reflect a charge of $406
million (after-tax), representing the undepreciated costs of Zion Station
(excluding the portion which will remain in use to provide voltage support),
materials and supplies inventories, and nuclear fuel inventories. In addition,
as required by GAAP, a liability for future closing costs associated with the
retirement of Zion Station, excluding severance costs, was recorded resulting
in a charge of $117 million (after-tax) in the fourth quarter of 1997. See
Note 17 for information regarding costs of voluntary employee separation
plans.
ComEd has completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has entered into
exclusive 15-year purchased power agreements for the output of the stations.
The sale of State Line Station was completed in December 1997, and the sale of
Kincaid Station was completed in February 1998. The net proceeds of the sales,
after income tax effects and closing costs, were approximately $190 million.
The proceeds were used to retire or redeem existing debt in the first quarter
of 1998.
(6) AUTHORIZED SHARES AND VOTING RIGHTS AND STOCK RIGHTS OF CAPITAL STOCK.
At March 31, 1998, Unicom's authorized shares consisted of 400,000,000 shares
of common stock. The authorized shares of ComEd preferred and preference
stocks at March 31, 1998 were: preference stock--22,368,560 shares; $1.425
convertible preferred stock--61,724 shares; and prior preferred stock--850,000
shares. The preference and prior preferred stocks are issuable in series and
may be issued with or without mandatory redemption requirements. Holders of
outstanding Unicom shares are entitled to one vote for each share held on each
matter submitted to a vote of such shareholders; and holders of outstanding
ComEd shares are entitled to one vote for each share held on each matter
submitted to a vote of such shareholders. All such shares have the right to
cumulate votes in elections for the directors of the corporation which issued
the shares.
Pursuant to a plan adopted by Unicom's Board of Directors on February 2,
1998, each share of Unicom's common stock carries the right (referred to
herein as a "Right") to purchase one-thousandth of one share of Unicom's
common stock at a purchase price of $100 per whole share of common stock,
subject to adjustment. The Rights are tradable only with Unicom's common stock
until they become exercisable. The Rights become exercisable upon the earlier
of ten days following a public
20
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
announcement that a person (an "Acquiring Person") has acquired 15% or more of
Unicom's outstanding common stock or ten business days (or such later date as
may be determined by action of Unicom's Board of Directors) following the
commencement of a tender or exchange offer which, if consummated, would result
in a person or group becoming an Acquiring Person. The Rights are subject to
redemption by Unicom at a price of $0.01 per Right, subject to certain
limitations, and will expire on February 2, 2008. If a person or group becomes
an Acquiring Person, each holder of a Right will thereafter have the right to
receive, upon exercise, Unicom common stock at a 50% discount from the then
current market price. If Unicom is acquired in a merger or other business
combination transaction in which Unicom is not the survivor, or 50% or more of
Unicom's assets or earning power is sold or transferred, each holder of a
Right shall then have the right to receive, upon exercise, common stock of the
acquiring company at a 50% discount from the then current market price of such
common stock. Rights held by an Acquiring Person become void upon the
occurrence of such events.
See Note 2 regarding ComEd's application to the ICC for the proposed
issuance of up to $3.4 billion of securities to refinance debt and equity, as
permitted under the 1997 Act.
(7) COMMON EQUITY. At March 31, 1998, shares of Unicom common stock were
reserved for the following purposes:
<TABLE>
<S> <C>
Long-Term Incentive Plan........................................ 3,003,279
Employee Stock Purchase Plan.................................... 507,567
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 94,476
1996 Directors' Fee Plan........................................ 176,639
---------
4,181,961
=========
</TABLE>
Common stock issued for the three months and twelve months ended March 31,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares of Common Stock Issued:
Long-Term Incentive Plan........ 174,287 45,144 337,247 200,527
Employee Stock Purchase Plan.... -- -- 196,003 196,513
Employee Savings and Investment
Plan........................... -- 202,700 71,503 496,700
Exchange for ComEd common stock
not held by Unicom............. 3,477 6,669 9,178 31,992
1996 Directors' Fee Plan........ 4,074 3,949 14,300 9,061
--------- --------- --------- ---------
181,838 258,462 628,231 934,793
========= ========= ========= =========
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Amount of Common Stock Issued:
Total issued.................... $ 4,198 $ 5,727 $ 14,239 $ 22,848
Held by trustee for Unicom Stock
Bonus Deferral Plan............ (1,997) (2,343) (2,129) (2,440)
Other........................... 25 50 (15) 64
--------- --------- --------- ---------
$ 2,226 $ 3,434 $ 12,095 $ 20,472
========= ========= ========= =========
</TABLE>
At March 31, 1998 and December 31, 1997, 76,607 and 76,868 ComEd common
stock purchase warrants, respectively, were outstanding. The warrants entitle
the holders to convert such warrants into common stock of ComEd at a
conversion rate of one share of common stock for three warrants.
21
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Unicom's retained earnings account had a deficit balance of $54 million and
$21 million at March 31, 1998 and December 31, 1997, respectively. As of March
31, 1998 and December 31, 1997, $298 million and $331 million, respectively,
of retained earnings have been appropriated for future dividend payments.
See Note 2 regarding ComEd's application to the ICC for the proposed
issuance of up to $3.4 billion of securities to refinance debt and equity, as
permitted under the 1997 Act.
(8) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN. Unicom has a
nonqualified stock option awards program under its Long-Term Incentive Plan.
The stock option awards program was adopted by Unicom in July 1996 to reward
valued employees responsible for, or contributing to, the management, growth
and profitability of Unicom and its subsidiaries. The stock options granted
will expire ten years from their grant date. One-third of the shares subject
to the options vest on each of the first three anniversaries of the option
grant date. In addition, the stock options will become fully vested
immediately if the holder dies, retires, is terminated by the Company other
than for cause or qualifies for long-term disability and will also vest in
full upon a change in control.
Stock options transactions through March 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at the beginning of 1996................ -- $ --
Granted during the year............................. 1,205,500 25.500
Expired/cancelled during the year................... (17,500) 25.500
---------
Outstanding as of December 31, 1996................. 1,188,000 25.500
Granted during the year............................. 1,339,350 22.313
Exercised during the year........................... (23,423) 25.500
Expired/cancelled during the year................... (212,549) 23.632
---------
Outstanding as of December 31, 1997................. 2,291,378 23.810
Granted during the first quarter.................... 260,000 33.010
Exercised during the first quarter.................. (164,077) 24.335
Expired/cancelled during the first quarter.......... (23,583) 23.473
---------
Outstanding as of March 31, 1998.................... 2,363,718 24.789
=========
</TABLE>
Of the stock options outstanding at March 31, 1998, 383,810 have vested with
a weighted average exercise price of $25.307.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
STOCK OPTION GRANT DATE
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected option life............................... 7 years 7 years 7 years
Dividend yield..................................... 4.80% 7.20% 6.30%
Expected volatility................................ 22.85% 22.29% 20.98%
Risk-free interest rate............................ 5.63% 6.25% 6.64%
</TABLE>
The estimated fair value for each stock option granted in the first quarter
of 1998 and in the years 1997 and 1996 was $6.22, $2.79 and $3.74,
respectively.
The ESPP allows employees to purchase Unicom common stock at a 10% discount
from market value. Substantially all of the employees of Unicom, ComEd and
certain subsidiaries are eligible to
22
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
participate in the ESPP. Unicom issued 196,003 and 196,513 shares of common
stock for the twelve months ended March 31, 1998 and 1997, respectively, under
the ESPP at a weighted average annual purchase price of $19.15 and $23.52,
respectively.
Unicom has adopted the disclosure-only provisions of SFAS No. 123. For
financial reporting purposes, Unicom has adopted APB No. 25 and thus no
compensation cost has been recognized for the stock option awards program or
ESPP. If Unicom had recorded compensation expense for the stock options
granted and the shares of common stock issued under the ESPP in accordance
with SFAS No. 123 using the fair value based method of accounting, the
additional charge to operations would have been $2 million (after-tax), or
$0.01 per common share and $1 million (after-tax), or $0.01 per common share
for the twelve months ended March 31, 1998 and 1997, respectively.
(9) COMED PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION
REQUIREMENTS. No shares of ComEd preferred or preference stocks without
mandatory redemption requirements were issued or redeemed during the twelve
months ended March 31, 1998 and 1997. The series of ComEd preference stock
without mandatory redemption requirements outstanding at March 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
INVOLUNTARY
SHARES AGGREGATE REDEMPTION LIQUIDATION
SERIES OUTSTANDING STATED VALUE PRICE(1) PRICE(1)
------ ----------- ------------ ---------- -----------
(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
$2.425 3,000,000 72,637 $ 25.00 $25.00
---------- --------
13,499,549 $504,957
========== ========
</TABLE>
--------
(1) Per share plus accrued and unpaid dividends, if any.
The outstanding shares of ComEd's $1.425 convertible preferred stock are
convertible at the option of the holders thereof, at any time, into common
stock of ComEd 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 ComEd 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.
23
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(10) COMED PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS.
During the twelve months ended March 31, 1998 and 1997, no shares of ComEd
preference stock subject to mandatory redemption requirements were issued. The
series of ComEd preference stock subject to mandatory redemption requirements
outstanding at March 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
SHARES AGGREGATE
SERIES OUTSTANDING STATED VALUE OPTIONAL REDEMPTION PRICE(1)
- -------------- ----------- ------------ -----------------------------------------------
(THOUSANDS
OF DOLLARS)
<S> <C> <C> <C>
$8.20 178,560 $ 17,856 $101
$8.40 Series B 300,000 29,798 $101
$8.85 225,000 22,500 $103 through July 31, 1998; and $101 thereafter
$9.25 525,000 52,500 $103 through July 31, 1999; and $101 thereafter
$9.00 130,000 12,887 Non-callable
$6.875 700,000 69,475 Non-callable
--------- --------
2,058,560 $205,016
========= ========
</TABLE>
- --------
(1) 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 ComEd preference
stock subject to mandatory redemption requirements are summarized as follows:
<TABLE>
<CAPTION>
SINKING
ANNUAL SINKING FUND INVOLUNTARY
SERIES FUND REQUIREMENT PRICE(1) LIQUIDATION PRICE(1)
-------------- ----------------- -------- --------------------
<S> <C> <C> <C>
$8.20 35,715 shares $100 $100.00
$8.40 Series B 30,000 shares(2) $100 $ 99.326
$8.85 37,500 shares $100 $100.00
$9.25 75,000 shares $100 $100.00
$9.00 130,000 shares $100 $ 99.125
$6.875 (3) $100 $ 99.25
</TABLE>
--------
(1) Per share plus accrued and unpaid dividends, if any.
(2) ComEd 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.
(3) All shares are required to be redeemed on May 1, 2000.
Annual remaining sinking fund requirements through 2002 on ComEd preference
stock outstanding at March 31, 1998 will aggregate $31 million in 1998, $18
million in 1999, $88 million in 2000 and $18 million in each of 2001 and 2002.
During each of the twelve months ended March 31, 1998 and 1997, 438,215 shares
of ComEd 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.
(11) COMED-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY COMED'S SUBORDINATED DEBT SECURITIES. In
September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd,
issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred
securities. The sole asset of ComEd Financing I is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust
of ComEd, issued 150,000 of its
24
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
8.50% ComEd-obligated mandatorily redeemable capital securities. The sole
asset of ComEd Financing II is $154.6 million principal amount of ComEd's
8.50% subordinated deferrable interest debentures due January 15, 2027. There
is a full and unconditional guarantee by ComEd of the Trusts' obligations
under the securities issued by the Trusts. However, ComEd's obligations are
subordinate and junior in right of payment to certain other indebtedness of
ComEd. ComEd has the right to defer payments of interest on the subordinated
deferrable interest notes by extending the interest payment period, at any
time, for up to 20 consecutive quarters. Similarly, ComEd has the right to
defer payments of interest on the subordinated deferrable interest debentures
by extending the interest payment period, at any time, for up to 10
consecutive semi-annual periods. If interest payments on the subordinated
deferrable interest notes or debentures are so deferred, distributions on the
preferred securities will also be deferred. During any deferral, distributions
will continue to accrue with interest thereon. In addition, during any such
deferral, ComEd may not declare or pay any dividend or other distribution on,
or redeem or purchase, any of its capital stock.
The subordinated deferrable interest notes are redeemable by ComEd, in whole
or in part, from time to time, on or after September 30, 2000, and with
respect to the subordinated deferrable interest debentures, on or after
January 15, 2007, or at any time in the event of certain income tax
circumstances. If the subordinated deferrable interest notes or debentures are
redeemed, the Trusts must redeem preferred securities having an aggregate
liquidation amount equal to the aggregate principal amount of the subordinated
deferrable interest notes or debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trusts, the holders of the
preferred securities will be entitled to receive, for each preferred security,
a liquidation amount of $25 for the securities of ComEd Financing I and $1,000
for the securities of ComEd Financing II, plus accrued and unpaid
distributions thereon, including interest thereon, to the date of payment,
unless in connection with the dissolution, the subordinated deferrable
interest notes or debentures are distributed to the holders of the preferred
securities.
(12) LONG-TERM DEBT. Sinking fund requirements and scheduled maturities
remaining through 2002 for ComEd's first mortgage bonds, sinking fund
debentures and other long-term debt outstanding at March 31, 1998, after
deducting deposits made for retirement of sinking fund debentures and sinking
fund debentures reacquired for satisfaction of future sinking fund
requirements, are summarized as follows: 1998--$135 million; 1999--$150
million; 2000--$462 million; 2001--$108 million; and 2002--$305 million.
Unicom Enterprises' note payable to bank of $185 million will mature in 1999.
At March 31, 1998, ComEd's outstanding first mortgage bonds maturing through
2002 were as follows:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
SERIES ----------------------
(THOUSANDS OF DOLLARS)
<S> <C>
6 3/4% due July 1, 1998............................ $ 50,000
6 3/8% due October 1, 1998......................... 75,000
9 3/8% due February 15, 2000....................... 125,000
6 1/2% due April 15, 2000.......................... 230,000
6 3/8% due July 15, 2000........................... 100,000
7 1/2% due January 1, 2001......................... 100,000
7 3/8% due September 15, 2002...................... 200,000
--------
$880,000
========
</TABLE>
25
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Other long-term debt outstanding at March 31, 1998 is summarized as follows:
<TABLE>
<CAPTION>
PRINCIPAL
DEBT SECURITY AMOUNT INTEREST RATE
- --------------- ---------- ---------------------------------------------------
(THOUSANDS
OF
DOLLARS)
<S> <C> <C>
Unicom--
Loans Payable:
Loan due Janu-
ary 1, 2003 $ 6,775 Interest rate of 8.31%
Loan due Janu-
ary 1, 2004 7,690 Interest rate of 8.44%
----------
$ 14,465
----------
ComEd--
Notes:
Medium Term
Note, Series
1N due April
1, 1998 $ 3,500 Interest rate of 9.55%
Medium Term
Notes, Series
3N due vari-
ous dates
through
October 15,
2004 296,000 Interest rates ranging from 9.00% to 9.20%
Notes due Jan-
uary 15, 2004 150,000 Interest rate of 7.375%
Notes due Oc-
tober 15,
2005 235,000 Interest rate of 6.40%
Notes due Jan-
uary 15, 2007 150,000 Interest rate of 7.625%
----------
$ 834,500
----------
Purchase Con-
tract Obliga-
tion
due April 30,
2005 $ 345 Interest rate of 3.00%
----------
Total ComEd $ 834,845
----------
Unicom Enter-
prises--
Long-Term Note
Payable to
Bank
due November
15, 1999 $ 185,000 Prevailing interest rate of 6.63% at March 31, 1998
----------
Total Unicom $1,034,310
==========
</TABLE>
Long-term debt maturing within one year has been included in current
liabilities.
ComEd's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by ComEd.
See Note 2 regarding ComEd's application to the ICC for the proposed
issuance of up to $3.4 billion of securities to refinance debt and equity, as
permitted under the 1997 Act.
(13) LINES OF CREDIT. ComEd had total bank lines of credit of $673 million
and unused bank lines of credit of $665 million at March 31, 1998. Of that
amount, $665 million (of which $146 million expires on September 27, 1998, $18
million expires in equal quarterly installments commencing on June 30, 1998
and ending on September 30, 1998 and $501 million expires in equal quarterly
installments commencing on June 30, 1998 and ending on September 30, 1999) may
be borrowed on secured or unsecured notes of ComEd 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 credit
rating of ComEd's outstanding first mortgage bonds 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 ComEd. Collateral, if
required for the borrowings, would consist of first mortgage bonds issued
under and in accordance with the provisions of ComEd's mortgage. ComEd is
obligated to pay commitment fees with respect to the unused portion of such
lines of credit.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $15 million was unused as of March 31, 1998. The
credit facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings
26
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
and Unicom Energy Services, and for general corporate purposes. The credit
facility is guaranteed by Unicom and includes certain covenants with respect
to Unicom and Unicom Enterprises' operations. Such covenants include, among
other things, (i) a requirement that Unicom and its consolidated subsidiaries
maintain a tangible net worth at least $10 million over that of ComEd and its
consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt
to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the
indebtedness for borrowed money that Unicom (excluding ComEd) and Unicom
Enterprises may incur, and (iv) a requirement that Unicom own 100% of the
outstanding stock of Unicom Enterprises and at least 80% of the outstanding
stock of ComEd; and provide that Unicom may not declare or pay dividends
during the continuance of an event of default. Interest rates for borrowings
under the credit facility are set at the time of a borrowing and are based on
either a prime interest rate or a floating rate bank index plus a spread which
varies with the credit rating of ComEd's outstanding first mortgage bonds.
Unicom Enterprises is obligated to pay commitment fees with respect to the
unused portion of such lines of credit.
(14) 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.
ComEd, 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
ComEd's nuclear generating stations. That contract provided for acceptance by
the DOE of such materials to begin in January 1998; however, that date was not
met by the DOE and is expected to be delayed significantly. The DOE's current
estimate for opening a facility to accept such waste is 2010. Extended delays
in spent nuclear fuel acceptance by the DOE would lead to ComEd's
consideration of costly storage alternatives. See "Depreciation and
Decommissioning" under Note 1 for additional information. The contract with
the DOE requires ComEd to pay the DOE a one-time fee applicable to nuclear
generation through April 6, 1983 of $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. As provided for
under the contract, ComEd has elected to pay the one-time fee, with interest,
just prior to the first delivery of spent nuclear fuel to the DOE. The
liability for the one-time fee and the related interest is reflected on the
Consolidated Balance Sheets.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and
assumptions were used to estimate the fair value of financial instruments
either held or issued and outstanding. The disclosure of such information does
not purport to be a market valuation of Unicom and subsidiary companies as a
whole. The impact of any realized or unrealized gains or losses related to
such financial instruments on the financial position or results of operations
of Unicom and subsidiary companies is in part dependent on the treatment
authorized under future ComEd ratemaking proceedings.
27
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Investments. Securities included in the 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 and based on published market data, as of March 31, 1998 and
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------------- --------------------------------
UNREALIZED UNREALIZED
COST BASIS GAINS FAIR VALUE COST BASIS GAINS FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments. $ 33,728 $ 28 $ 33,756 $ 33,524 $ 2 $ 33,526
U.S. Government and
Agency issues......... 216,748 15,122 231,870 170,240 15,882 186,122
Municipal bonds........ 334,709 19,067 353,776 306,104 20,598 326,702
Corporate bonds........ 240,393 4,411 244,804 231,738 4,293 236,031
Common stock........... 706,895 494,157 1,201,052 667,657 385,851 1,053,508
Other.................. 11,448 10,387 21,835 17,300 2,508 19,808
---------- -------- ---------- ---------- -------- ----------
$1,543,921 $543,172 $2,087,093 $1,426,563 $429,134 $1,855,697
========== ======== ========== ========== ======== ==========
</TABLE>
At March 31, 1998, 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................................... $ 41,937 $ 41,986
1 through 5 years............................... 168,309 172,855
5 through 10 years.............................. 258,750 270,647
Over 10 years................................... 365,972 388,399
</TABLE>
The net earnings of the nuclear decommissioning funds, which are recorded as
increases to the accumulated provision for depreciation, for the three months
and twelve months ended March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Gross proceeds from sales of
securities.................... $ 428,003 $ 570,769 $ 2,020,756 $ 2,288,872
Less cost based on specific
identification................ (394,333) (557,508) (1,925,126) (2,254,050)
--------- --------- ----------- -----------
Realized gains on sales of se-
curities...................... $ 33,670 $ 13,261 $ 95,630 $ 34,822
Other realized fund earnings
net of expenses............... 3,614 8,467 34,267 34,754
--------- --------- ----------- -----------
Total realized net earnings of
the funds..................... $ 37,284 $ 21,728 $ 129,897 $ 69,576
Unrealized gains (losses)...... 114,038 (14,057) 326,836 63,381
--------- --------- ----------- -----------
Total net earnings of the
funds........................ $ 151,322 $ 7,671 $ 456,733 $ 132,957
========= ========= =========== ===========
</TABLE>
Current Assets. Cash, temporary cash investments and other cash investments,
which include 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 values of ComEd preferred and preference
stocks, ComEd- obligated mandatorily redeemable preferred securities of the
Trusts and long-term debt were
28
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
obtained from an independent consultant. The estimated fair values, which
include the current portions of redeemable preference stock and long-term debt
but exclude accrued interest and dividends, as of March 31, 1998 and December
31, 1997 were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------------- --------------------------------
CARRYING UNREALIZED CARRYING UNREALIZED
VALUE LOSSES FAIR VALUE VALUE LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
ComEd preferred and
preference stocks.... $ 711,936 $ 11,695 $ 723,631 $ 712,069 $ 11,970 $ 724,039
ComEd-obligated
mandatorily
redeemable preferred
securities of the
Trusts holding solely
ComEd's subordinated
debt securities...... $ 350,000 $ 14,544 $ 364,544 $ 350,000 $ 21,701 $ 371,701
Long-term debt........ $5,700,946 $383,359 $6,084,305 $5,913,942 $380,890 $6,294,832
</TABLE>
Long-term notes payable, which are not included in the above table, amounted
to $200 million and $327 million at March 31, 1998 and December 31, 1997,
respectively. Such notes, for which interest is paid at fixed and prevailing
rates, are included in the consolidated financial statements at cost, which
approximates their fair value.
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
portions 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
March 31, 1998 and December 31, 1997; therefore, the carrying value is equal
to the fair value.
(16) PENSION AND POSTRETIREMENT BENEFITS. As of March 31, 1998, ComEd had a
qualified non-contributory defined benefit pension plan which covers all
regular employees. Benefits under this plan 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 March 31,
1998 and December 31, 1997 pension liabilities and related data were
determined using the January 1, 1997 actuarial valuation. Additionally, ComEd
maintains a nonqualified supplemental retirement plan which covers any excess
pension benefits that would be payable to management employees under the
qualified plan but which are limited by the Internal Revenue Code. On January
19, 1998, the qualified defined benefit plan of the Indiana Company was merged
into the ComEd pension plan as a result of the sale of the Indiana Company's
State Line Station and the transfer of its remaining employees to ComEd.
ComEd and the Indiana Company provide certain postretirement medical care,
dental care, vision care and life insurance for retirees and their dependents
and for the surviving dependents of eligible employees and retirees. The
employees become eligible for postretirement benefits when they reach age 55
with 10 years of service. The liability for postretirement benefits is funded
through trust funds based upon actuarially determined contributions that take
into account the amount deductible for income tax purposes. The health care
plans are contributory, funded jointly by the companies and the participating
retirees. The March 31, 1998 and December 31, 1997 postretirement benefit
liabilities and related data were determined using the January 1, 1997
actuarial valuations.
29
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Reconciliations of the beginning and ending balances of the pension
projected benefit obligation and the accumulated postretirement benefit
obligation and the funded status of these plans for the three months ended
March 31, 1998 and the twelve months ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
OTHER OTHER
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
---------- -------------- ---------- --------------
(THOUSANDS OF DOLLARS)
CHANGE IN BENEFIT
OBLIGATION
- -----------------
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of period.... $4,074,000 $1,084,000 $3,579,000 $1,035,000
Service cost............ 31,000 9,000 100,000 34,000
Interest cost........... 70,000 19,000 261,000 76,000
Plan participants' con-
tributions............. -- 1,000 -- 3,000
Curtailment gain........ -- -- (5,000) --
Actuarial loss (gain)... 1,000 -- 346,000 (23,000)
Benefits paid........... (53,000) (11,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,123,000 $1,102,000 $4,074,000 $1,084,000
---------- ---------- ---------- ----------
<CAPTION>
CHANGE IN PLAN ASSETS
- ---------------------
<S> <C> <C> <C> <C>
Fair value of plan as-
sets at beginning of
period................. $3,706,000 $ 768,000 $3,281,000 $ 665,000
Actual return on plan
assets................. 314,000 76,000 631,000 130,000
Employer contribution... -- -- 1,000 11,000
Plan participants' con-
tributions............. -- 1,000 -- 3,000
Benefits paid........... (53,000) (11,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $3,967,000 $ 834,000 $3,706,000 $ 768,000
---------- ---------- ---------- ----------
Plan assets less than
benefit obligation..... $ (156,000) $ (268,000) $ (368,000) $ (316,000)
Unrecognized net actuar-
ial loss (gain)........ (96,000) (461,000) 132,000 (406,000)
Unrecognized prior serv-
ice cost (asset)....... (63,000) 51,000 (64,000) 52,000
Unrecognized transition
obligation (asset)..... (110,000) 340,000 (114,000) 345,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (425,000) $ (338,000) $ (414,000) $ (325,000)
========== ========== ========== ==========
</TABLE>
The fair value of pension plan assets excludes $19 million and $17 million
held in grantor trust as of March 31, 1998 and December 31, 1997,
respectively, for payment of benefits under the supplemental plan.
In accounting for the pension costs and other postretirement benefit costs
under the plans, the following weighted average actuarial assumptions were
used for the periods during 1998, 1997 and 1996:
<TABLE>
<CAPTION>
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------- -----------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Annual discount rate................. 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Annual long-term rate of return on
plan assets......................... 9.50% 9.75% 9.75% 9.20% 9.40% 9.38%
Annual rate of increase in future
compensation levels................. 4.00% 4.00% 4.00% -- -- --
</TABLE>
30
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of pension and other postretirement benefit costs, portions
of which were recorded as components of construction costs, for the three
months and twelve months ended March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
PENSION COSTS --------- --------- --------- ---------
- ------------- (THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Service cost...................... $ 31,000 $ 25,000 $ 106,000 $ 93,000
Interest cost on projected benefit
obligation....................... 70,000 65,000 266,000 250,000
Expected return on plan assets.... (86,000) (78,000) (318,000) (294,000)
Amortization of transition asset.. (3,000) (3,000) (13,000) (13,000)
Amortization of prior service cost
(asset).......................... (1,000) (1,000) (4,000) (4,000)
Recognized loss................... -- -- 2,000 1,000
Curtailment gain.................. -- -- (5,000) --
--------- --------- --------- ---------
Net periodic benefit cost........ $ 11,000 $ 8,000 $ 34,000 $ 33,000
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
OTHER POSTRETIREMENT BENEFIT COSTS --------- --------- --------- ---------
- ---------------------------------- (THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Service cost...................... $ 9,000 $ 9,000 $ 34,000 $ 33,000
Interest cost on accumulated bene-
fit obligation................... 19,000 20,000 75,000 76,000
Expected return on plan assets.... (17,000) (15,000) (63,000) (55,000)
Amortization of transition obliga-
tion............................. 5,000 6,000 22,000 22,000
Amortization of prior service
cost............................. 1,000 1,000 4,000 3,000
Recognized gain................... (5,000) (3,000) (15,000) (10,000)
Severance plan cost............... 1,000 -- 8,000 5,000
--------- --------- --------- ---------
Net periodic benefit cost........ $ 13,000 $ 18,000 $ 65,000 $ 74,000
========= ========= ========= =========
</TABLE>
The pension curtailment gain in December 1997 represents the recognition of
prior service costs, the transition asset and the decrease in the projected
benefit obligation related to the reduction in the number of employees due to
the sale of State Line Station by the Indiana Company.
Postretirement health care costs for the twelve months ended March 31, 1998
and 1997 included $8 million and $5 million, respectively, related to
voluntary separation offers to certain employees of ComEd and the Indiana
Company.
The health care cost trend rates used to measure the expected cost of the
postretirement medical benefits are assumed to be 8.5% for pre-Medicare
recipients and 6.5% for Medicare recipients for 1998. Those rates are assumed
to grade down in 0.5% annual increments to 5% for the years 2005 and 2001,
respectively, and to remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. A one percentage point change in the assumed health care cost
trend rates would have the following effects:
<TABLE>
<CAPTION>
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Effect on total annual service and interest cost
components...................................... $ 21,000 $ (16,000)
Effect on postretirement benefit obligation...... 187,000 (151,000)
</TABLE>
31
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay. The participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $8 million for
the three months ended March 31, 1998 and 1997 and $32 million and $30 million
for the twelve months ended March 31, 1998 and 1997, respectively.
(17) SEPARATION PLAN COSTS. O&M expenses included $16 million and $3 million
for the three months ended March 31, 1998 and 1997, respectively, and $52
million and $18 million for the twelve months ended March 31, 1998 and 1997,
respectively, for costs related to voluntary separation offers to certain
employees of ComEd and the Indiana Company, as well as certain other one-time
employee related costs. Such costs resulted in charges of $10 million (after-
tax), or $0.04 per common share and $2 million (after-tax), or $0.01 per
common share for the three months ended March 31, 1998 and 1997, respectively,
and $31 million (after-tax), or $0.15 per common share and $11 million (after-
tax), or $0.05 per common share for the twelve months ended March 31, 1998 and
1997, respectively.
(18) INCOME TAXES. The components of the net deferred income tax liability
at March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs.......................... $4,004,936 $4,062,801
Overheads capitalized................................ 123,259 131,509
Repair allowance..................................... 227,650 231,697
Regulatory assets recoverable through future rates... 690,442 785,354
Deferred income tax assets:
Postretirement benefits.............................. (314,757) (305,242)
Unamortized investment tax credits................... (197,855) (206,112)
Regulatory liabilities to be settled through future
rates............................................... (607,623) (698,750)
Nuclear plant closure................................ (74,708) (194,244)
Other--net........................................... (142,975) (136,258)
---------- ----------
Net deferred income tax liability..................... $3,708,369 $3,670,755
========== ==========
</TABLE>
The $38 million increase in the net deferred income tax liability from
December 31, 1997 to March 31, 1998 is comprised of $42 million of deferred
income tax expenses reflected in operations and a $4 million decrease in
regulatory assets net of regulatory liabilities pertaining to income taxes for
the period. The amount of regulatory assets included in deferred income tax
liabilities primarily relates to the equity component of AFUDC which is
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. The amount of other
regulatory liabilities included in deferred income tax assets primarily
relates to deferred income taxes provided at rates in excess of the current
statutory rate.
32
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of net income tax expense charged to continuing operations
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Operating income:
Current income taxes............. $ 56,948 $ 65,265 $ 250,591 $306,366
Deferred income taxes............ (5,397) (12) 53,485 136,961
Investment tax credits deferred--
net............................. (7,160) (7,897) (30,278) (34,109)
Other (income) and deductions,
primarily deferred income taxes
in 1997.......................... (10,195) (283) (417,537) (3,543)
--------- -------- ---------- ---------
Net income taxes charged
(credited) to continuing
operations....................... $ 34,196 $ 57,073 $ (143,739) $405,675
========= ======== ========== =========
</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, 1998
and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Net income (loss) before
extraordinary item and cumulative
effect of change in accounting
principle........................ $ 53,715 $ 65,717 $(251,216) $ 594,885
Net income taxes charged
(credited) to continuing
operations....................... 34,196 57,073 (143,739) 405,675
Provision for dividends on ComEd
preferred and preference stocks.. 14,547 15,527 59,506 63,437
--------- --------- --------- ----------
Pre-tax income (loss) before
extraordinary item, cumulative
effect and provision for
dividends........................ $ 102,458 $ 138,317 $(335,449) $1,063,997
========= ========= ========= ==========
Effective income tax rate......... 33.4% 41.3% 42.8% 38.1%
========= ========= ========= ==========
</TABLE>
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Federal income taxes computed at
statutory rate................... $ 35,860 $ 74,661 $(117,408) $ 398,649
Equity component of AFUDC which
was excluded from taxable income. (89) (1,778) (6,630) (7,405)
Amortization of investment tax
credits, net of deferred income
taxes............................ (9,210) (7,897) (32,328) (34,109)
State income taxes, net of federal
income taxes..................... 5,838 11,647 (862) 56,632
Differences between book and tax
accounting, primarily
property-related deductions...... 1,797 (19,560) 13,489 (8,092)
--------- --------- --------- ----------
Net income taxes charged
(credited) to continuing
operations....................... $ 34,196 $ 57,073 $(143,739) $ 405,675
========= ========= ========= ==========
</TABLE>
The effects of an income tax refund related to prior years were recorded in
the third quarter of 1996, resulting in a positive impact of $26 million
(after-tax), or $0.12 per common share.
33
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Illinois public utility revenue......... $ 57,682 $ 51,755 $ 234,276 $ 220,306
Illinois invested capital............... -- 26,190 73,314 104,699
Illinois electricity distribution tax... 26,718 -- 26,718 --
Municipal utility gross receipts........ 42,551 41,103 169,542 168,240
Real estate............................. 39,991 39,168 152,331 124,491
Municipal compensation.................. 19,871 19,110 79,047 78,559
Other--net.............................. 20,613 23,872 71,886 70,195
--------- --------- --------- ---------
$ 207,426 $ 201,198 $ 807,114 $ 766,490
========= ========= ========= =========
</TABLE>
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
ComEd's real estate taxes reflect a credit of $23 million, recorded in the
second quarter of 1996, which related to the year 1995.
(20) LEASE OBLIGATIONS OF SUBSIDIARY COMPANIES. Under its nuclear fuel lease
arrangement, ComEd 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/bank borrowings and $400 million of intermediate term notes, to finance
the transactions. The commercial paper/bank borrowing portion of $300 million
will expire on November 23, 1999. With respect to the intermediate term notes,
$74 million expires on November 23, 1998, and an additional portion each
November 23 thereafter through November 23, 2003. At March 31, 1998, ComEd's
obligation to the lessor for leased nuclear fuel amounted to approximately
$665 million. As a result of the cessation of nuclear generation operations at
Zion Station (see Note 5), ComEd is required to repurchase not later than mid-
June 1998 approximately $100 million of nuclear fuel assemblies held under the
nuclear fuel lease arrangements at Zion Station. ComEd has agreed to make
lease payments which cover the amortization of the nuclear fuel used in
ComEd's reactors plus the lessor's related financing costs. ComEd has an
obligation for spent nuclear fuel disposal costs of leased nuclear fuel.
Future minimum rental payments, including the repurchase of Zion Station
nuclear fuel assemblies discussed above and net of executory costs, at March
31, 1998 for capital leases are estimated to aggregate $759 million, including
$223 million in 1998, $170 million in 1999, $133 million in 2000, $84 million
in 2001, $57 million in 2002 and $92 million in 2003-2006. The estimated
interest component of such rental payments aggregates $97 million. The
estimated portions of obligations due within one year under capital leases of
$241 million at March 31, 1998 and December 31, 1997 are included in current
liabilities on the Consolidated Balance Sheets.
Future minimum rental payments at March 31, 1998 for operating leases are
estimated to aggregate $353 million, including $31 million in 1998, $39
million in 1999, $36 million in 2000, $30 million in 2001, $26 million in 2002
and $191 million in 2003-2043.
(21) JOINT PLANT OWNERSHIP. ComEd has a 75% undivided ownership interest in
the Quad Cities nuclear generating station. Further, ComEd is responsible for
75% of all costs which are charged to appropriate investment and O&M accounts,
and provides its own financing. At March 31, 1998, for its share of ownership
in the station, ComEd had an investment of $669 million in production and
34
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
transmission plant in service (before a reduction of $214 million for the
related accumulated provision for depreciation) and $15 million in
construction work in progress.
(22) COMMITMENTS AND CONTINGENT LIABILITIES. Purchase commitments,
principally related to construction and nuclear fuel, approximated $346
million at March 31, 1998, comprised of $324 million for ComEd, $12 million
for UT Holdings and $10 million for Unicom Energy Services. In addition, ComEd
has substantial commitments for the purchase of coal. ComEd's coal costs are
high compared to those of other utilities. ComEd's western coal contracts and
its rail contracts for delivery of the western coal provide for the purchase
of certain coal at prices substantially above currently prevailing market
prices. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subcaption "Liquidity and Capital Resources," for
additional information regarding ComEd's purchase commitments.
ComEd is a member of NEIL which provides insurance coverage against property
damage and associated replacement power costs occurring at members' nuclear
generating facilities. 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 such that ComEd would not be
liable for any single incident. However, ComEd could be subject to assessments
in any policy year for each of three types of coverage provided. The maximum
assessments are approximately $53 million for primary property damage, $73
million for excess property damage and $22 million for replacement power.
Prior to January 1, 1998, the primary property damage coverage described was
provided by NML, another mutual insurance company which merged into NEIL. The
merger did not affect ComEd's obligations or coverage.
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,
ComEd would currently be subject to a maximum assessment of $1,030 million in
the event of an incident, limited to a maximum of $130 million in any calendar
year.
In addition, ComEd participates in the American Nuclear Insurers Master
Worker Program, which provides coverage for worker tort claims filed for
bodily injury caused by the nuclear energy hazard. This program was modified,
effective January 1, 1998, to provide coverage to all workers whose "nuclear
related employment" began on or after the commencement date of reactor
operations. ComEd will not be liable for a retrospective assessment under this
new policy. However, ComEd is still subject to a maximum retroactive
assessment of up to $36 million in the event losses incurred under the small
number of policies in the old program exceed accumulated reserves.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations 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. In 1994, a federal jury returned nominal dollar verdicts on eight
bellwether plaintiffs' claims in the 1989 cases, which verdicts were upheld on
appeal. The remaining claims in the 1989 actions have been settled and
dismissed. Although the 1991 cases will necessarily involve the resolution of
numerous contested issues of fact and law, Unicom and ComEd's determination is
that these actions will not have a material impact on their financial position
or results of operations. A case relating to 14 of the plaintiffs in the 1991
cases has been set for trial in June 1998.
ComEd is involved in administrative and legal proceedings concerning air
quality, water quality and other matters. The outcome of these proceedings may
require increases in future construction
35
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
expenditures and operating expenses and changes in operating procedures. ComEd
and its subsidiaries are or are likely to become parties to proceedings
initiated by the U.S. EPA, state agencies and/or other responsible parties
under CERCLA with respect to a number of sites, including MGP sites, or may
voluntarily undertake to investigate and remediate sites for which they may be
liable under CERCLA.
ComEd 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. ComEd also acquired former
MGP sites as vacant real estate on which ComEd facilities have been
constructed. To date, ComEd has identified 44 former MGP sites for which it
may be liable for remediation. ComEd presently estimates that its costs of
former MGP site investigation and remediation will aggregate from $25 million
to $150 million in current-year (1998) dollars. It is expected that the costs
associated with investigation and remediation of former MGP sites will be
incurred over a period not to exceed 30 years. Because ComEd is not able to
determine the most probable liability for such MGP costs, in accordance with
accounting standards, a reserve of $25 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997, which reflects the low end of the range of ComEd's
estimate of the liability associated with former MGP sites. In addition, as of
March 31, 1998 and December 31, 1997, a reserve of $8 million has been
included in other noncurrent liabilities on the Consolidated Balance Sheets,
representing ComEd's estimate of the liability associated with cleanup costs
of remediation sites other than former MGP sites. Approximately half of this
reserve relates to anticipated cleanup costs associated with a property
formerly used as a tannery which was purchased by ComEd in 1973. Unicom and
ComEd presently estimate that ComEd's costs of investigating and remediating
the former MGP and other remediation sites, pursuant to CERCLA and state
environmental laws, will not have a material impact on the financial position
or results of operations of Unicom or ComEd. 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.
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<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN THE ELECTRIC UTILITY INDUSTRY
Unicom and its predominant business, electric energy generation,
transmission and distribution, are in a period of fundamental change in the
manner in which customers obtain, and energy suppliers provide, energy
services. These changes are attributable to changes in technology, the
relaxation of regulatory barriers to utilities' respective service territories
as well as to efforts to change the manner in which electric utilities are
regulated. Federal law and regulations have been amended to provide for open
transmission system access, and various states, including Illinois, are
considering, or have adopted, new regulatory structures to allow access by
some or all customers to energy suppliers in addition to the local utility.
Electric Utility Industry. The electric utility industry historically has
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serve customers within relatively
defined service territories; and operate under extensive regulation with
respect to rates, operations and other matters. Utilities have operated under
a regulatory compact with the state, with a statutory obligation to serve all
of the electricity needs within their service territory in a nondiscriminatory
manner. Historically, investment and operating decisions have been made based
upon the utilities' respective assessment of the current and projected needs
of their customers. In view of this obligation, regulation has focused on
investment and operating costs, and rates have been based on a recovery of
some or all of such prudently incurred costs plus a return on invested
capital. Such rate regulation, and the ability of utilities to recover
investment and other costs through rates, have provided the basis for
recording certain costs as regulatory assets. These assets represent costs
which are allocated over future periods reflecting related regulatory
treatment, rather than expensed in the current period.
The 1997 Act. On December 16, 1997, the Governor of Illinois signed into law
the 1997 Act, which established a phased-process to introduce competition into
the electric industry in Illinois under a less regulated structure. The 1997
Act, as it applies to ComEd, provides for, among other things, a 15%
residential base rate reduction commencing on August 1, 1998, an additional 5%
residential base rate reduction commencing on May 1, 2002, and customer access
to other electric suppliers in a phased-in process. Access for commercial and
industrial customers will occur over a period from October 1999 to December
2000, and access for residential customers will occur after May 1, 2002. The
15% residential base rate reduction, commencing on August 1, 1998, is expected
to reduce ComEd's operating revenues by approximately $160 million and $375
million in 1998 and 1999, respectively, compared to 1997 rate levels. ComEd is
engaged in certain pricing experiments contemplated by the 1997 Act, which are
expected to reduce ComEd's operating revenues by approximately $30 million and
$60 million in 1998 and 1999, respectively, compared to 1997 rate levels;
however, such reductions are expected to be offset by the effects of customer
growth.
The 1997 Act also provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006, and can be extended through 2008 with ICC approval if
certain factors are met. The CTC will be established in accordance with a
formula defined in the 1997 Act. The CTC, which will be applied on a cents per
kilowatthour basis, considers the revenue which would have been collected from
a customer under tariffed rates, reduced by the revenue the utility will
receive for providing delivery services to the customer, the market price for
electricity and a defined mitigation factor which represents the utility's
opportunity to develop new revenue sources and achieve cost savings.
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<PAGE>
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. Under the earnings
provision of the 1997 Act, if the earned return on common equity of a utility
during this period exceeds an established threshold, a portion of the excess
earnings must be refunded to customers. A utility may request a rate increase
during the rate freeze period when necessary to ensure the utility's financial
viability, but not before January 1, 2000.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based
regulated rates. The 1997 Act also requires utilities to establish or join an
ISO that will independently manage and control utility transmission systems.
Additionally, the 1997 Act includes the leveling of certain regulatory
requirements to permit operational flexibility, the leveling of certain
regulatory and tax provisions as applied to various electric suppliers and a
new, more stringent, liability standard applicable to ComEd in the event of a
major outage.
The 1997 Act also allows a portion of ComEd's future revenues, including
tariffed rates and CTC revenues, to be segregated and used to support the
issuance of securities by ComEd or a special purpose financing entity. The
proceeds from such security issuances must be used to refinance outstanding
debt or equity or for certain other limited purposes. The total amount of such
securities that may be issued is approximately $6.8 billion; approximately
one-half of that amount can be issued in the twelve-month period commencing on
August 1, 1998. On April 22, 1998, ComEd filed an application with the ICC
seeking certain actions and approvals of the ICC under the 1997 Act in
connection with the proposed issuance of up to $3.4 billion of such
securities. ComEd plans to use the proceeds of the sale of such securities to
refinance its debt and equity, and anticipates using between $750 million and
$1.14 billion to repurchase shares of ComEd common stock held by Unicom.
Unicom in turn will use the funds it receives from ComEd's share repurchase to
repurchase publicly held shares of Unicom's common stock. At current market
prices, this repurchase would involve between 22 million and 33 million
shares, or 10 to 15 percent of Unicom's outstanding common stock. The Boards
of Directors of Unicom and ComEd have each approved the repurchase of up to 33
million shares of common stock. ComEd plans to use the remaining proceeds, net
of transaction costs, to redeem preference stock and debt.
As a result of the 1997 Act, prices for the supply of electric energy are
expected to transition from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover a portion of any of
its costs which might otherwise be unrecoverable under market-based rates.
Nonetheless, ComEd will need to take steps to address the portion of such
costs which are not recoverable through the CTC. Such steps may include cost
control efforts, developing new sources of revenue and potential asset
dispositions.
See Note 2 of Notes to Financial Statements for the accounting effects
related to the 1997 Act.
Federal Regulation. The Federal Energy Policy Act of 1992, among other
things, empowered the FERC to introduce a greater level of competition into
the wholesale marketplace for electric energy. In April 1996, the FERC Order
was issued requiring utilities to file open access tariffs with regard to
their transmission systems. These tariffs set forth the terms, including
prices, under which other parties and the utility's wholesale marketing
function may use the utility's transmission system. ComEd has an approved open
access tariff with the FERC. The FERC Order requires the separation of the
transmission operations and wholesale marketing functions so as to ensure that
unaffiliated third parties have access to the same information as to system
availability and other requirements.
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<PAGE>
The FERC Order further requires utilities to operate an electronic bulletin
board to make transmission price and access data available to all potential
users. A key feature of the FERC Order is that it contemplates full recovery
of a utility's costs "stranded" by competition. These costs are "stranded" or
"strandable" to the extent market-based rates would be insufficient to allow
for their full recovery. To recover stranded costs, the utility must show that
it had a reasonable expectation that it would continue to serve the customer
in question under its regulatory compact. In addition, some governmental
entities, such as cities, may elect to "municipalize" a utility's distribution
facilities through condemnation proceedings. Such municipalities would then be
able to purchase electric power on a wholesale basis and resell it to
customers over the newly acquired facilities. The FERC Order provides for the
recovery of a utility's investment stranded by municipalization.
ComEd's Response to Regulatory Changes. ComEd is responding, and is
undertaking significant strategic planning efforts to respond further, to the
developments within the utility industry and the 1997 Act and its potential
for strandable investment. During the past several years, such efforts have
focused on cost reductions, including personnel reductions, efficiencies in
purchasing and inventory management, and an incentive compensation system
keyed to cost control and improvement in shareholder value. Notwithstanding
these efforts, ComEd's costs remain high in comparison to its neighboring
utilities. Although ComEd's operating results and financial condition have
historically been affected by various rate proceedings, ComEd expects that the
changes in the national and Illinois electric energy marketplace, and ComEd's
activities anticipating or responding to them, will directly impact its
operating results and financial condition over the next several years.
ComEd anticipates that the 1997 Act, and the resultant increasing
competition to supply energy in Illinois and elsewhere, will have significant
effects upon its revenues and assets as it takes steps to adjust its
operations and services to meet the changing market for electric energy. Both
Unicom and ComEd have been examining methods of positioning themselves and
their affiliates to deal with those effects and to address the developing
opportunities and challenges. ComEd has been engaged in a broad-based
examination of its assets and operations, particularly nuclear and fossil
generation and generation-related (i.e., fuel and inventory) assets, with a
view toward rationalizing their investment and operating costs against their
ability to contribute to the revenues of ComEd under various market scenarios.
Such an assessment involves the consideration of numerous factors, including
revenue contribution, operating costs, impacts on ComEd's service obligations,
purchase commitments and the impact of various options. Such options include
continued operation with accelerated depreciation, indefinite suspension from
operation, potential asset sales and retirement or closure. As discussed
below, ComEd recently ceased nuclear generation operations and retired
facilities at its Zion Station. If ComEd retires or closes one or more
additional generating plants prior to expected retirement dates, further
write-offs will be required.
On January 14, 1998, the Boards of Directors of Unicom and ComEd authorized
the permanent cessation of nuclear generation operations and retirement of
facilities at ComEd's 2,080 megawatt Zion nuclear generating station. Such
retirement resulted in a charge in the fourth quarter of 1997 of $523 million
(after-tax), or $2.42 per common share. The decision to close Zion Station was
a result of ComEd's ongoing analysis which ComEd performed regarding the
economic value of its generating assets in light of the expected changes in
the manner in which electric energy is marketed and sold. The passage of the
1997 Act provided a clearer basis for evaluating the costs and benefits of
alternative courses of action. In reaching the decision to cease nuclear
generation operations at Zion Station, the Boards also considered the
significant uncertainty associated with continued operation of the station due
to the degradation of the steam generators and the expected operating costs
associated with continued station operation.
Notwithstanding the closure of Zion Station as a nuclear generating
facility, a portion of the station will continue to be used to provide voltage
support in the transmission system that serves
39
<PAGE>
ComEd's northern region. Such support will require capital expenditures at the
station, as well as upgrades to the transmission system at various points, in
order to improve the ability to import and transport power through the system.
See Note 5 of Notes to Financial Statements for additional information.
ComEd has completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has entered into
exclusive 15-year purchased power agreements for the output of the stations.
The sale of State Line Station was completed in December 1997, and the sale of
Kincaid Station was completed in February 1998. The net proceeds of the sales,
after income tax effects and closing costs, were approximately $190 million.
The proceeds were used to retire or redeem existing debt in the first quarter
of 1998.
ComEd joined with eight Midwestern utilities to form a regional Midwest ISO
in January 1998. To date, three other utilities have joined the Midwest ISO
and others have indicated their intent to join. The Midwest ISO is a key
element in accommodating the restructuring of the electric industry and will
promote enhanced reliability of the transmission system, equal access to the
transmission system and increased competition. The Midwest ISO will establish
an independent body that will ultimately direct the planning and operation of
the transmission system for the utilities involved. ComEd will retain
ownership of its transmission lines. The formation of the Midwest ISO is
subject to FERC approval.
LIQUIDITY AND CAPITAL RESOURCES
UTILITY OPERATIONS
Construction Program. ComEd has a construction program for the year 1998,
which consists principally of improvements to its existing nuclear and other
electric production, transmission and distribution facilities. It does not
include funds to add new generating capacity to ComEd's system. The program,
as currently approved by ComEd, includes the following estimated expenditures
(excluding nuclear fuel expenditures of approximately $160 million).
<TABLE>
<CAPTION>
1998
----
(MILLIONS OF DOLLARS)
<S> <C>
Production............................................. $425
Transmission and Distribution.......................... 415
General................................................ 90
----
$930
====
</TABLE>
Such estimated expenditures include $95 million toward the replacement of
the steam generators at ComEd's Braidwood Unit 1 and Byron Unit 1 nuclear
generating units by year-end 1998, in addition to approximately $35 million
for removal costs. The total replacement cost is estimated to be $455 million,
including approximately $80 million of removal costs. Approximately $325
million has been incurred through March 31, 1998 and $30 million will be
incurred in 1999.
ComEd's forecasts of peak load indicate a need for additional resources to
meet demand, either through generating capacity, equivalent purchased power
and/or the development of additional demand-side management resources, in 1998
and each year thereafter for the foreseeable future. However, ComEd believes
that adequate resources, including cost-effective demand-side management
resources, non-utility generation resources and other-utility power purchases,
could be obtained in sufficient quantities to meet such forecasted needs.
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $324 million at March 31, 1998. In addition,
ComEd's estimated commitments for the purchase of coal are as follows:
<TABLE>
<CAPTION>
CONTRACT PERIOD COMMITMENT(1)
-------- --------- -------------
<S> <C> <C>
Black Butte Coal Co. ............................. 1998-2000 $ 626
Decker Coal Co. .................................. 1998-2014 478
Other commitments ................................ 1998 25
------
$1,129
======
</TABLE>
--------
(1) In millions of dollars, excluding transportation costs. No
estimate of future cost escalation has been made.
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<PAGE>
For additional information concerning these coal contracts and ComEd's fuel
supply, see "Results of Operations," subcaption "Fuel Supply" below and Notes
1 and 22 of Notes to Financial Statements.
Capital Resources. ComEd forecasts that internal sources will provide
approximately three-fourths of the funds required for ComEd's 1998
construction program and other capital requirements, including nuclear fuel
expenditures, contributions to nuclear decommissioning funds, sinking fund
obligations and scheduled debt maturities. See Notes 10 and 12 of Notes to
Financial Statements for the summaries of the annual sinking fund requirements
and scheduled maturities for ComEd preference stock and long-term debt,
respectively. The forecast takes into consideration the effects of the 1997
Act, but does not take into consideration ComEd's application to the ICC for
the proposed issuance of up to $3.4 billion of securities to refinance debt
and equity, as permitted under the 1997 Act. See "Changes in the Electric
Utility Industry," subcaption "The 1997 Act" above, and "Regulation,"
subcaption "Rate Matters" below, for additional information.
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of ComEd at the time of such
financing. A portion of ComEd's financing is expected to be provided through
the continued sale and leaseback of nuclear fuel through ComEd's existing
nuclear fuel lease facility. See Note 20 of Notes to Financial Statements for
additional information concerning ComEd's nuclear fuel lease facility. ComEd
has $665 million of unused bank lines of credit at March 31, 1998, which may
be borrowed at various interest rates and 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 credit
ratings of ComEd's outstanding first mortgage bonds 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 ComEd's
mortgage. See Note 13 of Notes to Financial Statements for additional
information concerning lines of credit, including scheduled commitment
reductions. 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, 1998 and 1997.
During the first three months of 1998, ComEd sold and leased back $17
million of nuclear fuel through its existing nuclear fuel lease facility. See
the Statements of Consolidated Cash Flows and Note 7 of Notes to Financial
Statements for information regarding common stock activity.
As of May 11, 1998, ComEd has an effective "shelf" registration statement
with the SEC for the future sale of up to an additional $505 million of debt
securities and cumulative preference stock for general corporate purposes of
ComEd, including the discharge or refund of other outstanding securities.
ComEd's securities and other securities guaranteed by ComEd are currently
rated by three principal securities rating agencies 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- BBB-
Preference stock................................. baa3 BBB- BBB-
Trust Securities................................. baa3 BBB- BBB-
Commercial paper................................. P-2 A-2 D-2
</TABLE>
As of April 1998, Moody's rating outlook on ComEd's securities is
"negative", Duff & Phelps has classified ComEd's securities as "Rating Watch-
Down" and S&P's rating outlook is "positive."
See "Part II, Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters" in Unicom and ComEd's Annual Reports on Form 10-K for the
year ended December 31, 1997 for additional information regarding ComEd's
securities ratings.
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<PAGE>
See "Changes in the Electric Utility Industry," subcaption "The 1997 Act"
above, regarding ComEd's application to the ICC for the proposed issuance of
up to $3.4 billion of securities and use the proceeds to refinance debt and
equity, as permitted under the 1997 Act.
Capital Structure. ComEd's ratio of long-term debt to total capitalization
has increased to 48.6% at March 31, 1998 from 48.5% at December 31, 1997.
Unicom's retained earnings account had a deficit balance of $54 million and
$21 million as of March 31, 1998 and December 31, 1997, respectively. As of
March 31, 1998 and December 31, 1997, $298 million and $331 million,
respectively, of retained earnings had been appropriated for future dividend
payments. ComEd's retained earnings account had a deficit balance of $48
million and $19 million as of March 31, 1998 and December 31, 1997,
respectively. As of March 31, 1998 and December 31, 1997, $355 million and
$384 million, respectively, of retained earnings had been appropriated for
future dividend payments.
Year 2000 Conversion. Unicom, including ComEd, uses various software,
systems and technology throughout its businesses that will be affected by the
date change in the Year 2000 and any failure to address Year 2000 issues in a
timely manner could result in a material operational or financial risk.
Unicom's approach to addressing Year 2000 compliance issues is to upgrade or
remediate software, systems and technology that are not Year 2000 compliant
and that are not otherwise being replaced in accordance with Unicom's business
plans. Unicom is in the process of replacing certain of its financial, human
resources, payroll, and customer service and billing software with new
software that is Year 2000 compliant. In other cases, Unicom is upgrading
existing software to versions that are Year 2000 compliant where such upgrades
are available. In cases where Unicom has determined that it is not appropriate
to replace existing software that is not Year 2000 compliant, and that Year
2000-compliant upgrades are not available, Unicom is remediating the software
to make it Year 2000 compliant. Accordingly, Unicom is upgrading or
remediating certain software and systems in its nuclear and fossil electricity
generation business units and in its transmission and distribution and supply
management business units. Unicom is also in the process of evaluating whether
Year 2000 compliance issues will affect any of its key suppliers. The schedule
for the implementation of new Year 2000-compliant software and upgraded
versions of existing software, and the remediation of software not being
replaced or upgraded, contemplates that such efforts will be completed by the
end of 1998, except in the nuclear generation business unit where completion
is scheduled for the third quarter of 1999. The total cost of remediating or
upgrading software, that is not being replaced or upgraded in accordance with
business plans, is currently estimated to be approximately $20 million. The
company is currently performing an analysis of engineering systems to
determine additional remediation requirements. Preliminary estimates of the
costs of such additional remediation requirements range from $15 million to
$35 million.
Market Risks. ComEd is exposed to market risk due to changes in interest
rates and changes in the market price for electricity. Exposure for interest
rate changes relates to its long-term debt and preferred equity obligations.
Exposure to electricity market price risk relates to forward activities taken
to manage effectively the supply of, and demand for, the electric generation
capability of ComEd's generating plants. ComEd does not currently utilize
derivative commodity or financial instruments for trading or speculative
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subcaption "Liquidity and Capital Resources--Interest
Rate Exposure" and "--Market Price Exposure" in Unicom and ComEd's Current
Reports on Form 8-K dated January 30, 1998. There has not been a material
change in ComEd's exposure to interest rate risk or market price risk since
December 31, 1997.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through subsidiaries, in energy service
activities which are not subject to utility regulation by federal or state
agencies. One of these subsidiaries, UT Holdings,
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<PAGE>
provides district cooling, heating and related services to offices and other
buildings in the central business district of the city of Chicago and in other
cities in North America, generally working with local utilities. District
cooling involves, in essence, the production of chilled water at one or more
central locations and its circulation to customers' buildings through a closed
circuit of supply and return piping. Such water is circulated through
customers' premises primarily for air conditioning. This process is used by
customers in lieu of self-generated cooling. As a result of the Clean Air
Amendments, the manufacture of CFCs has been curtailed since January 1996,
thereby creating a marketing opportunity for non-CFC based systems, such as UT
Holdings' district cooling.
Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged
in providing energy services, including gas services, performance contracting,
distributed energy and active energy management systems. In 1997, Unicom
Energy Services entered into a joint venture with Sonat Marketing Company L.P.
to market natural gas and related services to large gas purchasers within
ComEd's service area in Northern Illinois and other Midwestern areas. As an
entry into the distributed energy market, Unicom Energy Services also entered
into an alliance with AlliedSignal Power Systems, Inc., a subsidiary of
AlliedSignal Inc., to market, install and service an electric energy generator
developed by AlliedSignal, known as a TurboGenerator, in a 12-state region and
the province of Ontario, Canada. Unicom Energy Services entered into an
exclusive national distributorship agreement with Engage Networks, Inc. to
market active energy management software and related hardware and services. As
of March 31, 1998, Unicom Energy Services had purchase commitments of
approximately $10 million.
Construction Program. Unicom has approved capital expenditures for 1998 of
approximately $92 million for UT Holdings, primarily related to an expansion
of two of its four Chicago district cooling facilities, the related
distribution piping and plants in other cities. As of March 31, 1998, UT
Holdings' purchase commitments, principally related to construction, were
approximately $12 million.
Capital Resources. Unicom expects to obtain funds to invest in its
unregulated subsidiaries principally from dividends received on its ComEd
common stock and from borrowings. The availability of ComEd's dividends to
Unicom is dependent on ComEd's financial performance and cash position, as
well as legal restrictions on the payment of dividends by public utilities.
Other forms of financing by ComEd to Unicom or the unregulated subsidiaries of
Unicom, such as loans or additional equity investments, which are not
expected, would be subject to prior approval by the ICC.
Unicom Enterprises has a $200 million credit facility which will expire in
1999, of which $15 million was unused as of March 31, 1998. The credit
facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings and Unicom Energy
Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Interest rates for borrowings under the credit
facility are set at the time of a borrowing and are based on either a prime
interest rate or a floating rate bank index plus a spread which varies with
the credit rating of ComEd's outstanding first mortgage bonds. See Note 13 of
Notes to Financial Statements for additional information regarding certain
covenants with respect to Unicom and Unicom Enterprises' operations.
On April 1, 1998, S&P issued a rating on Unicom's senior debt obligations of
BBB-. Ratings have not been obtained from Moody's or Duff & Phelps. See "Part
II, Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters" in Unicom and ComEd's Annual Reports on Form 10-K for the year ended
December 31, 1997, for additional information regarding securities ratings.
REGULATION
ComEd and the Indiana Company are subject to state and federal regulation in
the conduct of their respective businesses, including the operations of
Cotter. 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 operational and capital expenditures.
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<PAGE>
Rate Matters. In January 1995, the ICC issued its Rate Order in the
proceedings relating to ComEd's February 1994 rate increase request. The Rate
Order provided, among other things, for an
increase in ComEd's total revenues of approximately $302 million (excluding
add-on revenue taxes) on an annual basis. The rates provided in the Rate Order
became effective on January 14, 1995; however, they are being collected
subject to refund as a result of subsequent judicial action. The Rate Order
was appealed by intervenors and ComEd to the Illinois Appellate Court, which
issued a decision on May 30, 1997 affirming the Rate Order in all respects
with the exception of two issues, which it remanded to the ICC for the purpose
of providing further analysis. Those issues related to: (i) the manner in
which certain costs were recovered and which customers should pay those costs,
and (ii) the proper rate of return on common equity for ComEd. As of March 31,
1998, electric operating revenues of approximately $215 million would be
subject to refund in connection with the remanded issues. On April 6, 1998,
the ICC entered an order providing the analysis required by the Appellate
Court and affirming the Rate Order and the associated $302 million revenue
increase on an annual basis. The order is subject to a pending petition for
rehearing and to appeal.
See "Changes in the Electric Utility Industry," subcaption "The 1997 Act"
above, for information regarding the 1997 Act.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd--given the impact of such operations on overall O&M
expenditures and the ability of nuclear power plants to produce electric
energy at a relatively low marginal cost. ComEd operates a large number of
nuclear plants, ranging from the older Dresden and Quad Cities Stations to the
more recently completed LaSalle, Byron and Braidwood Stations, and is intent
upon safe, reliable and efficient operation. These plants were constructed
over a period of time in which technology, construction procedures and
regulatory initiatives and oversight have evolved, with the result that older
plants generally require greater attention and resources to meet regulatory
requirements and expectations as well as to maintain operational reliability.
See "Changes in the Electric Utility Industry," subcaption "ComEd's Response
to Regulatory Changes" above, for information regarding ComEd's cessation of
nuclear generation operations at its Zion Station.
ComEd's Dresden, Zion and LaSalle nuclear generating stations are currently
on the NRC's list of plants that require increased regulatory scrutiny by the
NRC. Dresden Station has been on the list since 1992 and LaSalle and Zion
Stations were added in January 1997. On January 21, 1998, the NRC stated in a
public meeting that although Dresden Station has demonstrated sustained
improved performance that would warrant removal from the list, continued
evidence of cyclical and inconsistent performance at ComEd's other nuclear
generating stations indicated removal of Dresden Station from the list would
not be appropriate at that time. The NRC also acknowledged improvements at
LaSalle Station but concluded that a substantial amount of work remains and
the plant should remain on the list. The NRC also stated that, based on a
determination made prior to the announcement of the cessation of power
operations at the station, Zion should remain on the list. The listing of the
plants does not prevent ComEd from operating the generating units; however, it
does mean that the NRC will devote additional resources to monitoring ComEd's
operating performance and that ComEd will need to work to demonstrate to the
NRC the sustainability of improvements which it believes it has undertaken and
is continuing to implement. Also at the meeting, the NRC noted a declining
performance trend at Quad Cities Station. In a meeting on March 3, 1998, the
NRC stated that weaknesses were observed with respect to certain operations,
maintenance and engineering activities at Quad Cities Station. The NRC has
indicated that it is monitoring ComEd's ability to manage its nuclear
operations in their entirety and that the performance at any one facility will
be viewed by the NRC in context with the performance of ComEd's nuclear
generating group as a whole.
In late January 1997, the NRC also took the unusual step of requiring ComEd
to submit information to allow the NRC to determine what actions, if any,
should be taken to assure that ComEd can safely operate its then six nuclear
generating stations while sustaining performance improvement at each site. The
request also required ComEd to submit information regarding the criteria that
it has
44
<PAGE>
established, or planned to establish, to measure performance and to explain
ComEd's proposed actions if the criteria are not met. The request stated the
NRC staff's concerns with the "cyclical safety performance of ComEd nuclear
stations," noting the presence on the list of plants that require increased
regulatory scrutiny by the NRC of Dresden, LaSalle and Zion Stations at
various times during the past 10 years. It also noted concerns regarding
"ComEd's ability to establish lasting and effective programs that result in
sustained performance improvement." The problems identified by the NRC are
consistent with weaknesses that had been identified in station self-
assessments initiated by ComEd, and management had already undertaken to
develop and implement programs designed to address these issues. ComEd
submitted a response to the NRC on March 28, 1997 and the NRC indicated in an
April 25, 1997 public meeting with representatives of ComEd management that
ComEd's response was generally adequate to demonstrate ComEd's ability to
operate its nuclear generating stations while sustaining performance
improvements. In a November 4, 1997 meeting with the NRC staff, the NRC
indicated that it believes ComEd's nuclear performance has shown improvement,
but that it is too early to conclude that lasting improvement has been
achieved. The NRC noted, as an exception to ComEd's general improving and
sustained performance in its nuclear operations, concerns regarding ComEd's
engineering efforts to resolve longstanding fire protection issues at the Quad
Cities Station. The NRC and representatives of ComEd's management have met,
and will continue to meet periodically in the future, to discuss the status of
recovery and restart efforts and overall performance of the ComEd nuclear
program.
INPO, a nuclear power industry funded organization, also has been critical
of ComEd's nuclear operations and the progress made by ComEd at correcting
problems INPO previously identified. In the past, INPO has raised concerns
with respect to management and performance of ComEd's nuclear operations,
including accountability and the effectiveness of efforts aimed at engaging
the workforce in the improvement process. ComEd continues to address INPO's
concerns.
ComEd has devoted, and intends to continue to devote, significant resources
to the management and operations of its nuclear generating stations. Over the
past several years, it has increased and reinforced station management with
managers drawn from other utilities which have resolved similar operational
and performance issues, including the appointment of a new Chief Nuclear
Officer in late 1997. It has also sought to identify, anticipate and address
operating and performance issues in a safe, cost-effective manner while
seeking to improve the availability and capacity factors of its nuclear
generating units.
ComEd's activities with respect to its nuclear generating stations have
included improvements in operating and personnel procedures and repair and
replacement of equipment and can result in longer unit outages. LaSalle Units
1 and 2 and Quad Cities Units 1 and 2 are currently not operating. It
currently is expected that LaSalle Unit 1 will restart by the end of the third
quarter of 1998 and LaSalle Unit 2 is expected to restart by the end of the
first quarter of 1999. Both units at Quad Cities Station are expected to
return to service by approximately the end of the second quarter of 1998. In
each case, the restart of these units requires the resolution of issues with
the NRC.
The NERC is analyzing electric system reliability and the potential for
electric energy shortages in the summer of 1998 in light of the potential for
continued outages at nuclear plants operated by ComEd and other utilities in
the Midwest power grid. ComEd has taken numerous steps to support the
reliability of its system during the summer of 1998. Such steps include
maximizing available on-system generating capacity during periods of peak
demand, arrangements to purchase over 4,300 MW of power from other utilities,
reinforcements to the transmission systems of ComEd and neighboring utilities
to increase capacity and to provide voltage support, and working with
customers to manage the use of and demand for power. ComEd estimates the
transmission and distribution system upgrades will result in capital
expenditures of approximately $30 million in 1998.
Generating station availability and performance during a year have been
issues in fuel reconciliation proceedings in assessing the prudence of fuel
and purchased power costs during such year. Final ICC orders have been issued
in fuel reconciliation proceedings for years prior to 1994 and
45
<PAGE>
for the year 1995. In 1996, an intervenor filed testimony in the fuel
reconciliation proceeding for 1994 seeking a refund of approximately $90
million relating to nuclear station performance. In March 1998, the ICC Staff
also filed testimony in the fuel reconciliation proceeding for 1994 proposing
a refund of $36 million. The 1997 Act provides that the fuel reconciliation
proceedings for 1994 and 1996 must be concluded by the end of 1998. If refunds
are required in these proceedings, the refunds could have a material adverse
effect on results of operations. The 1997 Act also provides that, because
ComEd eliminated its FAC effective January 1, 1997, the ICC shall not conduct
a fuel reconciliation proceeding for the year 1997 or any subsequent years.
Based on ComEd's most recent study approved by the ICC, decommissioning
costs, including the cost of decontamination and dismantling, are estimated to
aggregate $4.4 billion in current-year (1998) dollars, including a contingency
allowance. ComEd estimates that it will expend approximately $11.6 billion,
including a contingency allowance, for decommissioning costs primarily during
the period from 2007 through 2034. Additionally, ComEd estimates that it will
expend an aggregate of approximately $217 million in current-year (1998)
dollars during the period 2000 through 2014 to maintain Zion Station in a
secured mode until decommissioning begins. All such costs are expected to be
funded by the external decommissioning trusts, which ComEd established in
compliance with Illinois law and into which ComEd has been making annual
contributions. Future decommissioning cost estimates may be significantly
affected by the adoption of or changes to NRC regulations, as well as changes
in the assumptions used in making such estimates, including changes in
technology, available alternatives for the disposal of nuclear waste and
inflation. See Note 1 of Notes to Financial Statements under "Depreciation and
Decommissioning" for additional information regarding decommissioning costs.
Environmental Matters. ComEd is involved in administrative and legal
proceedings concerning air quality, water quality and other matters. The
outcome of these proceedings may require increases in future construction
expenditures and operating expenses and changes in operating procedures. See
Note 22 of Notes to Financial Statements and "Part II. Other Information, Item
1. Legal Proceedings."
RESULTS OF OPERATIONS
Unicom's earnings (loss) per common share were $0.25 for the three months
ended March 31, 1998, compared to $1.21 for the three months ended March 31,
1997, and $(4.90) for the twelve months ended March 31, 1998, compared to
$3.67 for the twelve months ended March 31, 1997. Earnings for the three
months and twelve months ended March 31, 1997 have been restated for a change
in accounting method for revenue recognition and, include the one-time
positive impact of a change in accounting principle of $197 million (after-
tax), or $0.91 per common share. Restated earnings per common share, excluding
the one-time positive effect of the change in accounting principle, were $0.30
and $2.76 for the three months and twelve months ended March 31, 1997,
respectively. Substantially all of the results of operations for Unicom are
the results of operations for ComEd. The results of Unicom's unregulated
subsidiaries currently are not material to the results of Unicom and
subsidiary companies as a whole. As such, the following section discusses the
effect of ComEd's operations on Unicom's financial results.
Net Income for the Three Months Ended March 31, 1998. The decrease in
ComEd's net income in the recent three-month period reflects, among other
factors, mild winter weather, the unfavorable comparison to the one-time
positive impact in the first quarter of 1997 of a change in accounting
principle of $197 million (after-tax) and increased energy costs.
Kilowatthour sales increased 3% during the first quarter of 1998, compared
to the same period in 1997, driven largely by increased sales to wholesale
customers. Kilowatthour sales to retail customers declined slightly due to
milder winter weather conditions experienced during the first quarter of 1998,
partially offset by continued economic growth in ComEd's service territory.
See "Operating Revenues" below for additional information.
46
<PAGE>
Fuel and purchased power costs increased 21% in the first quarter of 1998,
compared to the first quarter of 1997, largely due to higher purchases from
other utilities. See "Purchased Power" below for additional information.
Partially offsetting the lower earnings was a 6% reduction in interest expense
and dividend requirements on preferred and preference stocks, compared to the
same period in 1997, reflecting ComEd's efforts to reduce long-term debt.
O&M expenses decreased by 1% for the first quarter of 1998, compared to the
same period in 1997, as discussed in "Operation and Maintenance Expenses"
below. Excluding the costs of employee separation programs and certain other
one-time employee related costs, O&M expenses decreased by 3% in the first
quarter of 1998, compared to the first quarter of 1997.
In the fourth quarter of 1997, ComEd changed its method of accounting for
revenue recognition, retroactive to January 1, 1997, to record estimated
revenue for service delivered but not yet billed at the end of each accounting
period. The 1997 quarterly results have been restated as required by GAAP.
Restated first quarter 1997 results include the one-time cumulative positive
impact for years prior to 1997 of $197 million (after-tax), or $0.91 per
common share.
Net Income (Loss) for the Twelve Months Ended March 31, 1998. The decrease
in ComEd's net income (loss) in the recent twelve-month period was primarily
due to ComEd's discontinuation of regulatory accounting practices for the
generation portion of its business and other charges recorded in response to
the effectiveness of the 1997 Act. The results for the twelve months ended
March 31, 1998 also include the write-off for the closure of the Zion nuclear
generating station.
ComEd discontinued regulatory accounting practices for the generation
portion of its business in the fourth quarter of 1997 due to the expected
transition of electric generation services to market- based pricing as a
result of the 1997 Act. Accordingly, ComEd's generation-related net regulatory
assets (which represent assets and liabilities properly recorded under
regulatory accounting practices but which would not be recorded under GAAP for
non-regulated entities) were written off, resulting in an extraordinary charge
in the fourth quarter of 1997 of $810 million (after-tax), or $3.75 per common
share.
In addition, as permitted under the 1997 Act, ComEd elected to eliminate its
FAC in December 1997, which resulted in a charge in the fourth quarter of 1997
of $44 million (after-tax), or $0.20 per common share. The reduction includes
$25 million (after-tax), or $0.12 per common share, in net FAC charges billed
to its customers in 1997, which are currently being refunded to customers. The
reduction also includes a write-off of $19 million (after-tax), or $0.08 per
common share, in underrecovered energy costs that ComEd would have been
entitled to recover if the FAC had remained in effect.
Also, the results for the twelve months ended March 31, 1998 include the
write down of ComEd's investment in uranium-related properties to reflect
costs which are not expected to be recovered in a competitive market. The
write down resulted in a charge of $60 million (after-tax), or $0.28 per
common share, in the fourth quarter of 1997.
The twelve months ended March 31, 1998 reflect a change in the accounting
method for revenue recognition to record ComEd's revenues associated with
service which has been provided to customers but has not yet been billed at
the end of each accounting period, retroactive to January 1, 1997. This change
in accounting method, included in restated three months and twelve months
ended March 31, 1997 results, had a cumulative one-time positive impact for
years prior to 1997 of $197 million (after-tax), or $0.91 per common share.
The fourth quarter of 1997 also includes a charge of $523 million (after-
tax), or $2.42 per common share, reflecting the write-off of the unrecoverable
portion of the cost of ComEd's Zion Station plant and inventories and a
liability for future closing costs, resulting from the decision in January
1998 to cease nuclear generation operations at Zion Station.
47
<PAGE>
ComEd's kilowatthour sales, including sales to wholesale customers,
increased 5% in the twelve months ended March 31, 1998, compared to the same
period last year, as discussed in "Operating Revenues" below. O&M expenses
increased by 9% in the same period, as discussed in "Operation and Maintenance
Expenses" below.
Also reducing operating results for the recent twelve-month period was a 26%
increase in fuel and purchased power costs, largely due to higher purchases
from other utilities, as discussed in "Purchased Power" below. In addition a
1% increase in depreciation expense, primarily due to an increase in certain
nuclear plant depreciation, as discussed in "Depreciation" below.
Operating Revenues. ComEd's electric operating revenues reflect revenues
from sales to ultimate consumers (including residential, commercial and
industrial customers within its service territory), revenues from sales for
resale (i.e., sales to wholesale customers, principally other electric
utilities), and revenues from collections under its FAC for years prior to
1997 (which were intended to recover variations in ComEd's fuel cost for
generating electric energy and the energy portion of purchased power costs in
relation to the amount included in ComEd's base rates). Operating revenues are
affected by kilowatthour sales and rate levels. Kilowatthour sales, in turn,
are affected by weather, the level of economic activity within ComEd's service
area, and off-system or wholesale sales to other utilities. Off-system sales
are affected by a number of factors, including nuclear generating availability
and performance.
Operating revenues increased $40 million in the three months ended March 31,
1998, compared to the three months ended March 31, 1997, reflecting a 3%
increase in total kilowatthour sales, including an 18% increase in sales to
wholesale customers. Although total kilowatthour sales to ultimate consumers
decreased slightly primarily due to milder winter weather conditions, sales to
commercial and industrial customers increased, reflecting continued economic
growth. Operating revenues increased $192 million in the twelve months ended
March 31, 1998, compared to the twelve months ended March 31, 1997, reflecting
a 5% increase in total kilowatthour sales, primarily due to continued economic
growth and increased sales to wholesale customers.
Fuel Costs. Changes in fuel expense for the three months and twelve months
ended March 31, 1998, compared to the same periods ended March 31, 1997,
primarily resulted 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
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Cost of fuel consumed (per million Btu):
Nuclear...................................... $0.63 $0.55 $0.59 $0.54
Coal......................................... $1.96 $2.45 $2.17 $2.42
Oil.......................................... $3.37 $3.66 $3.70 $3.68
Natural gas.................................. $2.39 $2.98 $2.58 $2.77
Average all fuels............................ $1.25 $1.30 $1.32 $1.24
Net generation of electric energy (millions of
kilowatthours)............................... 17,327 22,319 80,869 91,875
Fuel sources of kilowatthour generation:
Nuclear...................................... 58% 62% 56% 64%
Coal......................................... 36 36 39 33
Oil.......................................... 1 -- -- 1
Natural gas.................................. 5 2 5 2
--------- --------- --------- ---------
100% 100% 100% 100%
========= ========= ========= =========
</TABLE>
The decrease in net generation of electric energy is due to the sale of
Kincaid and State Line Stations and lower nuclear plant availability. The
decrease in nuclear generation as a percentage of total generation for the
three months and twelve months ended March 31, 1998, compared to the prior
48
<PAGE>
periods, is primarily due to outages at certain of ComEd's nuclear generating
stations. See "Regulation," subcaption "Nuclear Matters" above, for
information regarding outages at certain of ComEd's nuclear generating
stations.
Fuel Supply. Compared to other utilities, ComEd has relatively low average
fuel costs as a result of its reliance predominantly on lower cost nuclear
generation. ComEd's coal costs, however, are high compared to those of other
utilities. ComEd's western coal contracts and its rail contracts for delivery
of the western coal provide for the purchase of certain coal at prices
substantially above currently prevailing market prices, and ComEd has
significant purchase commitments under its contracts. In addition, as of March
31, 1998, ComEd had coal reserves of $263 million. In prior years, ComEd's
commitments for the purchase of coal exceeded its requirements. Rather than
take all the coal it was required to take, ComEd agreed to purchase the coal
in place in the form of coal reserves. For additional information concerning
ComEd's coal purchase commitments see "Liquidity and Capital Resources" above
and for information concerning ComEd's fuel reconciliation proceedings see
"Regulation," subscription "Nuclear Matters" above. Also see Note 1 of Notes
to Financial Statements, under "Coal Reserves" and "Fuel Adjustment Clause",
concerning ComEd's coal reserves and FAC.
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of ComEd's generating units and the availability and
cost of power from other utilities. Purchased power increased $156 million and
$378 million for the three months and twelve months ended March 31, 1998,
compared to the same periods in 1997, primarily due to outages at certain of
ComEd's nuclear generating stations and the commencement of the power purchase
agreements associated with the sale of State Line and Kincaid Stations. See
"Regulation," subcaption "Nuclear Matters" above, for information regarding
outages at certain of ComEd's nuclear generating stations.
The number and average cost of kilowatthours purchased were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH TWELVE MONTHS ENDED
31 MARCH 31
-------------- ---------------------
1998 1997 1998 1997
------ ------ ---------- ---------
<S> <C> <C> <C> <C>
Kilowatthours (millions)............. 8,685 3,452 21,905 8,111
Cost per kilowatthour................ 2.54c 1.86c 2.54c 2.20c
</TABLE>
Purchased power is expected to increase in the year 1998, compared to the
year 1997, due to expected increased kilowatthour sales, lower nuclear
generation, increased sales to other utilities and higher costs for power
purchased from other utilities.
Operation and Maintenance Expenses. O&M expenses include the expenses
associated with operating and maintaining ComEd's generation, transmission and
distribution assets, as well as administrative overhead and support. Given the
variety of expense categories covered, there are a number of factors which
affect the level of such expenses within any given period. Two major
components of such expenses, however, are the costs associated with operating
and maintaining ComEd's nuclear and fossil generating facilities. Generating
station expenses are affected by the cost of materials, regulatory
requirements and expectations, the age of facilities and cost control efforts.
During the three months and twelve months ended March 31, 1998, the
aggregate level of O&M expenses decreased 1% and increased 9%, respectively,
compared to the same periods ended March 31, 1997. The recent twelve month
period includes an increase in the level of nuclear generating station
expenses, as discussed below. Additional factors in each period also affected
the level of O&M expenses.
O&M expenses associated with nuclear generating stations decreased $41
million and increased $24 million during the three months and twelve months
ended March 31, 1998, respectively,
49
<PAGE>
compared to the same periods ended March 31, 1997. The decrease in the recent
three-month period was primarily due to the permanent cessation of nuclear
generation operations at Zion Station. The increase in the recent twelve-month
period is primarily due to activities associated with the repair, replacement
and improvement of nuclear generating facility equipment, partially offset by
the permanent cessation of nuclear generation operations at Zion Station.
Beginning in 1995, ComEd increased the number and scope of maintenance
activities associated with its nuclear generating stations. Such efforts are
the result of station performance evaluations performed to identify the
sources and causes of unplanned equipment repairs. The goal of such efforts is
to design and implement cost effective repairs and improvements to increase
station availability. The efforts begun in 1995 are expected to continue
through 1998. See "Changes in the Electric Utility Industry," subcaption
"ComEd's Response to Regulatory Changes," regarding the permanent cessation of
nuclear operations at Zion Station.
The increase in O&M expenses associated with nuclear generating stations for
the recent twelve- month period has been driven by ComEd's objective to
improve station availability, as well as to meet regulatory requirements and
expectations. ComEd is pursuing a program to improve the quality of nuclear
operations, including safety and efficiency, which also is expected to achieve
a longer term goal of improved availability and to be positioned to take
advantage of opportunities in a more competitive market. Over the past several
years, ComEd has increased and reinforced station management with managers
drawn from other utilities which have resolved similar operating issues. It
has also sought to identify, anticipate and address nuclear station operation
and performance issues in a safe, cost-effective manner, while seeking to
improve the availability and capacity factors of its nuclear generating units.
Such activities have included improvements in operating and personnel
procedures and repair and replacement of equipment, and can result in longer
unit outages. Such activities have involved increased maintenance and repair
expenses in recent years.
During the three months and twelve months ended March 31, 1998, O&M expenses
associated with fossil generating stations increased $9 million and $53
million, respectively, compared to the same periods ended March 31, 1997. The
increases related to the fossil generating stations are primarily due to
increases in plant refurbishment costs, partially offset by a reduction of
personnel costs in the recent three months and twelve months ended, compared
to the same periods ended March 31, 1997.
O&M expenses associated with ComEd's transmission and distribution system
increased $13 million and $22 million in the three months and twelve months
ended March 31, 1998, respectively, compared to the same periods ended March
31, 1997. The increases in the recent three months and twelve months ended
reflect higher maintenance costs, including costs associated with emergency
storm restoration of electric service. O&M expenses associated with customer-
related activities increased $6 million and $19 million in the three months
and twelve months ended March 31, 1998, respectively, compared to the same
periods ended March 31, 1997, primarily due to an increase in uncollectible
accounts and personnel costs.
O&M expenses also include employee benefits expenses. Since 1995, ComEd has
reduced the size of its workforce by offering incentives for employees to
leave the company voluntarily. Such incentives included both current payments
and earlier eligibility for post-retirement health care benefits, in addition
to certain other one-time employee related costs, resulted in charges of $16
million and $3 million for the three months ended March 31, 1998 and 1997,
respectively, and $52 million and $18 million for the twelve months ended
March 31, 1997, respectively.
Other employee benefits expenses, excluding the effects of employee
separation plans and certain other one-time employee related costs, decreased
$10 million and $26 million for the three months and twelve months ended March
31, 1998, respectively, compared to the same periods ended March 31, 1997. The
decreases for the three months and twelve months ended March 31, 1998 are
primarily due to a reduction in medical costs for active and retired
employees.
50
<PAGE>
O&M expenses also reflect $41 million and $38 million for employee incentive
compensation plan costs for the twelve months ended March 31, 1998 and 1997,
respectively. The payments, which were made partly in cash and partly in
shares of Unicom common stock, were made under Unicom's Incentive Plans as the
result of the achievements during the years 1997 and 1996, respectively, of
specified financial performance, operating performance and increased
shareholder value.
O&M expenses for the twelve months ended March 31, 1998 also include $25
million for the additional write-off of obsolete materials and supplies,
compared to the twelve months ended March 31, 1997. O&M expenses associated
with certain administrative and general costs increased $8 million and $39
million for the three months and twelve months ended March 31, 1998,
respectively, compared to the same periods ended March 31, 1997. The increase
in the recent twelve-month period is due to a variety of reasons including an
increase in the provision for vacation pay liability, and costs associated
with information services and supply management. The effects of inflation have
also increased O&M expenses during the years and are also reflected in the
increases and decreases discussed herein.
Depreciation. Depreciation expense decreased for the three months and
increased for the twelve months ended March 31, 1998, compared to the same
periods ended March 31, 1997. The decrease in the recent three-month period is
primarily due to the retirement of Zion Station and the sale of State Line and
Kincaid Stations. The increase in the recent twelve-month period is a result
of additional nuclear plant depreciation and additions to plant in service,
partially offset by the reduction of depreciation expense due to the
retirement of Zion Station and the sale of State Line and Kincaid Stations.
The additional depreciation on ComEd's nuclear generating units primarily
relates to its steam generators at Byron Unit 1 and Braidwood Unit 1, which
are expected to be replaced prior to year-end 1998. This additional
depreciation resulted in charges of $17 million and $15 million for the three
months ended March 31, 1998 and 1997, respectively, and $61 million and
$45 million for the twelve months ended March 31, 1998 and 1997, respectively.
ComEd also continues to consider the possibility of additional depreciation
options. See "Depreciation and Decommissioning" in Note 1 of Notes to
Financial Statements.
Interest on Debt. Changes in interest on long-term debt and notes payable
for the three months and twelve months ended March 31, 1998, compared to the
same periods ended March 31, 1997, were due to changes in average interest
rates and in the amounts of long-term debt and notes payable outstanding.
Changes in interest on ComEd's long-term debt also reflected new issues of
debt, the retirement and early redemption of debt, and the retirement and
redemption of issues which were refinanced at generally lower rates of
interest. The average amounts of ComEd's 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
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Long-term debt outstanding:
Average amount (millions)... $5,961 $6,519 $6,102 $6,599
Average interest rate....... 7.55% 7.68% 7.64% 7.66%
Notes payable outstanding:
Average amount (millions)... $ 213 $ 138 $ 172 $ 192
Average interest rate....... 5.95% 5.74% 5.99% 5.72%
</TABLE>
Decommissioning. The staff of the SEC has questioned certain of the current
accounting practices of the electric utility industry, including ComEd,
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 FASB is reviewing the
accounting for nuclear decommissioning costs and issued an exposure draft in
February 1996 requesting written comment.
51
<PAGE>
If current electric utility industry accounting practices for such
decommissioning costs are changed, annual provisions for decommissioning could
increase and the estimated cost for the decommissioning of operating nuclear
plants after retirement could be recorded as a liability rather than as
accumulated depreciation. Decommissioning costs of currently retired nuclear
plants are recorded as a liability. Unicom and ComEd do not believe that such
changes, if required, would have an adverse effect on the results of
operations due to ComEd's ability to recover decommissioning costs through
rates.
Other Items. The amounts of AFUDC reflect changes in the average levels of
investment subject to AFUDC and changes in the average annual capitalization
rates as discussed in Note 1 of Notes to Financial Statements under "AFUDC and
Interest Capitalized." ComEd discontinued SFAS No. 71 regulatory accounting
practices in December 1997 for the generation-related portion of its business.
As a result, beginning in 1998, ComEd capitalizes interest costs on its
generation-related construction work in progress and nuclear fuel in process.
Interest costs capitalized were $2 million for the three months and twelve
months ended March 31, 1998. AFUDC and interest capitalized do not contribute
to the current cash flow of Unicom or ComEd.
ComEd's ratios of earnings to fixed charges for the twelve months ended
March 31, 1998 and December 31, 1997 were 0.53 and 0.58, respectively. ComEd's
ratios of earnings to fixed charges and preferred and preference stock
dividend requirements for the twelve months ended March 31, 1998 and December
31, 1997 were 0.45 and 0.49, respectively. Earnings for the twelve months
ended March 31, 1998 and December 31, 1997 were inadequate to cover fixed
charges by approximately $282 million and $259 million, respectively, and
fixed charges and preferred and preference stock dividend requirements by
approximately $381 million and $359 million, respectively. The deficiency is
principally attributable to the earnings impact of the closure of Zion
Station.
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
ComEd'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.
52
<PAGE>
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53
<PAGE>
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 March 31, 1998 and December 31,
1997, and the related statements of consolidated operations, retained earnings
(deficit) and cash flows for the three-month and twelve-month periods ended
March 31, 1998 and 1997. 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 March 31, 1998 and December 31, 1997,
and the results of their operations and their cash flows for the three-month
and twelve-month periods ended March 31, 1998 and 1997, in conformity with
generally accepted accounting principles.
As discussed in Note 3, effective January 1, 1997, the Company changed its
method of accounting for revenue recognition.
Arthur Andersen LLP
Chicago, Illinois
May 11, 1998
54
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months and
twelve months ended March 31, 1998 and 1997 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 prices, regulation, population, business activity, competition,
taxes, environmental control, energy use, fuel, cost of labor, 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
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Electric Operating Reve-
nues................... $1,709,613 $1,669,585 $ 7,113,116 $6,920,643
---------- ---------- ----------- ----------
Electric Operating Ex-
penses and Taxes:
Fuel................... $ 231,376 $ 309,068 $ 1,161,746 $1,182,948
Purchased power........ 220,730 64,307 556,478 178,167
Operation.............. 343,990 400,210 1,658,240 1,548,940
Maintenance............ 220,759 168,424 742,064 657,373
Depreciation........... 247,758 249,120 984,515 970,373
Recovery of regulatory
assets................ -- 3,818 11,454 15,272
Taxes (except income).. 206,966 201,101 805,032 765,638
Income taxes--
Current--Federal..... 51,501 50,707 215,143 248,320
--State.............. 10,591 18,043 57,835 71,046
Deferred--Federal--
net................. (7,016) 3,313 45,782 119,564
--State--net......... (563) (4,986) 6,967 10,948
Investment tax credits
deferred--net......... (7,160) (7,897) (30,278) (34,109)
---------- ---------- ----------- ----------
$1,518,932 $1,455,228 $ 6,214,978 $5,734,480
---------- ---------- ----------- ----------
Electric Operating In-
come................... $ 190,681 $ 214,357 $ 898,138 $1,186,163
---------- ---------- ----------- ----------
Other Income and (Deduc-
tions):
Interest on long-term
debt.................. $ (112,445) $ (125,109) $ (465,866) $ (505,277)
Interest on notes pay-
able.................. (3,119) (1,951) (10,302) (11,007)
Allowance for funds
used during construc-
tion--
Borrowed funds....... 1,576 4,052 16,079 18,580
Equity funds......... 1,584 5,080 20,274 21,158
Income taxes applicable
to nonoperating
activities............ 2,884 366 13,748 3,902
Provision for dividends
on company-obligated
mandatorily redeemable
preferred securities
of subsidiary trusts
holding solely the
Company's subordinated
debt securities....... (7,428) (6,648) (29,640) (19,368)
Loss on nuclear plant
closure............... -- -- (885,611) --
Income tax effect of
nuclear plant closure. -- -- 362,952 --
Miscellaneous--net..... (1,900) (8,872) (89,351) (25,399)
---------- ---------- ----------- ----------
$ (118,848) $ (133,082) $(1,067,717) $ (517,411)
---------- ---------- ----------- ----------
Net Income (Loss) Before
Extraordinary Item and
Cumulative Effect of
Change in Accounting
Principle.............. $ 71,833 $ 81,275 $ (169,579) $ 668,752
Extraordinary Loss, Less
Applicable Income
Taxes.................. -- -- (810,335) --
Cumulative Effect of
Change in Accounting
Principle.............. -- 196,700 -- 196,700
---------- ---------- ----------- ----------
Net Income (Loss)....... $ 71,833 $ 277,975 $ (979,914) $ 865,452
Provision for Dividends
on Preferred and
Preference Stocks...... 14,547 15,527 59,506 63,437
---------- ---------- ----------- ----------
Net Income (Loss) on
Common Stock........... $ 57,286 $ 262,448 $(1,039,420) $ 802,015
========== ========== =========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
55
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $1,086 million
and $1,131 million, respectively)................. $27,264,888 $27,519,365
Less--Accumulated provision for depreciation....... 11,737,771 11,645,985
----------- -----------
$15,527,117 $15,873,380
Nuclear fuel, at amortized cost.................... 929,631 906,043
----------- -----------
$16,456,748 $16,779,423
----------- -----------
Investments:
Nuclear decommissioning funds...................... $ 2,087,093 $ 1,855,697
Subsidiary companies............................... 50,031 48,605
Other investments, at cost......................... 44,398 39,002
----------- -----------
$ 2,181,522 $ 1,943,304
----------- -----------
Current Assets:
Cash............................................... $ 3,468 $ --
Temporary cash investments......................... 76,576 72,634
Special deposits................................... 271 271
Receivables--
Customers........................................ 881,418 873,418
Other............................................ 58,140 130,537
Provisions for uncollectible accounts............ (17,432) (17,544)
Coal and fuel oil, at average cost................. 156,850 120,664
Materials and supplies, at average cost............ 255,790 255,338
Deferred income taxes related to current assets and
liabilities....................................... 72,651 179,493
Prepayments and other.............................. 135,443 125,507
----------- -----------
$ 1,623,175 $ 1,740,318
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 1,452,013 $ 1,685,235
Coal reserves...................................... 167,524 194,769
Other.............................................. 72,880 115,354
----------- -----------
$ 1,692,417 $ 1,995,358
----------- -----------
$21,953,862 $22,458,403
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
56
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity................................. $ 4,838,164 $ 4,866,438
Preferred and preference stocks without mandatory
redemption requirements............................ 506,920 507,053
Preference stock subject to mandatory redemption re-
quirements......................................... 174,328 174,328
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the
Company's subordinated debt securities* ........... 350,000 350,000
Long-term debt ..................................... 5,560,390 5,562,883
----------- -----------
$11,429,802 $11,460,702
----------- -----------
Current Liabilities:
Notes payable....................................... $ 379,650 $ 158,150
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations..... 408,421 772,831
Accounts payable.................................... 474,781 490,124
Accrued interest.................................... 140,534 167,807
Accrued taxes....................................... 234,096 198,556
Dividends payable................................... 102,896 106,083
Customer deposits................................... 54,023 55,214
Accrued plant closing costs......................... 119,641 135,000
Other............................................... 133,314 164,897
----------- -----------
$ 2,047,356 $ 2,248,662
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,768,112 $ 3,839,607
Nuclear decommissioning liability for retired
plants............................................. 1,202,600 1,301,000
Accumulated deferred investment tax credits......... 587,490 602,122
Accrued spent nuclear fuel disposal fee and related
interest........................................... 701,756 692,673
Obligations under capital leases.................... 424,343 437,950
Regulatory liabilities.............................. 607,623 698,750
Other............................................... 1,184,780 1,176,937
----------- -----------
$ 8,476,704 $ 8,749,039
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$21,953,862 $22,458,403
=========== ===========
</TABLE>
*As described in Note 11 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
57
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Stock Equity:
Common stock, $12.50 par value per share--
Outstanding--214,232,430 shares and 214,228,077
shares, respectively............................. $ 2,677,906 $ 2,677,851
Premium on common stock and other paid-in capital.. 2,223,642 2,223,564
Capital stock and warrant expense.................. (15,805) (15,805)
Retained earnings (deficit)........................ (47,579) (19,172)
----------- -----------
$ 4,838,164 $ 4,866,438
----------- -----------
Preferred and Preference Stocks Without Mandatory
Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--13,499,549 shares ................... $ 504,957 $ 504,957
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--61,724 shares and 65,912 shares, re-
spectively....................................... 1,963 2,096
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding............................. -- --
----------- -----------
$ 506,920 $ 507,053
----------- -----------
Preference Stock Subject to Mandatory Redemption Re-
quirements:
Preference stock, cumulative, without par value--
Outstanding--2,058,560 shares..................... $ 205,016 $ 205,016
Current redemption requirements for preference
stock included in current liabilities............. (30,688) (30,688)
----------- -----------
$ 174,328 $ 174,328
----------- -----------
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely the
Company's Subordinated Debt Securities.............. $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1998 through 2002--6.00% to 9 3/8%...... $ 880,000 $ 1,060,000
Maturing 2003 through 2012--3.70% to 8 3/8%...... 1,440,400 1,440,400
Maturing 2013 through 2022--5.85% to 9 7/8%...... 1,791,000 1,791,000
Maturing 2023--7 3/4% to 8 3/8%.................. 560,000 560,000
----------- -----------
$ 4,671,400 $ 4,851,400
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%.................................. 98,298 100,298
Pollution control obligations, due 2007 through
2014--3.65% to 5 7/8%............................. 142,200 142,200
Other long-term debt............................... 834,845 1,016,889
Deposit for retirement of long-term debt........... (4,064) --
Current maturities of long-term debt included in
current liabilities............................... (136,837) (501,445)
Unamortized net debt discount and premium.......... (45,452) (46,459)
----------- -----------
$ 5,560,390 $ 5,562,883
----------- -----------
$11,429,802 $11,460,702
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
58
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Balance at Beginning of Period..... $(19,172) $1,157,956 $1,334,714 $ 875,547
Add--Net income (loss)............. 71,833 277,975 (979,914) 865,452
-------- ---------- ---------- ----------
$ 52,661 $1,435,931 $ 354,800 $1,740,999
-------- ---------- ---------- ----------
Deduct--
Dividends declared on--
Common stock................... $ 85,693 $ 85,690 $ 342,766 $ 342,744
Preferred and preference
stocks........................ 14,547 15,527 59,179 63,108
Other capital stock
transactions--net.............. -- -- 434 433
-------- ---------- ---------- ----------
$100,240 $ 101,217 $ 402,379 $ 406,285
-------- ---------- ---------- ----------
Balance at End of Period (Includes
$355 million of appropriated
retained earnings at March 31,
1998)............................. $(47,579) $1,334,714 $ (47,579) $1,334,714
======== ========== ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
59
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Cash Flow From Operating Activi-
ties:
Net income (loss).............. $ 71,833 $ 277,975 $ (979,914) $ 865,452
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortiza-
tion........................ 260,719 258,714 1,034,336 1,006,783
Deferred income taxes and in-
vestment tax credits--net... 24,500 (9,633) (314,755) 99,016
Extraordinary loss related to
write-off of certain net
regulatory assets........... -- -- 810,335 --
Cumulative effect of a change
in accounting principle..... -- (196,700) -- (196,700)
Loss on nuclear plant
closure..................... -- -- 885,611 --
Provisions/(payments) for
revenue refunds............. (34,504) -- 10,966 --
Equity component of allowance
for funds used during
construction................ (1,584) (5,080) (20,274) (21,158)
Recovery of regulatory as-
sets........................ -- 3,818 11,454 15,272
Provisions/(payments) for li-
ability for separation
costs--net.................. 7,425 (626) 24,037 1,790
Net effect on cash flows of
changes in:
Receivables................ 64,285 102,992 (17,513) 60,196
Coal and fuel oil.......... (36,186) (32,275) 15,787 (27,970)
Materials and supplies..... (3,739) (30) 37,950 10,627
Accounts payable excluding
separation costs--net..... (21,958) (38,736) (4,901) (16,099)
Accrued interest and taxes. 8,267 61,392 (59,590) (25,273)
Other changes in certain
current assets and
liabilities............... 16,704 36,168 274,449 194,274
Other--net................... 58,166 65,902 170,179 167,955
--------- --------- ---------- -----------
$ 413,928 $ 523,881 $1,878,157 $ 2,134,165
--------- --------- ---------- -----------
Cash Flow From Investing Activi-
ties:
Construction expenditures...... $(170,986) $(209,706) $ (930,905) $ (878,744)
Nuclear fuel expenditures...... (60,549) (48,773) (197,149) (296,187)
Sale on generating plants...... 177,454 -- 238,245 --
Equity component of allowance
for funds used during
construction.................. 1,584 5,080 20,274 21,158
Contributions to nuclear
decommissioning funds......... (80,077) (80,181) (114,721) (116,284)
Other investments and special
deposits...................... (861) (24,302) 18,739 (24,307)
--------- --------- ---------- -----------
$(133,435) $(357,882) $ (965,517) $(1,294,364)
--------- --------- ---------- -----------
Cash Flow From Financing Activi-
ties:
Issuance of securities--
Long-term debt................ $ -- $ 297,663 $ -- $ 496,565
Company-obligated mandatorily
redeemable preferred securi-
ties of subsidiary trusts
holding solely the Company's
subordinated debt securi-
ties......................... -- 150,000 -- 150,000
Capital stock................. 133 199 222 843
Retirement and redemption of
securities--
Long-term debt................ (364,044) (501,911) (596,901) (933,855)
Capital stock................. (133) (199) (44,045) (44,687)
Deposits and securities held
for retirement and redemption
of securities................. (4,064) (2,331) (1,733) 1,287
Premium paid on early redemp-
tion of long-term debt........ -- (9,500) -- (9,500)
Cash dividends paid on capital
stock......................... (110,854) (105,456) (432,314) (428,028)
Proceeds from sale/leaseback
of nuclear fuel............... 16,565 44,470 122,049 236,875
Nuclear fuel lease principal
payments...................... (32,186) (49,550) (149,048) (205,241)
Increase (Decrease) in short-
term borrowings............... 221,500 1,000 249,900 (105,800)
--------- --------- ---------- -----------
$(273,083) $(175,615) $ (851,870) $ (841,541)
--------- --------- ---------- -----------
Increase (Decrease) in Cash and
Temporary Cash Investments..... $ 7,410 $ (9,616) $ 60,770 $ (1,740)
Cash and Temporary Cash
Investments at Beginning of
Period......................... 72,634 28,890 19,274 21,014
--------- --------- ---------- -----------
Cash and Temporary Cash Invest-
ments at End of Period......... $ 80,044 $ 19,274 $ 80,044 $ 19,274
========= ========= ========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
60
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
See Unicom's Note 1 of Notes to Financial Statements for a discussion of
significant accounting policies, except for the following specific policies
discussed below and the subcaption "Earnings per Share" in Unicom's Note 1.
Income Taxes. ComEd is included in the consolidated federal and state income
tax returns filed by Unicom. Current and deferred income taxes of the
consolidated group are allocated to ComEd as if ComEd filed separate tax
returns. 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.
Interest. Total interest costs incurred on debt, leases and other
obligations were $137 million and $152 million for the three months ended
March 31, 1998 and 1997, respectively, and $573 million and $614 million for
the twelve months ended March 31, 1998 and 1997, respectively.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months and
twelve months ended March 31, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capital-
ized)............................. $ 150,537 $ 157,735 $ 495,062 $ 534,623
Income taxes (net of refunds)...... $ -- $ 6,998 $ 274,370 $ 245,918
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Capital lease obligations incurred... $ 17,996 $ 46,397 $ 130,011 $ 241,879
</TABLE>
(2) ACCOUNTING EFFECTS RELATED TO THE 1997 ACT. See Unicom's Note 2 of Notes
to Financial Statements, except for EPS information.
(3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. See Unicom's Note
3 of Notes to Financial Statements, except for pro forma and EPS information.
The following pro forma information reflects the financial results for the
twelve months ended March 31, 1997 as if the new accounting method had been in
effect for the full twelve-month period, excluding the cumulative effect of a
change in accounting principle (unaudited):
<TABLE>
<CAPTION>
(THOUSANDS
OF
DOLLARS)
<S> <C>
Net Income........................................................... $663,712
</TABLE>
(4) RATE MATTERS. See Unicom's Note 4 of Notes to Financial Statements.
(5) CLOSURE AND SALE OF PLANTS. See Unicom's Note 5 of Notes to Financial
Statements, except for EPS information.
61
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(6) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK. At March 31, 1998,
the authorized shares of capital stock were: common stock--250,000,000 shares;
preference stock--22,368,560 shares; $1.425 convertible preferred stock--
61,724 shares; and prior preferred stock--850,000 shares. The preference and
prior preferred 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 shareholders, with the
right to cumulate votes in all elections for directors.
See Unicom's Note 2 regarding ComEd's application to the ICC for the
proposed issuance of up to $3.4 billion of securities to refinance debt and
equity, as permitted under the 1997 Act.
(7) COMMON EQUITY. At March 31, 1998, shares of common stock were reserved
for the following purposes:
<TABLE>
<S> <C>
Conversion of $1.425 convertible preferred stock................... 62,958
Conversion of warrants............................................. 25,535
------
88,493
======
</TABLE>
Shares of common stock issued for the three months and twelve months ended
March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Conversion of $1.425 convertible
preferred stock...................... 4,269 6,382 7,148 27,727
Conversion of warrants................ 84 181 265 1,476
--------- --------- --------- ----------
4,353 6,563 7,413 29,203
========= ========= ========= ==========
</TABLE>
At March 31, 1998 and December 31, 1997, 76,607 and 76,868 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.
ComEd's retained earnings account had a deficit balance of $48 million and
$19 million at March 31, 1998 and December 31, 1997, respectively. As of March
31, 1998 and December 31, 1997, $355 million and $384 million, respectively,
of retained earnings have been appropriated for future dividend payments.
See Unicom's Note 2 regarding ComEd's application to the ICC for the
proposed issuance of up to $3.4 billion of securities to refinance debt and
equity, as permitted under the 1997 Act.
(8) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN. See Unicom's Note 8 of
Notes to Financial Statements, except for EPS information.
(9) PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION
REQUIREMENTS. See Unicom's Note 9 of Notes to Financial Statements.
(10) PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS. See
Unicom's Note 10 of Notes to Financial Statements.
62
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(11) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY THE COMPANY'S SUBORDINATED DEBT SECURITIES.
See Unicom's Note 11 of Notes to Financial Statements.
(12) LONG-TERM DEBT. See Unicom's Note 12 of Notes to Financial Statements.
(13) LINES OF CREDIT. See the first paragraph of Unicom's Note 13 of Notes
to Financial Statements.
(14) DISPOSAL OF SPENT NUCLEAR FUEL. See Unicom's Note 14 of Notes to
Financial Statements.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS. See Unicom's Note 15 of Notes to
Financial Statements.
(16) PENSION AND POSTRETIREMENT BENEFITS. See Unicom's Note 16 of Notes to
Financial Statements.
(17) SEPARATION PLAN COSTS. See Unicom's Note 17 of Notes to Financial
Statements, except for EPS information.
(18) INCOME TAXES. The components of the net deferred income tax liability
at March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Deferred income tax liabilities:
Accelerated cost recovery and liberalized
depreciation, net of removal costs.................. $3,991,973 $4,051,191
Overheads capitalized................................ 123,259 131,509
Repair allowance..................................... 227,650 231,697
Regulatory assets recoverable through future rates... 690,442 785,354
Deferred income tax assets:
Postretirement benefits.............................. (314,733) (305,220)
Unamortized investment tax credits................... (197,855) (206,112)
Regulatory liabilities to be settled through future
rates............................................... (607,623) (698,750)
Nuclear plant closure................................ (74,708) (194,244)
Other--net........................................... (142,944) (135,311)
---------- ----------
Net deferred income tax liability..................... $3,695,461 $3,660,114
========== ==========
</TABLE>
The $35 million increase in the net deferred income tax liability from
December 31, 1997 to March 31, 1998 is comprised of $39 million in deferred
income tax expenses reflected in operations and a $4 million decrease in
regulatory assets net of regulatory liabilities pertaining to income taxes for
the period. The amount of regulatory assets included in deferred income tax
liabilities primarily relates to the equity component of AFUDC which is
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. The amount of other
regulatory liabilities included in deferred income tax assets primarily
relates to deferred income taxes provided at rates in excess of the current
statutory rate.
63
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of net income tax expense charged to continuing operations
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Electric operating income:
Current income taxes.............. $ 62,092 $ 68,750 $ 272,978 $319,366
Deferred income taxes............. (7,579) (1,673) 52,749 130,512
Investment tax credits deferred--
net.............................. (7,160) (7,897) (30,278) (34,109)
Other (income) and deductions,
primarily deferred income taxes in
1997.............................. (10,195) (283) (417,537) (3,543)
--------- --------- --------- --------
Net income taxes charged (credited)
to continuing operations.......... $ 37,158 $ 58,897 $(122,088) $412,226
========= ========= ========= ========
</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, 1998
and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Pre-tax book income (loss) (thou-
sands)........................... $ 108,991 $ 140,172 $(291,667) $1,080,978
Effective income tax rate......... 34.1% 42.0% 41.9% 38.1%
</TABLE>
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Federal income taxes computed at
statutory rate...................... $ 38,147 $ 75,310 $(102,083) $404,592
Equity component of AFUDC which was
excluded from taxable income........ (89) (1,778) (6,630) (7,405)
Amortization of investment tax
credits, net of deferred income
taxes............................... (9,210) (7,897) (32,328) (34,109)
State income taxes, net of federal
income taxes........................ 6,134 11,647 1,272 56,625
Differences between book and tax
accounting, primarily property-
related deductions.................. 2,176 (18,385) 17,681 (7,477)
-------- --------- --------- --------
Net income taxes charged (credited)
to continuing operations............ $ 37,158 $ 58,897 $(122,088) $412,226
======== ========= ========= ========
</TABLE>
The effects of an income tax refund related to prior years were recorded in
the third quarter of 1996, resulting in a positive impact of $26 million
(after-tax).
64
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
(19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C>
Illinois public utility revenue........... $ 57,682 $ 51,755 $234,276 $220,306
Illinois invested capital................. -- 26,190 73,314 104,699
Illinois electricity distribution tax..... 26,718 -- 26,718 --
Municipal utility gross receipts.......... 42,551 41,103 169,542 168,240
Real estate............................... 39,631 39,168 150,642 124,025
Municipal compensation.................... 19,871 19,110 79,047 78,559
Other--net................................ 20,513 23,775 71,493 69,809
--------- --------- -------- --------
$ 206,966 $ 201,101 $805,032 $765,638
========= ========= ======== ========
</TABLE>
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
ComEd's real estate taxes reflect a credit of $23 million, recorded in the
second quarter of 1996, which related to the year 1995.
(20) LEASE OBLIGATIONS. See the first and second paragraphs of Unicom's Note
20 of Notes to Financial Statements.
Future minimum rental payments at March 31, 1998 for operating leases are
estimated to aggregate $320 million, including $30 million in 1998, $37
million in 1999, $35 million in 2000, $29 million in 2001, $24 million in 2002
and $165 million in 2003-2024.
(21) JOINT PLANT OWNERSHIP. See Unicom's Note 21 of Notes to Financial
Statements.
(22) COMMITMENTS AND CONTINGENT LIABILITIES. See Unicom's Note 22 of Notes
to Financial Statements.
65
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN THE ELECTRIC UTILITY INDUSTRY. See Unicom's "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Changes in the Electric Utility Industry," which is incorporated
herein by this reference, except for EPS information.
LIQUIDITY AND CAPITAL RESOURCES. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Liquidity and Capital Resources--UTILITY OPERATIONS," which is incorporated
herein by this reference.
REGULATION. See Unicom's "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Regulation," which is
incorporated herein by this reference.
RESULTS OF OPERATIONS. See Unicom's "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Results of
Operations" (other than the first paragraph thereof), which is incorporated
herein by this reference, except for EPS information.
66
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since January 1, 1998, civil penalties were imposed on ComEd on three
occasions for violations of NRC regulations in amounts aggregating $495,000.
To ComEd's knowledge, there are two current enforcement issues outstanding and
under review by the NRC.
On June 13, 1997, the IDR issued a Notice of Tax Liability to ComEd alleging
deficiencies in Illinois invested capital tax for the years 1988 through 1994,
as subsequently adjusted by the IDR, of $32 million, plus interest of $15
million and a penalty of $3.5 million. On January 2, 1998, the IDR issued a
second Notice of Tax Liability also alleging deficiencies in Illinois invested
capital tax for the years 1995 through 1996 of $7 million, plus interest of $1
million. ComEd has protested the notices, and the matter is currently pending
before the IDR's Office of Administrative Hearings. Interest will continue to
accrue on the alleged tax deficiencies at 9% per annum.
CERCLA provides for immediate response and removal actions coordinated by
the U.S. EPA to releases of hazardous substances into the environment and
authorizes the U.S. 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 cleanup costs of waste at sites, most of which are listed by
the U.S. EPA on the NPL. These responsible parties can be ordered to perform a
cleanup, can be sued for costs associated with a U.S. EPA directed cleanup,
may voluntarily settle with the U.S. 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. ComEd and its subsidiaries are or are likely
to become parties to proceedings initiated by the U.S. EPA, state agencies
and/or other responsible parties under CERCLA with respect to a number of
sites, including MGP sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. See Note 22 of
Notes to Financial Statements for information regarding costs associated with
investigating and remediating former MGP sites.
From time to time, Unicom and its subsidiaries 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 their facilities. Unicom and
ComEd do not believe, so far as they now foresee, that such violations or
defaults will have a material adverse effect on their future business and
operating results, except for events otherwise described in Unicom and ComEd's
Annual Reports on Form 10-K for the year ended December 31, 1997 or in these
Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 1998,
which could have such an effect.
FORWARD-LOOKING INFORMATION. Except for historical data, the information
contained herein constitutes forward-looking statements. Forward-looking
statements are inherently uncertain and subject to risks. Such statements
should be viewed with caution. Actual results or experience could differ
materially from the forward-looking statements as a result of many factors.
Forward-looking statements in this report include, but are not limited to: (1)
statements regarding expectations of revenue reductions as a result of the
1997 Act in "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subcaption "Changes in the Electric Utility Industry"
and in Note 2 of Notes to Financial Statements, (2) statements regarding
estimated capital expenditures in "Management's Discussion and Analysis of
Financial Condition and Results of Operations,"
67
<PAGE>
subcaptions "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction
Program" and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--
Construction Program," (3) statements regarding the estimated return to
service of certain nuclear generating units and an increase in purchased power
costs for 1998 in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," subcaption "Regulation--Nuclear Matters," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Results of Operations--Purchased Power," (4)
statements regarding the costs of decommissioning nuclear generating stations
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Regulation--Nuclear Matters" and in Note 1 of Notes
to Financial Statements, under "Depreciation and Decommissioning," and (5)
statements regarding cleanup costs associated with MGPs and other remediation
sites in Note 22 of Notes to Financial Statements. Management cannot predict
the course of future events or anticipate the interaction of multiple factors
beyond management's control and their effect on revenues, project timing and
costs. The statements regarding revenue reductions are subject to unforeseen
developments in the market for electricity in Illinois resulting from
regulatory changes. The statements regarding estimated capital expenditures,
estimated return to service of nuclear generation units, decommissioning costs
and cleanup costs are subject to changes in the scope of work and manner in
which the work is performed and consequent changes in the timing and level of
the projected expenditure, and are also subject to changes in laws and
regulations or their interpretation or enforcement. The statements regarding
the estimated return to service of nuclear generating units are subject to the
concurrence of the NRC with proceeding to power operations. Unicom and ComEd
make no commitment to disclose any revisions to the forward-looking
statements, or any facts, events or circumstances after the date hereof that
may bear upon forward-looking statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------------
<C> <S>
(10)-1 Retirement and Separation Agreement dated as of March 12, 1998
among Unicom, ComEd and Samuel K. Skinner.
(10)-2 Retirement and Separation Agreement dated as of March 30, 1998
among Unicom, ComEd and James J. O'Connor.
(10)-3 Employment Agreement among Unicom, ComEd and John W. Rowe dated as
of March 10, 1998.
(12) Statement computing Commonwealth Edison Company ratios of earnings
to fixed charges and ratios of earnings to fixed charges and
preferred and preference stock dividend requirements.
(23)-1 Consent of independent public accountants applicable to Unicom
Corporation.
(23)-2 Consent of independent public accountants applicable to
Commonwealth Edison Company.
(27)-1 Financial data schedule of Unicom Corporation.
(27)-2 Financial data schedule of Commonwealth Edison Company.
</TABLE>
(b) Reports on Form 8-K
A Current Report on Form 8-K dated January 14, 1998 was filed by Unicom
and ComEd describing the permanent cessation of nuclear operations and
retirement of ComEd's nuclear generating station located in Zion, Illinois.
A Current Report on Form 8-K dated January 30, 1998 was filed containing
Unicom's consolidated financial statements as of, and for the year ended,
December 31, 1997.
68
<PAGE>
A Current Report on Form 8-K dated January 30, 1998 was filed containing
ComEd's consolidated financial statements as of, and for the year ended,
December 31, 1997.
A Current Report on Form 8-K dated February 2, 1998 was filed by Unicom
describing Unicom's Shareholder Rights Plan.
A Current Report on Form 8-K dated February 6, 1998 was filed by Unicom
and ComEd announcing the election of John W. Rowe as Chairman, President
and Chief Executive Officer.
69
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 11th day of May, 1998. The
signature for each undersigned company shall be deemed to relate only to
matters having reference to such company and its subsidiaries thereof.
Unicom Corporation
Registrant
Robert E. Berdelle
By __________________________________
Robert E. Berdelle
Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
Commonwealth Edison Company
Registrant
Robert E. Berdelle
By __________________________________
Robert E. Berdelle
Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
70
<PAGE>
EXHIBIT INDEX
Exhibits filed with or incorporated by reference in Form 10-Q for the
quarterly period ended March 31, 1998;
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------
<C> <S>
(10)-1 Retirement and Separation Agreement dated as of March 12, 1998 among
Unicom, ComEd and Samuel K. Skinner.
(10)-2 Retirement and Separation Agreement dated as of March 30, 1998 among
Unicom, ComEd and James J. O'Connor.
(10)-3 Employment Agreement among Unicom, ComEd and John W. Rowe dated as of
March 10, 1998.
(12) Statement computing Commonwealth Edison Company ratios of earnings to
fixed charges and ratios of earnings to fixed charges and preferred
and preference stock dividend requirements.
(23)-1 Consent of independent public accountants applicable to Unicom
Corporation.
(23)-2 Consent of independent public accountants applicable to Commonwealth
Edison Company.
(27)-1 Financial data schedule of Unicom Corporation.
(27)-2 Financial data schedule of Commonwealth Edison Company.
</TABLE>
<PAGE>
Exhibit (10)-1
Unicom Corporation and Commonwealth Edison Company
Form 10-Q File Nos. 1-11375 and 1-1839
RETIREMENT AND SEPARATION AGREEMENT
THIS RETIREMENT AND SEPARATION AGREEMENT ("Agreement") dated as of March
12, 1998, by and among Samuel K. Skinner ("Executive"), Commonwealth Edison
Company ("ComEd") and Unicom Corporation ("Unicom") (both such corporations
hereinafter referred to collectively as the "Company").
RECITALS
--------
WHEREAS, the Executive has served as President of ComEd and Unicom pursuant
to a letter agreement dated December 16, 1992 and as amended, May 31, 1995,
November 20, 1996, December 11, 1996 and March 24, 1997 (the "Prior
Agreements"); and
WHEREAS, the Executive has indicated his intention to retire from the
Company;
NOW, THEREFORE, in consideration of the foregoing, the mutual promises,
covenants and conditions hereinafter set forth, and other good and valuable
consideration, the parties agree as follows:
1. Termination of Prior Agreements. The Prior Agreements shall be terminated,
effective as of the date hereof, and, except as specifically provided herein,
neither the Company nor the Executive shall have any further liability to the
other thereunder.
2. Resignation of Executive. The Executive shall resign any and all positions
he currently holds as an officer or director of ComEd, Unicom or any subsidiary
thereof, effective as of March 16, 1998. The Executive shall remain on the ComEd
payroll as an active employee and shall continue to be paid his current salary
through and including March 31, 1998. The Executive shall be deemed to have
retired from senior executive officer status with ComEd, Unicom and any
subsidiary for purposes of (A) vesting and exercise of options and awards
(including annual or long-term) under the Company's Long Term Incentive Plan,
(B) transferring policy ownership under the Company's life insurance programs,
and (C) the Company's certificate of incorporation and by-laws.
3. Severance Benefits. Subject to the Executive's execution of the Waiver and
Release attached hereto as Appendix A and made a part hereof, the Company will
provide the following benefits:
(a) The Company agrees to pay to the Executive a severance payment equal
to $2,007,000 (two times the sum of the Executive's current annual
base salary and target annual incentive). Payment shall be made in a
lump sum, net of
<PAGE>
applicable federal and state taxes which are required to be withheld,
on the date which is eight days after the date on which the Executive
returns the signed Waiver and Release, but no earlier than April 1,
1998.
(b) The Executive shall be entitled to a retirement benefit equal to the
annual retirement benefit that would have been payable under the
Commonwealth Edison Company Service Annuity System (the "Pension
Plan") (including payments under the Commonwealth Edison Company
Supplemental Management Retirement Plan) as currently in effect for
employees who retire at age 60 calculated based on the assumption that
the Executive had, as of the date of his employment with the Company,
completed 20 years of credited service (as defined in the Pension
Plan) and has accrued an additional year of credited service during
each year of his employment with the Company.
The annual retirement benefit provided to the Executive under this
Section 3(b) ("SERP Benefit") shall equal the amount which, when added
to all other annual retirement benefits provided by the Company
(including benefits provided under the Pension Plan, the Commonwealth
Edison Company Supplemental Management Retirement Plan and the Social
Security Supplement paid by the Company until the Executive attains
age 65) results in the SERP Benefit described in the preceding
paragraph.
The SERP Benefit will be payable semimonthly commencing April 1, 1998,
in the form of a marital annuity with surviving spouse benefit, with
applicable adjustment for such marital annuity made to the amount
calculated above that would be payable in the form of a regular
annuity. The SERP Benefit shall be unfunded and payable from the
general assets of the Company, provided that if, prior to, on or after
the date of this Agreement, the Company shall establish a grantor
trust for purposes of funding benefits under the Commonwealth Edison
Company Supplemental Management Retirement Plan or any other non-
qualified retirement plan maintained by the Company (a so-called
"rabbi trust"), then the Executive's SERP Benefit will be included as
part of such trust, and funded to the same extent as similar benefits
for the Company's senior executive officers.
(c) The Executive shall be entitled to elect post-retirement coverage for
himself and his dependents under the Commonwealth Edison Medical
Expense Plan, the Commonwealth Edison Dental Expense Plan and the
Commonwealth Edison Vision and Hearing Care Plan (collectively, the
"Plans"), provided he meets the requirements for such coverage under
the Plans as of April 1, 1998. Solely for purposes of satisfying the
eligibility requirements for post-retirement coverage under such
Plans, the Executive is hereby deemed to have completed 10 years of
credited service under the Commonwealth Edison Company Service Annuity
System.
2
<PAGE>
(d) The Company will pay to the Executive, in a cash lump sum in
accordance with its personnel practices, an amount equal to the value
of 38 days of paid time off (PTO).
(e) Through September 30, 1998, the Executive will be entitled to (1) a
furnished office located in such space as the Company and the
Executive shall agree, (2) a full-time secretary provided by the (e)
Company, and (3) access to office equipment, supplies and support
services on a basis that is comparable to that which the Company makes
available to its senior executive officers.
(f) ComEd shall purchase the car currently leased for the Executive's use
and shall transfer the title thereof to the Executive effective April
1, 1998.
(g) ComEd shall transfer to the Executive, effective April 1, 1998 (1) the
company-owned home computer, and (2) any company-owned cellular phones
currently provided for the Executive's use.
(h) ComEd will pay for the cost of financial counseling and tax
preparation services for two years following the date of this
Agreement.
(i) ComEd shall pay to the Executive the amount necessary to reimburse the
Executive for any federal or state income taxes payable by him (I)
with respect to the benefits described in paragraphs 3(f), 3(g)(1) and
3(h), and (II) with respect to the amount paid hereunder as
reimbursement for such income (i) taxes; provided, however, that any
amount payable under this paragraph (i) with respect to paragraph 3(h)
shall not exceed $10,000.
If the Executive should die prior to the payment of the amounts described
in paragraphs (a), (d), (h) or (i) of this Section 3, the Company shall pay all
such amounts to the Executive's spouse, if she is then living and if not, to the
Executive's estate.
Notwithstanding the preceding, in the event of (1) a breach by the
Executive of any of the covenants contained in Sections 5, 8 or 11 of this
Agreement and the failure by the Executive to cure such breach within 10 days
after his receipt of a written notice thereof from the Company, or (2) a breach
by the Executive of any of the covenants contained in Section 7 of this
Agreement and notice from the Company to the Executive followed by an
opportunity for the Executive to be heard within 10 business days of receipt of
such notice, the Company shall be entitled to (I) require the Executive to
promptly repay to the Company the amount which was payable to the Executive
under Section 3(a), and (II) to discontinue payment of the SERP Benefit and any
or all of the other payments or benefits provided to the Executive under this
Section 3.
4. Other Benefits. Except as provided in Section 3, above, the Executive's
rights under any employee benefit or deferred compensation plans sponsored or
maintained by the
3
<PAGE>
Company shall be determined in accordance with the provisions of such plans and
shall not be limited or reduced in any way by this Agreement.
5. Publicity. Until filed as an exhibit to the Company's quarterly report of
the results of operations, neither the Executive nor the Company shall issue or
cause the publication of any press release or other announcement with respect to
the terms or provisions of this Agreement, nor disclose the contents hereof to
any third party, without obtaining in each case the consent of the other parties
hereto, which consent shall not be withheld where such release, announcement or
disclosure shall be required by applicable law or administrative regulation or
agency.
6. Confidential Information Defined. For the purposes hereof, the term
"Confidential Information" shall mean any information not generally known in the
relevant trade or industry, which was obtained from the Company, or which was
learned, discovered, developed, conceived, originated or prepared during or as
result of the performance of any services by the Executive on behalf of the
Company and which falls within the following general categories:
(a) information relating to trade secrets of the Company or any customer
or supplier of the Company;
(b) information relating to existing or contemplated products, services,
technology, designs, processes, formulae, algorithms, research or
product developments of the Company or any customer or supplier of the
Company;
(c) information relating to business plans or strategies, sales or
marketing methods, methods of doing business, customer lists, customer
usages and/or requirements, supplier information of the Company or any
customer or supplier of the Company; and
(d) any other confidential information which either the Company or any
customer or supplier of the Company may reasonably have the right to
protect by patent, copyright or by keeping it secret and confidential.
The parties agree that Confidential Information, as defined herein, also
qualifies as "confidences or secrets" within the meaning of the Illinois Rules
of Professional Conduct.
7. Nondisclosure of Confidential Information. The Executive will not use for
his own benefit, either direct or indirect, or disclose any Confidential
Information obtained by the Executive during his employment with the Company at
any time, to any other person, firm or corporation (except to the extent
directly related to and required by the Executive's performance of duties
assigned to the Executive by the Company) without the Company's prior written
consent except as may be required by the lawful order of a court or agency of
4
<PAGE>
competent jurisdiction. The Executive shall take all reasonable steps to
safeguard such Confidential Information and to protect such information against
disclosure, misuse, loss and theft. The Executive's obligations under this
paragraph with respect to any specific Confidential Information shall cease when
that specific portion of Confidential Information becomes publicly known.
5
<PAGE>
8. Covenant Not to Compete; Non-Interference.
a) Competition. The Executive agrees that, for a period of two (2) years
beginning on the date hereof, without the prior written approval of the
Company, he will not participate in the management or serve as a
director of, be employed by (whether as a common law employee or an
independent contractor) or consult with, other than as provided in
paragraph (b), below, or own any business enterprise that (1) engages
in or proposes to engage in (I) the production, transmission,
distribution, marketing or sale of electricity, or (II) any other
business engaged in by the Company or its affiliates prior to the date
hereof which represents, as of such date, or is projected by the
Company and its affiliates as reflected in a business plan adopted
prior to the date hereof to yield during any year within the first
three-fiscal-year period commencing on or after the date hereof, more
than 5% of the gross revenues of the Company and with respect to which
the Executive had access to Confidential Information, and (2) which is
located (I) anywhere in the United States, or (II) anywhere outside of
the United States where the Company is engaged in or proposed as of
such date to engage in any of such activities (a "Competing Business");
provided, however, that nothing in this paragraph 8(a) shall prohibit
the Executive from owning stock or other securities of any such
business amounting to less than five percent of the outstanding capital
stock of such business where the Executive does not participate in the
management, control or operation of such business.
b) Practice of Law. The Executive agrees that, for a period of two years
beginning on the date hereof, he will not undertake, without first
obtaining written consent from the General Counsel of the Company, the
representation, as legal counsel, of any Competing Business: (1) in a
litigation matter adverse to the Company or any of its affiliates; (2)
in a regulatory or legislative matter where the position of the
Competing Business is contrary to the position of the Company or any of
its affiliates; (3) in a position adverse to the Company or any of its
affiliates as part of a contract negotiation; or (4) in any other
matter that would risk the disclosure of or involve any Confidential
Information
c) Interference. The Executive hereby agrees that, for a period of two
years beginning on the date hereof, he will not (1) employ any Key
Employee (as defined below) or encourage any Key Employee to terminate
his or her employment; (2) take any action which is intended to
adversely affect the Company's or any of its affiliates' relationships
with any person, firm, corporation, or other business organization who
or which at any time (whether before or after the date hereof) was a
Key
6
<PAGE>
Employee, or which, during the period commencing one year prior to the
date hereof, was a material supplier of, or maintained a material
supplier relationship with, any business of the Company or its d)
affiliates, or (3) endeavor to entice away from the Company or any of
its affiliates a Key Employee or a business which, during the period
commencing one year prior to the date hereof, was a material customer
(five or more megawatts) or material supplier of, or maintained a
material business relationship with (other than as a customer or
supplier), the Company or an affiliate. For purposes of this Section
8(c), "Key Employee" means any employee of the Company who is rated at
Group Level 12 or above ("Group Level") or any employee of an affiliate
of the Company who is rated at a level which is the equivalent of Group
Level.
9. Reasonableness of Restrictive Covenants. The Executive acknowledges that
the covenants contained in Sections 7 and 8 of this Agreement are reasonable in
the scope of the activities restricted, the geographic area covered by the
restrictions, and the duration of the restrictions, and that they are reasonably
necessary to protect the Company's legitimate interests in its Confidential
Information and in its relationships with its customers.
The Company and the Executive further acknowledge that the covenants
contained in Sections 7 and 8 are essential elements of this Agreement and that,
but for the agreement of the Executive to comply with such covenants, the
Company would not have agreed to enter into this Agreement. If a court of
competent jurisdiction shall, in a final nonappealable order, limit or
invalidate any provision of the covenants contained in Sections 7 or 8, then, in
the event of a breach by the Executive of any of the covenants contained in
Sections 7 or 8 of this Agreement, at the Company's sole discretion, (I) the
Company shall require the Executive to promptly repay to the Company the amount
which was payable to the Executive under Section 3(a), and shall be entitled to
discontinue payment of the SERP Benefit and any or all of the other payments or
benefits provided to the Executive under this Section 3; (II) the Executive
agrees to enter into an agreement embodying the essential elements of the
covenants contained in Sections 7 or 8 or both of them which is valid and
enforceable; or (III) the parties shall agree to be bound by provisions with
respect to Sections 7 and 8 which are reformed by the court pursuant to Section
12 hereof.
The Executive and the Company further acknowledge that nothing in this
Agreement is intended to limit the application of the Illinois Rules of
Professional Conduct.
The Executive and the Company have independently consulted with their
respective counsel and have been advised concerning the reasonableness and
propriety of such covenants with specific regard to the nature of the business
conducted by the Company. The Executive acknowledges that his observance of the
covenants contained in Sections 7 and 8 of this Agreement will not deprive him
of the ability to earn a livelihood or to support his dependents.
7
<PAGE>
10. Remedies. In recognition of the confidential nature of the Confidential
Information, and in recognition of the necessity of the limited restrictions
imposed under Sections 7 and 8 of this Agreement, the parties agree that it is
impossible to measure solely in money the damages which will accrue to the
Company by reason of the Executive's failure to abide by any of his obligations
under this Agreement. The Executive hereby specifically affirms the
appropriateness of injunctive or other equitable relief in any such action.
Accordingly, the Executive agrees that if he breaches any of the provisions of
Sections 7 or 8, the Company shall have the right, in addition to any other
remedies it may have under this Agreement or otherwise, to obtain in any court
of competent jurisdiction injunctive relief to restrain any breach or threatened
breach hereof or otherwise to specifically enforce any of the provisions hereof,
and the Executive hereby waives any and all rights to assert any claim or
defense that the Company has an adequate remedy at law for any breach. Disputes
regarding the rights of the Company and the Executive hereunder as to which the
Company has not sought equitable relief shall be resolved in a court of
competent jurisdiction. The Company acknowledges that the Executive would be
irreparably injured by a violation of Section 11 hereof. The Company agrees
that, in addition to any other remedies available to the Executive for such
breach or threatened breach, the Executive shall be entitled to a preliminary
injunction, temporary restraining order, or other equivalent relief, restraining
the Company from any actual or threatened breach of Section 11.
11. Non-Disparagement. The Executive agrees that he will not make any written
or oral statement that brings Unicom or ComEd or any of its employees, officers
or agents into disrepute, or tarnishes any of their images or reputations. The
Executive further agrees not to publish, comment upon or disseminate any
statements suggesting or accusing Unicom or ComEd or any of its agents,
employees or officers of any misconduct or unlawful behavior. The Company agrees
that neither the directors nor the officers of the Company nor any official
spokesperson for the Company will make any written or oral statements that bring
the Executive into disrepute or materially tarnishes his image or reputation.
The Company further agrees not to publish or disseminate any statements
suggesting or accusing the Executive of any misconduct or unlawful behavior, and
to take all reasonable steps to prevent statements prohibited hereunder. The
provisions of this Section 11 shall not apply to testimony as a witness,
compliance with other legal obligations, assertion of or defense against any
claim of breach of this Agreement, or any activity that otherwise may be
required by the lawful order of a court or agency of competent jurisdiction, and
shall not require the Company or the Executive to make false statements or
disclosures.
12. Partial Invalidity/Severability. If any provision of this Agreement shall
be held invalid or unenforceable, the remainder nevertheless shall remain in
full force and effect. If any provision is held invalid or unenforceable with
respect to particular circumstances, it nevertheless shall remain in full force
and effect in all other circumstances. Further, the covenants contained in
Sections 7 and 8 of this Agreement shall be construed as independent of any
other provision of this Agreement, and the existence of any claim or cause of
action (whether predicated on this Agreement or otherwise) shall not constitute
a defense to the enforcement by the Company of said covenants. In the event that
any provision of this Agreement should be found by a court of competent
jurisdiction to be unreasonable, invalid,
8
<PAGE>
or otherwise unenforceable, it is the desire of the parties hereto that (a) such
provision be considered severable, and (b) such provision be reformed by such
court so as to render it reasonable, valid, and enforceable, and that it be so
enforced.
13. Benefit of Agreement. This Agreement shall inure to the benefit of, and
shall be binding upon, the parties hereto and their respective successors,
assigns, heirs, and legal representatives, including any person with which the
Company may merge or consolidate. Insofar as the Executive is concerned, this
Agreement, being personal, cannot be assigned.
14. Entire Agreement. This Agreement contains the entire agreement between the
parties and constitutes the complete, final, and exclusive embodiment of their
agreement with respect to the subject matters covered by this Agreement. This
Agreement is executed without reliance upon any promise, warranty or
representation, written or oral, by any party or any representative of any party
other than those expressly contained herein and supersedes any other such
promises, warranties, representations, or agreements. This instrument shall not
affect any indemnification or other rights and benefits afforded to the
Executive by the Company's certificate of incorporation or by-laws. The Company
shall continue the Executive's coverage under the directors' and officers'
liability coverage maintained by the Company, as in effect from time to time, to
the same extent as other current or former senior executive officers and
directors of the Company.
15. Modifications and Waivers. No change, modification or waiver of any
provision of this Agreement shall be valid or binding unless it is in writing,
dated subsequent to the date hereof, and signed by the party intended to be
bound. No waiver of any breach, term, or condition of this Agreement by either
party shall constitute a subsequent waiver of the same or any other breach,
term, or condition.
16. Construction. This Agreement shall be governed by, construed and enforced
(both as to validity and performance) in accordance with the internal laws of
the State of Illinois applicable to agreements made and to be performed wholly
within such jurisdiction, without regard to principles of conflicts of law.
17. Post-Employment Communications. Nothing in this Agreement, including
Sections 5 or 11, shall be construed to prohibit the Executive from freely
communicating with, including testifying in any administrative proceeding
before, the Nuclear Regulatory Commission or the United States Department of
Labor, or from otherwise addressing issues related to nuclear safety with any
party or taking any other action protected under Section 211 of the Energy
Reorganization Act.
18. Mitigation and Set-Off. The Executive shall not be required to mitigate
the amount of any payment provided for in this Agreement by seeking other
employment or otherwise. The Company shall not be entitled to set off against
the amounts payable to the Executive hereunder any amounts owed to the Company,
any amounts earned (or foregone) by the Executive in other employment after
termination of his
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<PAGE>
employment with the Company, or any amounts that might have been earned by the
Executive in other employment had he sought such other employment.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written as indicated below.
Executive
----------------------------------
Samuel K. Skinner
COMMONWEALTH EDISON COMPANY
By:
------------------------------
UNICOM CORPORATION
By:
------------------------------
10
<PAGE>
Appendix A
WAIVER AND RELEASE
------------------
In exchange for the separation benefits described in the Retirement and
Separation Agreement dated March 12, 1998, which I acknowledge I am not
otherwise entitled to receive, I freely and voluntarily agree to this Waiver and
Release.
1. In signing this Waiver and Release, I hereby waive and release any and all
claims relating to my employment with Commonwealth Edison Company and Unicom
Corporation and my service as an officer and director of each of them that I may
ever have had or that I now have against the following persons and
organizations:
a) Commonwealth Edison Company, Commonwealth Edison Company of Indiana,
Unicom Corporation and any of their affiliates, successors and
subsidiaries; and
b) Any and all officers, directors, employees, shareholders and agents of
Commonwealth Edison Company, Commonwealth Edison Company of Indiana,
Unicom Corporation and any of their affiliates, successors or
subsidiaries.
2. I understand and agree that in signing this document, I am waiving and
releasing any and all claims of whatever nature that I may ever have had or now
have against the persons and organizations listed in paragraph 1. I understand
and agree that among the claims that I am waiving and releasing are the
following:
a) Claims of age discrimination in employment under the federal Age
Discrimination in Employment Act;
b) Claims of race, color, sex, national origin, and religious
discrimination in employment under Title VII of the Civil Rights Act of
1964, as amended, and the Civil Rights Act of 1866, 42 U.S.C. (S)1981,
as amended;
c) Claims of disability discrimination under the Americans with
Disabilities Act;
d) Claims of discrimination in employment under any state or local
statute, ordinance, regulation, or constitution;
e) Claims of breach of contract or claims or vacation, bonuses, incentive
compensation or other benefits, except that nothing contained herein
shall constitute a waiver or release of any claim or cause of action
arising out of an alleged breach or other violation of any obligation
under the Retirement and Separation Agreement dated March 12, 1998; and
f) Any common law or statutory claims of wrongful discharge and any other
common law tort or statutory claims.
I understand and agree that I am waiving and releasing any and all claims
that I may ever have had or that I now have, regardless of their nature of
origin, and that the fact that such claim is not listed in subparagraphs
(a) through (f), above, does not mean that such claim is not included in
this Waiver and Release.
<PAGE>
Appendix A
3. The existence of, and the terms of, the separation benefits described in
the Retirement and Separation Agreement dated March 12, 1998 and in this Waiver
and Release shall be confidential, and I will not reveal the contents of the
Retirement and Separation Agreement dated March 12, 1998 and this Waiver and
Release to anyone, including but not limited to, past, present or future
employees of the released parties, other than except to tax, financial or legal
advisers or members of the Executive's immediate family, or as may be required
by the lawful order of a court or agency of competent jurisdiction, where
required by law. The Retirement and Separation Agreement dated March 12, 1998
and this Waiver and Release may, however, be used as evidence in a judicial
proceeding in which any of the parties allege a breach or other violation of
this agreement.
4. I agree that I have no present or future right to seek employment with
Commonwealth Edison Company or Unicom Corporation. Further, I will not apply
for, or seek consideration for, any employment with Commonwealth Edison Company
or Unicom Corporation.
5. In signing this agreement, I agree and understand that this Waiver and
Release will be binding not only on me but also on my heirs, administrators, and
assigns with respect to the claims covered by this agreement. As of the date of
my signing of this agreement, I have made no assignment of any claims against
any of the persons or organizations described in paragraph 1.
6. The Retirement and Separation Agreement dated March 12, 1998 and this
Waiver and Release may only be modified in writing, and any party's failure to
enforce this agreement in the event of one or more events which violate this
agreement shall not constitute a waiver of any right to enforce this agreement
against subsequent violations.
7. I hereby acknowledge that, at the time I was given this Waiver and Release,
I was informed in writing by Commonwealth Edison Company that I had at least
twenty-one (21) days in which to consider whether I would sign this Waiver and
Release. I also acknowledge that, at the time I was given this Waiver and
Release, I was informed in writing that I should consult with an attorney before
signing this agreement. I have had an opportunity to consult with any attorney
and have either had such consultations or have decided of my own free will that
I will sign this agreement without consulting with legal counsel.
8. I acknowledge that I have been informed that I may revoke my acceptance of
this Waiver and Release by delivering a letter to S. Gary Snodgrass, Senior Vice
President, One First National Plaza, 37th Floor, Chicago, IL 60690 within seven
days of the date I have signed this agreement. I understand that this Waiver and
Release will not become effective until the eighth day following my signing of
this agreement. I understand and intend that, in the event I do not revoke my
acceptance of this agreement within the seven-day period described in this
paragraph, this Waiver and Release will be legally binding and enforceable.
9. This Waiver and Release shall, in all respects, be construed in accordance
with and governed by the laws of the State of Illinois.
I STATE THAT I HAVE READ THE FOREGOING, THAT IN UNDERSTAND EACH OF ITS TERMS AND
THAT I INTEND TO BE BOUND THERETO.
- ----------------------------------- -----------------------------------
Name (Print) Social Security Number
- ----------------------------------- -----------------------------------
Signature Date
2
<PAGE>
Exhibit (10)-2
Unicom Corporation and Commonwealth Edison Company
Form 10-Q File Nos. 1-11375 and 1-1839
RETIREMENT AND SEPARATION AGREEMENT
THIS RETIREMENT AND SEPARATION AGREEMENT ("Agreement") dated as of March
30, 1998, by and among James J. O'Connor ("Executive"), Commonwealth Edison
Company ("ComEd") and Unicom Corporation ("Unicom") (both such corporations
hereinafter referred to collectively as the "Company").
RECITALS
--------
WHEREAS, the Executive has served as Chief Executive Officer of ComEd and
Unicom, and as Chairman of the Board of Directors of each of them; and
WHEREAS, the Executive has indicated his intention to retire from the
Company; effective as of September 1, 1998 (the "Separation Date");
NOW, THEREFORE, in consideration of the foregoing, the mutual promises,
covenants and conditions hereinafter set forth, and other good and valuable
consideration, the parties agree as follows:
1. Resignation of Executive. The Executive shall resign any and all positions
he currently holds as an officer or director of ComEd, Unicom or any
subsidiary thereof, effective as of March 16, 1998. The Executive shall
remain on the ComEd payroll as an active employee and shall continue to be
paid his current salary through August 31, 1998.
2. Severance Benefits. Subject to the Executive's execution of the Waiver and
Release attached hereto as Appendix A and made a part hereof, the Company
will provide the following benefits:
(a) The Company agrees to pay to the Executive a severance payment equal
to $3,056,000 (two times the sum of the Executive's current annual
base salary and target annual incentive). Payment shall be made in a
lump sum, net of applicable federal and state taxes which are required
to be withheld, on the date which is at least eight days after the
date on which the Executive returns the signed Waiver and Release, but
no earlier than the Separation Date.
(b) Long Term Performance Unit and Annual Incentive Awards to which the
Executive is entitled and which are made or payable with respect to
periods beginning on or after January 1, 1998 shall be prorated
through August 31, 1998 and paid in accordance with the terms of the
applicable programs.
<PAGE>
(c) ComEd will pay to the Executive, in a cash lump sum in accordance with
its customary personnel practices, an amount equal to the value of 35
days of paid time off (PTO), or, if less, the number of PTO days
remaining to the Executive's credit as of August 31, 1998.
(d) Through August 31, 2008, the Executive will be entitled to a furnished
office located in such space as the Company and the Executive shall
agree, and to secretarial and office support services at the Company's
expense. Such arrangements may be extended by mutual agreement of the
parties for such additional period as the parties shall determine.
(e) ComEd shall purchase the car currently leased for the Executive's use
and shall transfer the title thereof to the Executive effective
September 1, 1998.
(f) ComEd shall transfer to the Executive, effective September 1, 1998
(1) the ComEd-owned home computer, and (2) any ComEd-owned cellular
phones currently provided for the Executive's use.
(g) ComEd will pay for the cost of financial counseling and tax
preparation services for five years following the date of this
Agreement. ComEd may, in its sole discretion, continue to pay for such
services for such additional period as the parties shall determine.
(h) ComEd shall pay to the Executive the amount necessary to reimburse the
Executive for any federal or state income taxes payable to him (I)
with respect to the benefits described in paragraphs 2(e) and 2(f)(1),
and (II) with respect to the amount paid hereunder as reimbursement
for such income taxes.
Notwithstanding the preceding, in the event of (1) a breach by the
Executive of any of the covenants contained in Sections, 4, 7 or 10 of this
Agreement and a failure by the Executive to cure such breach within 10 days
after his receipt of a written notice thereof from the Company, or (2) a
breach by the Executive of any of the covenants contained in Section 6 of
this Agreement, the Company shall be entitled to (I) require the Executive
to promptly repay to the Company the amount which was payable to the
Executive under Section 2(a), and (II) to discontinue any or all of the
other payments or benefits provided to the Executive under this Section 2
3. Other Benefits. Except as provided in Section 2, above, the Executive's
rights under any employee benefit or deferred compensation plans sponsored
or maintained by the Company shall be determined in accordance with the
provisions of such plans and shall not be affected in any way by this
Agreement.
2
<PAGE>
4. Publicity. Until filed as an exhibit to the Company's quarterly report of
the results of operations, neither the Executive nor the Company shall
issue or cause the publication of any press release or other announcement
with respect to the terms or provisions of this Agreement, nor disclose the
contents hereof to any third party, without obtaining in each case the
consent of the other parties hereto, which consent shall not be withheld
where such release, announcement or disclosure shall be required by
applicable law or administrative regulation or agency.
5. Confidential Information Defined. For the purposes hereof, the term
"Confidential Information" shall mean any information not generally known
in the relevant trade or industry, which was obtained from the Company, or
which was learned, discovered, developed, conceived, originated or prepared
during or as result of the performance of any services by the Executive on
behalf of the Company and which falls within the following general
categories:
(a) information relating to trade secrets of the Company or any customer
or supplier of the Company;
(b) information relating to existing or contemplated products, services,
technology, designs, processes, formulae, algorithms, research or
product developments of the Company or any customer or supplier of the
Company;
(c) information relating to business plans or strategies, sales or
marketing methods, methods of doing business, customer lists, customer
usages and/or requirements, supplier information of the Company or any
customer or supplier of the Company; and
(d) any other confidential information which either the Company or any
customer or supplier of the Company may reasonably have the right to
protect by patent, copyright or by keeping it secret and confidential.
The parties agree that Confidential Information, as defined herein, also
qualifies as "confidences or secrets" within the meaning of the Illinois
Rules of Professional Conduct.
6. Nondisclosure of Confidential Information. The Executive will not use for
his own benefit, either direct or indirect, or disclose any Confidential
Information obtained by the Executive during his employment with the
Company at any time, to any other person, firm or corporation (except to
the extent directly related to and required by the Executive's performance
of duties assigned to the Executive by the Company) without the Company's
prior written consent, except as may be required by the lawful order of a
court or agency of competent jurisdiction. The Executive shall take all
reasonable steps to safeguard such Confidential Information and to protect
such information against disclosure, misuse, loss and theft. The
Executive's obligations under this
3
<PAGE>
paragraph with respect to any specific Confidential Information shall cease
when that specific portion of Confidential Information becomes publicly
known.
7. Covenant Not to Compete; Non-Interference.
(a) Competition. The Executive agrees that, for a period of two (2) years
beginning on the Separation Date, without the prior written approval
of the Company, he will not participate in the management of, be
employed by . (whether as a common law employee or an independent
contractor) or consult with, other than as provided in paragraph (b),
below, or own any business enterprise that (1) engages in or proposes
to engage in (I) the production, transmission, distribution, marketing
or sale of electricity, or (II) any other business engaged in by the
Company or its affiliates prior to the date hereof which represents,
as of such date, or is projected by the Company and its affiliates as
reflected in a business plan adopted prior to the date hereof to yield
during any year within the first three-fiscal-year period commencing
on or after the date hereof, more than 5% of the gross revenues of the
Company and with respect to which the Executive had access to
Confidential Information, and (2) which is located (I) anywhere in the
United States, or (II) anywhere outside of the United States where the
Company is engaged in or proposed as of such date to engage in any of
such activities (a "Competing Business"); provided, however, that
nothing in this paragraph 8(a) shall prohibit the Executive from
owning stock or other securities of any such business amounting to
less than five percent of the outstanding capital stock of such
business where the Executive does not participate in the management,
control or operation of such business.
(b) Practice of Law. The Executive agrees that, for a period of two years
beginning on the date hereof, he will not undertake, without first
obtaining written consent from the General Counsel of the Company, the
representation, as legal counsel, of any Competing Business: (1) in a
litigation matter adverse to the Company or any of its affiliates; (2)
in a regulatory or legislative matter where the position of the
Competing Business is contrary to the position of the Company or any
of its affiliates; (3) in a position adverse to the Company or any of
its affiliates as part of a contract negotiation; or (4) in any other
matter that would risk the disclosure of or involve any Confidential
Information.
(c) Interference. The Executive hereby agrees that, for a period of two
years beginning on the date hereof, he will not (1) employ
4
<PAGE>
any Key Employee (as defined below) or encourage any Key Employee to
terminate his or her employment; (2) take any action which is intended
to adversely affect the Company's or any of its affiliates'
relationships with any person, firm, corporation, or other business
organization who or which at any time (whether before or after the
date hereof) was a Key Employee, or which, during the period
commencing one year prior to the date hereof, was a material supplier
of, or maintained a material supplier relationship with, any business
of the Company or its affiliates, or (3) endeavor to entice away from
the Company or any of its affiliates a Key Employee or a business
which, during the period commencing one year prior to the date hereof,
was a material customer (five or more megawatts) or material supplier
of, or maintained a material business relationship with (other than as
a customer or supplier), the Company or an affiliate. For purposes of
this Section 8(c), "Key Employee" means any employee of the Company
who is rated at Group Level 12 or above ("Group Level") or any
employee of an affiliate of the Company who is rated at a level which
is the equivalent of Group Level.
8. Reasonableness of Restrictive Covenants. The Executive acknowledges that
the covenants contained in Sections 6 and 7 of this Agreement are
reasonable in the scope of the activities restricted, the geographic area
covered by the restrictions, and the duration of the restrictions, and that
they are reasonably necessary to protect the Company's legitimate interests
in its Confidential Information and in its relationships with its
customers. The Company and the Executive further acknowledge that the
covenants contained in Sections 6 and 7 are essential elements of this
Agreement and that, but for the agreement of the Executive to comply with
such covenants, the Company would not have agreed to enter into this
Agreement.
If a court of competent jurisdiction shall, in a final nonappealable order,
limit or invalidate any provision of the covenants contained in Sections 6
or 7, then, in the event of a breach by the Executive of any of the
covenants contained in Sections 6 or 7 of this Agreement, at the Company's
sole discretion, (I) the Company shall require the Executive to promptly
repay to the Company the amount which was payable to the Executive under
Section 2(a), and shall be entitled to discontinue payment of any or all of
the other payments or benefits provided to the Executive under Section 2;
(II) the Executive agrees to enter into an agreement embodying the
essential elements of the covenants contained in Sections 6 or 7 or both of
them which is valid and enforceable; or (III) the parties shall agree to be
bound by provisions with respect to Sections 6 or 7 which are reformed by
the court pursuant to Section 11 hereof.
5
<PAGE>
The Executive and the Company further acknowledge that nothing in this
Agreement is intended to limit the application of the Illinois Rules of
Professional Conduct.
The Executive and the Company have independently consulted with their
respective counsel and have been advised concerning the reasonableness and
propriety of such covenants with specific regard to the nature of the
business conducted by the Company. The Executive acknowledges that his
observance of the covenants contained in Sections 6 and 7 of this Agreement
will not deprive him of the ability to earn a livelihood or to support his
dependents.
9. Remedies. In recognition of the confidential nature of the Confidential
Information, and in recognition of the necessity of the limited
restrictions imposed under Sections 6 and 7 of this Agreement, the parties
agree that it is impossible to measure solely in money the damages which
will accrue to the Company by reason of the Executive's failure to abide by
any of his obligations under this Agreement. The Executive hereby
specifically affirms the appropriateness of injunctive or other equitable
relief in any such action. Accordingly, the Executive agrees that if he
breaches any of the provisions of Sections 6 or 7, the Company shall have
the right, in addition to any other remedies it may have under this
Agreement or otherwise, to obtain in any court of competent jurisdiction
injunctive relief to restrain any breach or threatened breach hereof or
otherwise to specifically enforce any of the provisions hereof, and the
Executive hereby waives any and all rights to assert any claim or defense
that the Company has an adequate remedy at law for any breach. Disputes
regarding the rights of the Company and the Executive hereunder as to which
the Company has not sought equitable relief shall be resolved in a court of
competent jurisdiction.
10. Non-Disparagement. The Executive agrees that he will not make any
written or oral statement that brings Unicom or ComEd or any of its
employees, officers or agents into disrepute, or tarnishes any of their
images or reputations. The Executive further agrees not to publish, comment
upon or disseminate any statements suggesting or accusing Unicom or ComEd
or any of its agents, employees or officers of any misconduct or unlawful
behavior. The Company agrees that neither the directors nor the officers of
the Company nor any official spokesperson for the Company will make any
written or oral statements that bring the Executive into disrepute or
materially tarnishes his image or reputation. The Company further agrees
not to publish or disseminate any statements suggesting or accusing the
Executive of any misconduct or unlawful behavior, and to take all
reasonable steps to prevent statements prohibited hereunder. The provisions
of this Section 10 shall not apply to testimony as a witness, compliance
with other legal obligations, assertion of or defense against any claim of
breach of this Agreement, or any activity that otherwise may be required by
the lawful order of a court or agency
6
<PAGE>
of competent jurisdiction, and shall not require the Company or the
Executive to make false statements or disclosures.
11. Partial Invalidity/Severability. If any provision of this Agreement shall
be held invalid or unenforceable, the remainder nevertheless shall remain
in full force and effect. If any provision is held invalid or unenforceable
with respect to particular circumstances, it nevertheless shall remain in
full force and effect in all other circumstances. Further, the covenants
contained in Sections 6 and 7 of this Agreement shall be construed as
independent of any other provision of this Agreement, and the existence of
any claim or cause of action (whether predicated on this Agreement or
otherwise) shall not constitute a defense to the enforcement by the Company
of said covenants. In the event that any provision of this Agreement should
be found by a court of competent jurisdiction to be unreasonable, invalid,
or otherwise unenforceable, it is the desire of the parties hereto that (a)
such provision be considered severable, and (b) such provision be reformed
by such court so as to render it reasonable, valid, and enforceable, and
that it be so enforced.
12. Benefit of Agreement. This Agreement shall inure to the benefit of, and
shall be binding upon, the parties hereto and their respective successors,
assigns, heirs, and legal representatives, including any person with which
the Company may merge or consolidate. Insofar as the Executive is
concerned, this Agreement, being personal, cannot be assigned.
13. Entire Agreement. This Agreement contains the entire agreement between the
parties and constitutes the complete, final, and exclusive embodiment of
their agreement with respect to the subject matters covered by this
Agreement. This Agreement is executed without reliance upon any promise,
warranty or representation, written or oral, by any party or any
representative of any party other than those expressly contained herein and
supersedes any other such promises, warranties, representations, or
agreements.
14. Modifications and Waivers. No change, modification or waiver of any
provision of this Agreement shall be valid or binding unless it is in
writing, dated subsequent to the date hereof, and signed by the party
intended to be bound. No waiver of any breach, term, or condition of this
Agreement by either party shall constitute a subsequent waiver of the same
or any other breach, term, or condition.
15. Construction. This Agreement shall be governed by, construed and enforced
(both as to validity and performance) in accordance with the internal laws
of the State of Illinois applicable to agreements made and to be performed
wholly within such jurisdiction, without regard to principles of conflicts
of law.
7
<PAGE>
16. Post-Employment Communications. Nothing in this Agreement, including
Sections 4 or 10, shall be construed to prohibit the Executive from freely
communicating with, including testifying in any administrative proceeding
before, the Nuclear Regulatory Commission or the United States Department
of Labor, or from otherwise addressing issues related to nuclear safety
with any party or taking any other action protected under Section 211 of
the Energy Reorganization Act.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written as indicated below.
Executive
__________________________________
James J. O'Connor
COMMONWEALTH EDISON COMPANY
By:_______________________________
UNICOM CORPORATION
By:_______________________________
8
<PAGE>
James J. O'Connor
Appendix A
WAIVER AND RELEASE
------------------
In exchange for the separation benefits described in that certain Retirement and
Separation Agreement dated March 30, 1998 (the "Agreement"), which I acknowledge
I am not otherwise entitled to receive, I freely and voluntarily agree to this
Waiver and Release.
1. In signing this Waiver and Release, I hereby waive and release any and all
claims that I may ever have had or that I now have against the following
persons and organizations:
a) Commonwealth Edison Company, Commonwealth Edison Company of Indiana,
Unicom Corporation and any of their affiliates, successors and
subsidiaries; and
b) Any and all officers, directors, employees, shareholders and agents of
Commonwealth Edison Company, Commonwealth Edison Company of Indiana,
Unicom Corporation and any of their affiliates, successors or
subsidiaries.
2. I understand and agree that, in signing this document, I am waiving and
releasing any and all claims of whatever nature that I may ever have had or
now have against the persons and organizations listed in paragraph 1. I
understand and agree that among the claims that I am waiving and releasing
are the following:
a) Claims of age discrimination in employment under the federal Age
Discrimination in Employment Act;
b) Claims of race, color, sex, national origin, and religious
discrimination in employment under Title VII of the Civil Rights Act
of 1964, as amended, and the Civil Rights Act of 1866, 42 U.S.C.
(S)1981, as amended;
c) Claims of disability discrimination under the Americans with
Disabilities Act;
d) Claims of discrimination in employment under any state or local
statute, ordinance, regulation, or constitution;
e) Claims of breach of contract or claims or vacation, bonuses, incentive
compensation or other benefits, except that nothing contained herein
shall constitute a waiver or release of any claim or cause of action
arising out of an alleged breach or other violation of any obligation
under the Agreement; and
f) Any common law or statutory claims of wrongful discharge and any other
common law tort or statutory claims.
I understand and agree that I am waiving and releasing any and all claims
that I may ever have had or that I now have, regardless of their nature of
origin, and that the fact that such claim is not listed in subparagraphs
(a) through (f), above, does not mean that such claim is not included in
this Waiver and Release.
3. The existence of, and the terms of, the separation benefits described in
the Agreement and in this Waiver and Release shall be confidential, and I
will not engage in any action which might reveal the contents of the
Agreement and this Waiver and Release to anyone, including but not limited
to, past,
<PAGE>
James J. O'Connor
Appendix A
present or future employees of the released parties, other than to members
of my immediate family or to tax, legal or financial advisers, except as
may be required by the lawful order of a court or agency of competent
jurisdiction. The Agreement and this Waiver and Release may, however, be
used as evidence in a judicial proceeding in which any of the parties
allege a breach or other violation of this agreement.
4. I agree that I have no present or future right to seek employment with
Commonwealth Edison Company or Unicom Corporation. Further, I will not
apply for, or seek consideration for, any employment, engagement, or
contract with Commonwealth Edison Company or Unicom Corporation.
5. In signing this agreement, I agree and understand that this Waiver and
Release will be binding not only on me but also on my heirs,
administrators, and assigns with respect to the claims covered by this
agreement. As of the date of my signing of this agreement, I have made no
assignment of any claims against any of the persons or organizations
described in paragraph 1.
6. The Agreement and this Waiver and Release may only be modified in writing,
and any party's failure to enforce this agreement in the event of one or
more events which violate this agreement shall not constitute a waiver of
any right to enforce this agreement against subsequent violations.
7. I hereby acknowledge that, at the time I was given this Waiver and Release,
I was informed in writing by Commonwealth Edison Company that I had at
least twenty-one (21) days in which to consider whether I would sign this
Waiver and Release. I also acknowledge that, at the time I was given this
Waiver and Release, I was informed in writing that I should consult with an
attorney before signing this agreement. I have had an opportunity to
consult with any attorney and have either had such consultations or have
decided of my own free will that I will sign this agreement without
consulting with legal counsel.
8. I acknowledge that I have been informed that I may revoke my acceptance of
this Waiver and Release by delivering a letter to S. Gary Snodgrass, Senior
Vice President, One First National Plaza, 37th Floor, Chicago, IL 60690
within seven days of the date I have signed this agreement. I understand
that this Waiver and Release will not become effective until the eighth day
following my signing of this agreement. I understand and intend that, in
the event I do not revoke my acceptance of this agreement within the seven-
day period described in this paragraph, this Waiver and Release will be
legally binding and enforceable.
9. This Waiver and Release shall, in all respects, be construed in accordance
with and governed by the laws of the State of Illinois.
I STATE THAT I HAVE READ THE FOREGOING, THAT IN UNDERSTAND EACH OF ITS TERMS AND
THAT I INTEND TO BE BOUND THERETO.
___________________________ _______________________________
Name (Print) Social Security Number
___________________________ _______________________________
Signature Date
2
<PAGE>
Exhibit (10)-3
Unicom Corporation and Commonwealth Edison Company
Form 10-Q File Nos. 1-11375 and 1-1839
EMPLOYMENT AGREEMENT
among
UNICOM CORPORATION,
COMMONWEALTH EDISON COMPANY
and
JOHN W. ROWE
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement") dated as of March 10, 1998 (the "Agreement
Date") is made by and among Unicom Corporation, an Illinois corporation
("Unicom"), Commonwealth Edison Company, an Illinois corporation ("ComEd" and
with Unicom collectively, the "Company"), and John W. Rowe ("Executive"); and
WHEREAS, Unicom and ComEd desire to obtain the services of Executive and
Executive is willing to render such services, in accordance with the terms
hereof; and
NOW, THEREFORE, in consideration of the mutual undertakings of the parties
hereto, Unicom, ComEd and Executive agree as follows:
ARTICLE I.
DEFINITIONS
The terms set forth below have the following meanings (such meanings to be
applicable to both the singular and plural forms):
1.1. "Accrued Base Salary" means that portion of Executive's Base Salary
which is accrued but unpaid as of the Termination Date.
1.2. "Accrued Annual Incentive" means either:
(i) the amount of any Annual Incentive earned with respect to the
calendar year ended prior to the Termination Date, but which is unpaid as of
the Termination Date, if both (x) the amount of such Annual Incentive has been
objectively determined solely by the application of a formula that does not
provide the Company any discretion to increase the amount of the Annual
Incentive and (y) the Company has not applied any discretion it may have
pursuant to Unicom's Annual Incentive Award Program or otherwise to reduce the
amount of such Annual Incentive or,
(ii) if the conditions specified in clause (i) of this sentence have not
been satisfied, the average of the Annual Incentives that were actually paid
to Executive with respect to Executive's last three full calendar years of
employment by the Company.
For purposes of clause (ii) of the preceding sentence, if Annual Incentives have
been paid to Executive in respect of fewer than three years, such average shall
be computed by reference to the Annual Incentives that were actually paid to
Executive.
1.3. "Affiliate" means, when used with reference to any Person, any other
Person directly or indirectly controlling, controlled by, or under direct or
indirect common control with, the referent Person or such other Person, as the
case may be. For the purposes of this definition, the
<PAGE>
term "control" when used with respect to any Person means the power to direct or
cause the direction of management or policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise.
1.4. "Agreement Date" -- see the recitals to this Agreement.
1.5. "Anniversary Date" means any annual anniversary of the Commencement Date.
1.6. "Annual Incentive" -- see Section 4.3.
1.7. "Base Salary" -- see Section 4.1.
1.8. "Beneficiary" -- see Section 9.4.
1.9. "Cause" means any of the following:
(a) Executive's conviction of a felony or of a misdemeanor involving moral
turpitude, fraud or dishonesty,
(b) wilful misconduct by Executive in the performance of his duties under
this Agreement that was intended to personally benefit Executive, or
(c) material breach of this Agreement by Executive (other than as a result
of incapacity due to physical or mental illness);
provided that, if a material breach of this Agreement involved an act, or a
failure to act, which was done, or omitted to be done, by Executive in good
faith and with a reasonable belief that Executive's act, or failure to act, was
in the best interest of the Company or was required by applicable law or
administrative regulation, such breach shall not constitute Cause if, within 30
days (10 days in the event of a breach of covenants contained in Article VIII)
after Executive is given written notice of such breach that specifically refers
to this Section, Executive cures such breach to the fullest extent that it is
curable.
1.10. "Change in Control" means any one or more of the following:
(a) the acquisition by any Person (including for purposes of this
definition any "person" within the meaning of Section 13(d)(3) or 14(d)(2) of
the Exchange Act, of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (i) the then-
outstanding shares of Common Stock (the "Outstanding Unicom Common Stock") or
(ii) the combined voting power of the then-outstanding Voting Securities of
Unicom (the "Outstanding Unicom Voting Securities"), but excluding (A) any
acquisition directly from Unicom (excluding any acquisition resulting from the
exercise of an exercise, conversion or exchange privilege unless the security
being so exercised, converted or exchanged was acquired directly from Unicom),
(B) any
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acquisition by Unicom, (C) any acquisition by an employee benefit plan (or
related trust) sponsored or maintained by Unicom or any corporation
controlled by Unicom (a "Company Plan") or (D) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii)
and (iii) of subsection (c) of this definition; provided further, that for
purposes of clause (B), if any Person (other than Unicom or any Company
Plan) shall become the beneficial owner of 20% or more of the Outstanding
Unicom Common Stock or 20% or more of the Outstanding Unicom Voting
Securities by reason of an acquisition by Unicom, and such Person shall,
after such acquisition by Unicom, become the beneficial owner of any
additional shares of the Outstanding Unicom Common Stock or any additional
Outstanding Unicom Voting Securities (other than pursuant to any dividend
reinvestment plan or arrangement maintained by Unicom) and such beneficial
ownership is publicly announced, such additional beneficial ownership shall
constitute a Change in Control;
(b) individuals who, as of the Agreement Date, constitute the Unicom Board
(the "Incumbent Board") cease for any reason to constitute at least a
majority of the Incumbent Board; provided that any individual who becomes a
director of Unicom subsequent to the Agreement Date whose election, or
nomination for election by Unicom stockholders, was approved by the vote of
at least a majority of the directors then comprising the Incumbent Board
shall be deemed a member of the Incumbent Board; and provided further, that
any individual who was initially elected as a director of Unicom as a result
of an actual or threatened election contest (as such terms are used in Rule
14a-11 promulgated under the Exchange Act) or any other actual or threatened
solicitation of proxies or consents by or on behalf of any Person other than
the Unicom Board shall not be deemed a member of the Incumbent Board;
(c) approval by the stockholders of Unicom of a reorganization, merger or
consolidation or sale or other disposition of more than 50% of the operating
assets of Unicom (determined on a consolidated basis) other than in
connection with a sale-leaseback or other arrangement resulting in the
continued utilization of such assets (or the operating products of such
assets) by the Company (such sale or other disposition, a "Corporate
Transaction"); excluding, however, a Corporate Transaction pursuant to
which:
(i) all or substantially all of the individuals or entities who are
the beneficial owners, respectively, of the Outstanding Unicom Common
Stock and the Outstanding Unicom Voting Securities immediately prior to
such Corporate Transaction will beneficially own, directly or indirectly,
more than 60% of, respectively, the outstanding shares of common stock,
and the combined voting power of the outstanding Voting Securities of such
corporation, as the case may be, of the corporation resulting from such
Corporate Transaction (including a corporation which as a result of such
transaction owns Unicom or all or substantially all of its assets either
directly or indirectly) in substantially the same proportions relative to
each other as their ownership, immediately prior to such Corporate
Transaction, of
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<PAGE>
the Outstanding Unicom Common Stock and the Outstanding Unicom Voting
Securities, as the case may be;
(ii) no Person (other than Unicom; any Company Plan; the corporation
resulting from such Corporate Transaction; and any Person which beneficially
owned, immediately prior to such Corporate Transaction, directly or
indirectly, 20% or more of the Outstanding Unicom Common Stock or the
Outstanding Unicom Voting Securities, as the case may be) will beneficially
own, directly or indirectly, 20% or more of, respectively, the outstanding
shares of common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the outstanding Voting
Securities of such corporation;
(iii) individuals who were members of the Incumbent Board will
constitute at least a majority of the members of the board of directors of
the corporation resulting from such Corporate Transaction; and
(iv) Executive shall be elected the Chairman of the Board, President
and Chief Executive Officer of the corporation resulting from such Corporate
Transaction; or
(d) approval by the stockholders of Unicom of a plan of complete
liquidation or dissolution of Unicom or ComEd, other than a plan of
liquidation or dissolution which results in the acquisition of all or
substantially all the assets of ComEd by Unicom or its Affiliates.
1.11. "Common Stock" means common stock, without par value, of Unicom.
1.12. "Commencement Date" -- see Section 3.1.
1.13. "ComEd" see the recitals to this Agreement.
1.14. "ComEd Board" means the Board of Directors of ComEd.
1.15. "Company" -- see the recitals to this Agreement.
1.16. "Compensation Committee" means the Corporate Governance and Compensation
Committee of the Unicom Board, or any successor committee thereto.
1.17. "Confidential Information" means any information not generally known in
the relevant trade or industry, which was obtained from the Company, or which
was learned, discovered, developed, conceived, originated or prepared during or
as a result of the performance of any services by Executive on behalf of the
Company and which:
(a) relates to one or more of the following:
(i) trade secrets of the Company or any customer or supplier of the
Company;
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<PAGE>
(ii) existing or contemplated products, services, technology, designs,
processes, formulae, algorithms, research or product developments of the
Company or any customer or supplier of the Company;
(iii) business plans, sales or marketing methods, methods of doing
business, customer lists, customer usages and/or requirements, supplier
information of the Company or any customer or supplier of the Company; or
(b) the Company or any customer or supplier of the Company may reasonably
have the right to protect by patent, copyright or by keeping it secret and
confidential.
Confidential Information does not include any information that is or may become
publicly known other than through the improper actions of Executive.
1.18. "Contract Term" -- see Section 3.1.
1.19. "Disability" means a mental or physical condition which, in the opinion
of the Unicom Board, renders Executive unable or incompetent to carry out the
job responsibilities which such Executive held or the duties to which Executive
was assigned at the time the disability was incurred, which has existed for at
least three months and which in the opinion of a physician mutually agreed upon
by ComEd and Executive (provided that neither party shall unreasonably withhold
or delay such agreement) is expected to be permanent or to last for an
indefinite duration or a duration in excess of six months.
1.20. "Early Retirement" means a Termination of Employment by Executive at
least five years after the Commencement Date, other than a Normal Retirement.
1.21. "Exchange Act" means the Securities Exchange Act of 1934.
1.22. "Executive" -- see the recitals to this Agreement.
1.23. "Formula Annual Incentive" means the greater of (i) the Annual Incentive
for the latest calendar year ended on or before the Termination Date, or (ii)
the average of the Annual Incentives that were actually paid (or would have been
paid in respect of the year preceding the Termination Date but for a termination
of Executive's employment after the end of such preceding year) to Executive
with respect to Executive's last three full calendar years of employment by the
Company. For purposes of clause (ii) of the preceding sentence, if Annual
Incentives have been paid to Executive in respect of fewer than three years,
such average shall be computed by reference to the Annual Incentives that were
actually paid to Executive.
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<PAGE>
1.24. "Good Reason" means any material breach of this Agreement by the
Company, including:
(a) a failure to provide the compensation and benefits required by this
Agreement, including a reduction in the Base Salary of Executive below the
Base Salary in effect during the immediately preceding year, unless such
reduction is commensurate with and part of a general salary reduction
program applicable to all senior executives of the Company;
(b) failure to appoint or elect Executive as Chairman of the Unicom Board
and the ComEd Board, President and Chief Executive Officer of Unicom and
ComEd, and a member of the Unicom Board and the ComEd Board; provided that,
with the consent of Executive, Unicom and ComEd may from time to time appoint
another person to serve as President of Unicom and/or ComEd so long as such
Person reports to Executive;
(c) causing or requiring Executive to report to any Person or group other
than the Unicom Board;
(d) any material adverse change in the status, responsibilities or
perquisites of Executive; or
(e) any public announcement by the Board of either ComEd or Unicom that it
is seeking a replacement for Executive, which announcement is made prior to
Executive's attaining age 60, unless Executive has consented to such
announcement;
provided, however, that an act or omission shall not constitute a material
breach of this Agreement by the Company:
(i) unless Executive gives the Company 30 days' prior notice of such
act or omission and the Company fails to cure such act or omission within
the 30-day period;
(ii) if Executive first acquired actual knowledge of such act or
omission more than 12 months before Executive gives the Company such
notice; or
(iii) if Executive has consented in writing to such act or omission in
a document that makes specific reference to this Section.
1.25. "Initial Term" shall mean the three-year period beginning on March 16,
1998 and ending on March 15, 2001.
1.26. "including" means including without limitation.
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<PAGE>
1.27. "Key Employee" means any employee of the Company who is Group Level 12
or above ("Group Level") or any employee of any Affiliate of the Company who is
at a level which is the equivalent of Group Level.
1.28. "LTIP" means the Unicom Corporation Long-Term Incentive Plan.
1.29. "Normal Retirement" means a Termination of Employment by Executive
either (i) at least eight years after the Commencement Date or (ii) at least
five years after the Commencement Date if the Unicom Board shall have
determined that such Termination shall constitute Normal Retirement for purposes
of this Agreement.
1.30. "Option" means an option to purchase shares of Common Stock pursuant to
the terms and conditions of this Agreement and the LTIP (or any successor plan).
1.31. "Option Expiration Date" means, with respect to a specific Option, the
expiration date of such Option as specified in the grant agreement or the plan
(as applicable) relating thereto.
1.32. "Performance Unit Program" means Unicom's Long Term Performance Unit
Award Program.
1.33. "Person" means any individual, sole proprietorship, partnership, limited
liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, entity or government (whether federal,
state, county, municipal or otherwise).
1.34. "Post-Retirement Health Care Coverage" means the medical, dental and
vision care coverage provided by the Company from time to time to its retired
senior executives who retired on or after the Agreement Date.
1.35. "Practices" means practices, policies and programs.
1.36. "Prorated Annual Incentive" means, in respect of the calendar year
during which the Termination Date occurs, an amount equal to the product of the
Formula Annual Incentive multiplied by a fraction, the numerator of which equals
the number of days between January 1 of such calendar year and the Termination
Date and the denominator of which equals 365.
1.37. "SERP Benefit" -- see Section 6.3(b).
1.38. "Service Annuity System" means the Commonwealth Edison Company Service
Annuity System.
1.39. "Severance Period" means the period that commences on the Termination
Date and ends on:
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(a) the later of the third Anniversary Date or one year after the
Termination Date (if the Termination Date occurs during the Initial Term),
or
(b) one year after the Termination Date (if the Termination Date occurs
after the end of the Initial Term);
provided, however, that if the Termination Date occurs within two years after a
Change in Control, the Severance Period shall end three years after the
Termination Date.
1.40. "Supplemental Retirement Plan" means the Commonwealth Edison Company
Supplemental Management Retirement Plan.
1.41. "Taxes" means federal or Illinois income taxes.
1.42. "Termination Date" means the date as of which Executive's employment
with the Company is terminated by the Company or by Executive for any reason.
1.43. "Termination for Good Reason" means a Termination of Employment by
Executive for Good Reason.
1.44. "Termination of Employment" occurs on the first day on which Executive
is for any reason no longer employed by the Company.
1.45. "Termination Without Cause" means a termination of Executive's
employment by the Company for any reason other than Cause or Disability.
1.46. "Unicom" -- see the recitals to this Agreement.
1.47. "Unicom Board" means the Board of Directors of Unicom.
1.48. "Voting Securities" means, with respect to a corporation, the securities
of such corporation entitled to vote generally in the election of the directors
of such corporation.
ARTICLE II.
DUTIES
2.1. Duties. During the Contract Term, Executive shall be the Chairman of the
Unicom Board and the ComEd Board, President and Chief Executive Officer of both
Unicom and ComEd and a member of the Unicom Board and the ComEd Board. It is
contemplated that, in connection with each annual meeting of shareholders (or
action by written consent in lieu thereof) of Unicom and ComEd during the
Contract Term, (i) the shareholders of Unicom will elect Executive to the Unicom
Board and (ii) Unicom will elect Executive to the ComEd Board. During the
Contract Term (excluding any periods of vacation, sick leave or disability to
which Executive is entitled),
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Executive (subject to Section 2.2) shall devote his full attention and time to
the business and affairs of the Company and use his best efforts to perform his
duties and responsibilities described herein.
2.2. Other Activities. Executive may (a) serve on corporate, civic or
charitable boards or committees, (b) fulfill speaking engagements or teach at
educational institutions or (c) manage personal investments, in each case to the
extent that such activities do not materially interfere with the performance of
his duties under this Agreement.
ARTICLE III.
TERM OF AGREEMENT
3.1. Term. The term of this Agreement (the "Contract Term") shall begin on
March 16, 1998 (the "Commencement Date") and shall continue in effect until the
Termination Date.
ARTICLE IV.
COMPENSATION
4.1. Base Salary. During the Initial Term, the Company shall pay Executive in
accordance with its normal payroll practices an annual salary of at least
$900,000 (the "Base Salary"). After the expiration of the Initial Term, the Base
Salary shall be reviewed at least annually and may be adjusted at any time and
from time to time as shall be determined by the Compensation Committee. Any
increase in Base Salary shall not limit or reduce any other obligation to
Executive under this Agreement.
4.2. Inducement Incentive. As an inducement to enter into this Agreement, the
Company shall pay Executive an initial incentive in the amount of $600,000 on
the Agreement Date.
4.3. Annual Incentive. During the Contract Term, Executive shall participate
in Unicom's Annual Incentive Award Program and shall be eligible to receive an
annual incentive award ("Annual Incentive") in accordance with the terms and
conditions thereof and on the same basis as other senior executives of the
Company; provided that, in respect of the 1998 and 1999 calendar years, such
Annual Incentive shall equal the greater of (a) the actual award for such year
determined in accordance with such terms and conditions, or (b) $600,000. During
each of 1998 and 1999, the Annual Incentive shall be paid in cash as to the
first $600,000 thereof and the excess, if any, shall be paid 75% in cash and 25%
in shares of Common Stock.
4.4. Performance Unit Awards. Effective as of the Commencement Date, Executive
shall participate in the Performance Unit Program in accordance with the terms
and conditions thereof and on the same basis as other senior executives of the
Company; provided, however, that any award payable to Executive under such
Program with respect to each of the three-year performance periods ending on
December 31, 1998, 1999 or 2000 will be made as though
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Executive had participated in such Program throughout such performance periods
(except in the event of a Termination of Employment, in which case the
provisions of the Performance Unit Program shall apply).
ARTICLE V.
OPTION GRANTS
5.1. Initial Grant. On the Commencement Date, Unicom shall grant to
Executive an Option to purchase 250,000 shares of Common Stock. Subject to the
provisions of Article VII, such Option shall become exercisable in equal
installments on each of the three first Anniversary Dates and shall thereafter
remain exercisable until the 10th Anniversary Date. The option price of such
Option shall equal 100% of the fair market value of the Common Stock as of the
Commencement Date as determined by the Compensation Committee.
5.2. Future Grants. Commencing in 1999, the Compensation Committee shall in
its discretion consider Executive for possible future annual or other grants of
Options under the LTIP on the same date or dates and on the same basis as other
senior executives of the Company.
ARTICLE VI.
OTHER BENEFITS
6.1. Buy-out of Forfeited Benefits. As partial compensation for actual and
expected compensation, benefits and programs to which Executive was, or
reasonably expected to become, entitled to receive from his previous employer,
the Company shall pay Executive a lump-sum amount equal to $2,000,000 on the
Agreement Date.
6.2. Savings and Other Plans. During the Contract Term, Executive shall be
entitled to participate in all savings, deferred compensation and retirement
plans which are or may hereafter become generally available to senior executives
of the Company (subject to the eligibility requirements of such plans, except as
such eligibility requirements are modified by the provisions of Section 4.4 and
Article VI).
6.3. Retirement Benefits.
(a) Upon the first to occur of (i) Executive's Early Retirement or
Normal Retirement, (ii) a Termination Without Cause or a Termination for Good
Reason, or (iii) a Termination of Employment by reason of death or Disability,
Executive (or, in the event of his death, his surviving spouse) shall thereafter
receive an annual retirement benefit determined as provided in the following
sentence; provided, however, that Executive shall not receive any such
retirement benefit pursuant to this Section 6.3 if, before the first to occur of
the events specified in clauses (i), (ii) and (iii) of this sentence, Executive
shall have received a Notice of Termination
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and his employment is subsequently terminated by the Company for Cause. The
amount of such anual retirement benefit shall equal the amount that would have
been payable under the Service Annuity System (including under the Supplemental
Retirement Plan) as now in effect for employees who retire at age 60 (or, if
greater, the attained age of Executive upon such Early or Normal Retirement,
death, Disability, Termination Without Cause or Termination for Good Reason),
calculated based on the assumption that Executive has 20 years of service on the
Commencement Date and accrues, while employed by the Company, one additional
year of service on each Anniversary Date. If Executive shall not have satisfied
the conditions of the first sentence of this Section 6.3(a) as of the
Termination Date, he shall not be entitled to receive a retirement benefit
determined in accordance with this Section 6.3.
(b) The annual retirement benefit to be provided to Executive under this
Section (the "SERP Benefit") shall equal the amount which, when added to all
other retirement benefits provided by the Company and its Affiliates during such
year (including payments under the Service Annuity System, the Supplemental
Retirement Plan, the Social Security supplement paid by ComEd until Executive
attains age 65, and any other sources) results in the SERP Benefit; provided,
however, that (i) in no event shall any SERP Benefit be payable during the
Severance Period and (ii) Executive's right to receive the SERP Benefit shall be
subject to Section 7.7.
(c) Executive shall have the option to receive the SERP Benefit (i) as a
lump-sum amount, (ii) as a regular life annuity, or (iii) as a joint and
survivor marital annuity (to be appropriately adjusted in accordance with the
provisions of the Service Annuity System). In the event of Executive's death
during his employment by the Company, his spouse will immediately become
entitled to a surviving spouse benefit.
6.4. Welfare Benefits. During the Contract Term, Executive (and his family)
shall be eligible to participate in and shall receive benefits under all welfare
benefit plans and Practices provided by the Company (including medical,
prescription, dental, vision care, disability, salary continuance, employee
life, group life, dependent life, accidental death and travel accident insurance
plans and programs) generally available to senior executives of the Company;
provided, however, that the Company shall provide at no cost to Executive an
amount of term life insurance coverage that, when added to the coverage
available at no cost to Executive under the Company's group or employee life
plans or programs, equals three times his Base Salary.
6.5. Employee Benefits. During the Contract Term, Executive shall be entitled
to employee benefits generally available to other senior executives of the
Company, including financial planning and tax planning services.
6.6. Relocation. Executive shall be entitled to a relocation allowance in
connection with his relocation to the Chicago, Illinois metropolitan area
pursuant to the terms of the Company's relocation program applicable to other
senior executives of the Company. On or before March 1, 1999, the Company shall
pay Executive, in cash, an amount (the "Gross-Up Amount") equal to the sum of
(i) any Taxes paid or payable by Executive in respect of such relocation
allowance
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and (ii) an additional amount such that, after payment of Taxes on the Gross-Up
Amount, there remains a sufficient amount to pay the Taxes being reimbursed
pursuant to clause (i) of this sentence. For purposes of the preceding sentence,
Executive shall be deemed to be subject to the highest marginal rate of federal
and Illinois taxes.
6.7. Time Off. During each year of the Contract Term, Executive shall be
entitled to 30 "paid time off" days in accordance with the PTO policy applicable
to senior executives of the Company.
6.8. Expenses. During the Contract Term, Executive shall be entitled to
receive prompt reimbursement for all of his reasonable employment-related
expenses upon the Company's receipt of accounting in accordance with Practices
applicable to senior executives of the Company.
6.9. Office; Support Staff. During the Contract Term, Executive shall be
entitled to an office of a size and with furnishing and other appointments, and
to personal secretarial and other assistance, as is appropriate to the positions
being assumed by Executive, but in no event less than those provided to other
senior executives of the Company.
ARTICLE VII.
TERMINATION BENEFITS
7.1. Termination for Cause or Other Than for Good Reason, Retirement, Death or
Disability.
(a) If, whether before or after the end of the Initial Term, Executive's
employment is terminated by the Company for Cause or by Executive for any
reason other than Good Reason, death, Disability, Early Retirement or Normal
Retirement, then:
(i) the Company shall within 10 days after the Termination Date
pay Executive his Accrued Base Salary and Accrued Annual Incentive;
(ii) all of Executive's Options (whether or not then exercisable)
shall expire on the Termination Date; and
(iii) any Performance Unit Program award that has not yet become
payable in accordance with the terms and conditions thereof shall be
forfeited.
(b) The Company may not terminate Executive's employment for Cause
unless:
(i) no fewer than 30 days prior to the Termination Date, the
Company provides Executive with written notice of its intent to consider
a termination of employment for Cause that states the proposed
Termination Date and includes a
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<PAGE>
detailed description of the specific reasons which form the basis for
such consideration (the "Notice of Consideration");
(ii) during a period of not fewer than 15 days after the date
Notice of Consideration is provided, Executive shall have the opportunity
to appear before the Unicom Board, with legal representation if he so
elects, to present arguments on his own behalf; and
(iii) following the presentation to the Unicom Board as provided in
(ii) above, Executive shall be terminated for Cause only if (x) not less
than 60% of the members of the Unicom Board (other than Executive if
Executive is a member of the Unicom Board, or any other member of the
Unicom Board alleged to be involved in the events that form the basis of
the proposed termination for Cause) determines that the actions of
Executive constituted Cause and that his employment should accordingly be
terminated for Cause; and (y) the Unicom Board provides Executive with a
written determination setting forth the basis of such termination of
employment which shall be consistent with the reasons set forth in the
Notice of Consideration.
(c) After providing Notice of Consideration to Executive, the Unicom
Board may suspend Executive with pay pending a final determination pursuant to
this Section.
7.2. Termination for Death or Disability. If Executive's employment terminates
due to death or Disability:
(a) the Company shall pay to Executive, his Beneficiaries or his estate,
as the case may be, immediately after the Termination Date an amount which is
equal to the sum of his Accrued Base Salary, Accrued Annual Incentive and
Prorated Annual Incentive; and
(b) each of Executive's Options (including any Options not then
exercisable) shall be fully exercisable and shall remain exercisable until the
applicable Option Expiration Date.
7.3. Termination Without Cause or for Good Reason. In the event of a
Termination Without Cause or a Termination for Good Reason:
(a) Executive shall receive a lump sum equal to his Accrued Base Salary,
Accrued Annual Incentive, and Prorated Annual Incentive;
(b) Executive shall receive for the duration of the Severance Period,
(i) periodic payments in accordance with the Company's normal
payroll practices and in amounts equal to his Base Salary in effect
during the calendar year preceding the Termination Date and, for each
year during the Severance Period, the Formula Annual Incentive, and
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<PAGE>
(ii) a continuation of the benefits described in Section 6.4 to
which Executive and his family are entitled as of the Termination Date
(or, if such benefits are not available, the economic equivalent
thereof);
(c) each of Executive's Options that is exercisable on the Termination
Date shall remain exercisable until the applicable Option Expiration Date;
(d) each of Executive's Options that has not yet become exercisable as
of the Termination Date shall become exercisable during the Severance Period
at such times and in such amounts (if any) as if Executive had remained
employed by the Company throughout the Severance Period and, after becoming so
exercisable, shall remain exercisable until the applicable Option Expiration
Date; and
(e) any of Executive's Options that remain unexercisable at the end of
the Severance Period shall be forfeited.
7.4. Termination Upon Normal Retirement. If Executive's employment terminates
due to Normal Retirement:
(a) Executive shall receive a lump sum equal to his Accrued Base Salary,
Accrued Annual Incentive, and Prorated Annual Incentive;
(b) each of Executive's Options that is exercisable on the Termination
Date shall remain exercisable until the applicable Option Expiration Date; and
(c) each of Executive's Options that has not yet become exercisable as
of the Termination Date shall become exercisable after Executive's retirement
at such times and in such amounts as if Executive had remained employed by the
Company following his retirement and, after becoming so exercisable, shall
remain exercisable until the applicable Option Expiration Date.
7.5. Termination Upon Early Retirement. If Executive's employment terminates
due to Early Retirement:
(a) Executive shall receive a lump sum equal to his Accrued Base Salary,
Accrued Annual Incentive, and Prorated Annual Incentive;
(b) each of Executive's Options that is exercisable on the Termination
Date shall remain exercisable until the later to occur of (i) the end of the
period that is applicable under such circumstances pursuant to the form of
grant agreement in general use for grants to senior executives at the time
such Option was granted or (ii) 90 days after the Termination Date, but in no
event after the applicable Option Expiration Date); and
-15-
<PAGE>
(c) each of Executive's Options that has not yet become exercisable as
of the Termination Date shall expire on the Termination Date.
7.6. Post-Retirement Health Care Coverage. In the event of any Termination of
Employment on account of death, Disability, Early Retirement, Normal Retirement,
by Executive for Good Reason or by the Company without Cause, Executive and his
spouse shall each be entitled to Post-Retirement Health Care Coverage for the
remainder of their respective lives. Such coverage shall not duplicate any
benefits that may then be available to Executive and his spouse under Section
6.4 and shall be secondary to any coverage provided by any other employer or
Medicare.
7.7. Breach of Covenants; Exculpation. In the event of (a) a wilful and
material breach by Executive of any of the covenants contained in Article VIII,
or (b) a failure by Executive to cure (to the fullest extent curable) a non-
wilful breach of any of such covenants within 10 days after his receipt of a
written notice thereof from the Company, the Company shall be entitled, after
obtaining a final judicial determination (or, if the Company reasonably
determines, based upon the advice of counsel, that it is more likely than not
that each of the Circuit Court of Cook County, Illinois and the United States
District Court for the Northern District of Illinois will decline to adjudicate
the issue, a final decree in an arbitration proceeding conducted in accordance
with the rules of the American Arbitration Association, with such arbitration
proceeding to be conducted in Chicago, Illinois before a panel of three
arbitrators) to the effect that such action by the Company is appropriate and
consistent with the requirements and procedures set forth in this Agreement, to
take any or all of the following actions:
(i) discontinue the SERP Benefit and any or all payments and
benefits provided to Executive pursuant to Article VII and any other
provision of this Agreement,
(ii) terminate any Options then held by Executive, whether or not
then exercisable, and
(iii) require Executive to:
(w) repay to the Company all amounts previously received by
Executive pursuant to any provision of Article VII on or after the
first date on which the Executive breached any of the covenants
contained in Article VIII (the "Breach Date"),
(x) repay to the Company all amounts previously received by
Executive pursuant the SERP Benefit at any time on or after the
Termination Date,
(y) pay to the Company an amount equal to the aggregate
"spread" on all Options exercised on or after the Breach Date, and
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<PAGE>
(z) repay to the Company any other amount that it paid to
Executive on or after the Breach Date which Executive would not have
been entitled to receive if the Company had terminated the
employment of Executive for Cause as of the Breach Date;
provided, however, that (I) no benefits shall be discontinued or terminated
nor shall Executive have any monetary liability to the Company for any breach
of the covenants contained in Article VIII for any act or failure to act,
including without limitation simple negligence or an error in judgment, if
such act or failure to act was done in good faith, with a reasonable belief
that the act, or failure to act, was in the best interest of the Company or
was required by applicable law or administrative regulations, and was not done
primarily to benefit Executive and (II) no action may be brought under this
Section 7.7 more than three years after the Termination Date. For purposes of
clause (iii) (y) of the preceding sen tence, "spread" in respect of any Option
shall mean the product of the number of shares as to which such Option has
been exercised on or after the Breach Date multiplied by the difference
between the closing price of the Common Stock on the exercise date (or if the
Common Stock did not trade on the New York Stock Exchange on the exercise
date, the most recent date on which the Common Stock did so trade) and the
exercise price of the Option.
7.8. Other Employment. Executive shall not be obligated to seek other
employment or take any other action by way of mitigation of the amounts payable
to Executive under any provision of this Agreement. The amounts payable
hereunder shall not be reduced by any payments received by Executive from any
other employer; provided, however, that any continued welfare benefits provided
for by Section 6.4 shall not duplicate any benefits that are provided to
Executive and his family by such other employer and shall be secondary to any
coverage provided by such other employer.
ARTICLE VIII.
RESTRICTIVE COVENANTS
8.1. Confidential Information.
(a) Executive acknowledges that it is the policy of the Company to
maintain as secret and confidential all Confidential Information, and that
Confidential Information has been and will be developed at substantial cost
and effort to the Company. Executive acknowledges that he will have access to
Confidential Information with respect to the Company which information is a
valuable and unique asset of the Company and that disclosure of such
Confidential Information would cause irreparable damage to the Company's
business and operations.
-17-
<PAGE>
(b) Executive acknowledges that the Confidential Information is, as
between the Company and Executive, the exclusive property of the Company.
(c) Both during Executive's employment by the Company (whether during or
after the Initial Term) and at any time after the Termination Date, Executive:
(i) shall not, directly or indirectly, divulge, furnish or make
accessible to any Person (except (x) to the extent Executive reasonably
and in good faith believes that such actions are related to, and required
by, Executive's performance of his duties under this Agreement, or (y) as
may be compelled by applicable law or administrative regulation; provided
that Executive, to the extent not prohibited from doing so by applicable
law or administrative regulation, shall give the Company written notice
of the information to be so disclosed pursuant to clause (y) of this
sentence as far in advance of its disclosure as is practicable, shall
cooperate with the Company in its ef forts to protect the information
from disclosure, and shall limit its disclosure of such information to
the minimum disclosure required by law or administrative regulation
unless the Company agrees in writing to a greater level of disclosure);
(ii) shall not use for his own benefit in any manner, any
Confidential Information;
(iii) shall not cause any such Confidential Information to become
publicly known; and
(iv) shall take all reasonable steps to safeguard such Confidential
Information and to protect it against disclosure, misuse, loss and theft.
(d) For purposes of this Agreement, Confidential Information represents
trade secrets subject to protection under the Uniform Trade Secrets Act, as
adopted by the State of Illinois, or to any comparable protection afforded by
applicable laws.
8.2. Non-Competition.
(a) During the period beginning on the Agreement Date and ending two
years after the Termination Date, Executive shall not, directly or indirectly,
in any capacity, engage or participate in, become employed by, serve as a
director of, or render advisory or consulting or other services in connection
with, any Competitive Business (as defined in Section 8.2(c)).
(b) During the period beginning on the Agreement Date and ending two
years after the Termination Date, Executive shall not at any time make any
financial investment, whether in the form of equity or debt, or own any
interest, directly or indirectly, in any Competitive Business. Nothing in this
subsection shall, however, restrict Executive from making an investment in any
Competitive Business if such investment does not (i) represent more than
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<PAGE>
1% of market value of the outstanding capital stock or debt (as applicable) of
such Competitive Business, (ii) give Executive any right or ability, directly
or indirectly, to control or influence the policy decisions of any Competitive
Business, and (iii) create a conflict of interest between Executive's duties
under this Agreement and his interest in such investment. In addition, nothing
in this subsection shall restrict Executive's ability to retain any interest
(including any interest in common stock now held or subsequently acquired upon
exercise of options or similar rights now held or upon the conversion of
convertible securities now held) in New England Electric System or any of its
successors received by Executive as a result of his former employment
relationship with such entity.
(c) "Competitive Business" means as of any date (including during the
two-year period commencing on the Termination Date) any Person (and any
branch, office or operation thereof) which engages in, or proposes to engage
in (i) the production, transmission, distribution, marketing or sale of
electricity or (ii) any other business engaged in by the Company prior to the
Termination Date which represents for any calendar year during the Contract
Term, or is projected by the Company (as reflected in a business plan adopted
by the Company before the Termination Date) to yield during any year during
the first three-fiscal year period commencing on or after the Termination
Date, more than 5% of the gross revenue of the Company, and which is located
(i) anywhere in the United States, or (ii) anywhere outside of the United
States where the Company is then engaged in, or proposes to engage in, any of
such activities.
8.3. Non-Solicitation. During the period beginning on the Agreement Date and
ending two years after the Termination Date, Executive shall not, directly or
indirectly:
(a) other than in connection with the performance of his duties as an
officer of the Company, encourage any Key Employee to terminate his or her
employment;
(b) employ, engage as a consultant or adviser, or solicit the employment
or engagement as a consultant or adviser of, any Key Employee (other than by
the Company or its Affiliates), or cause any Person to do any of the
foregoing;
(c) establish a business with, or encourage others to establish a
business with, any Key Employee; or
(d) interfere with the relationship of the Company or any of its
Affiliates with, or endeavor to entice away from, the Company any Person who
or which at any time during the period commencing one year prior to the
Commencement Date was a material customer or material supplier of, or
maintained a material business relationship with, the Company or any of its
Affiliates.
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<PAGE>
8.4. Reasonableness of Restrictive Covenants.
(a) Executive acknowledges that the covenants contained in Sections 8.1,
8.2 and 8.3 are reasonable in the scope of the activities restricted, the
geographic area covered by the restrictions, and the duration of the
restrictions, and that such covenants are reasonably necessary to protect
the Company's legitimate interests in its Confidential Information and in
its relationships with employees, customers and suppliers. Executive further
acknowledges such covenants are essential elements of this Agreement and
that, but for such covenants, the Company would not have entered into this
Agreement.
(b) The Company and Executive have each consulted with their respective
legal counsel and have been advised concerning the reasonableness and
propriety of such covenants. Executive acknowledges that his observance of
the covenants contained in Sections 8.1, 8.2 and 8.3 will not deprive him of
the ability to earn a livelihood or to support his dependents.
8.5. Right to Injunction; Survival of Undertakings.
(a) In recognition of the confidential nature of the Confidential
Information, and in recognition of the necessity of the limited restrictions
imposed by Sections 8.1, 8.2 and 8.3, the parties agree that it would be
impossible to measure solely in money the damages which the Company would
suffer if Executive were to breach any of his obligations under such
Sections. Executive acknowledges that any breach of any provision of this
such Sections would irreparably injure the Company. Accordingly, Executive
agrees that if he breaches any of the provisions of such Sections, the
Company shall be entitled, in addition to any other remedies to which the
Company may be entitled under this Agreement or otherwise, to an injunction
to be issued by a court of competent jurisdiction, to restrain any breach,
or threatened breach, of such provisions, and Executive hereby waives any
right to assert any claim or defense that the Company has an adequate remedy
at law for any such breach.
(b) If a court determines that any of the covenants included in this
Article VIII is unenforceable in whole or in part because of such covenant's
duration or geographical or other scope, such court shall have the power to
reduce the duration or scope of such provision, as the case may be, so as to
cause such covenant to be thereafter enforceable.
(c) All of the provisions of this Article VIII shall survive any
Termination of Employment without regard to (i) the reasons for such
termination or (ii) the expiration of the Contract Term.
8.6. Non-Disparagement. During the two-year period commencing on the
Termination Date, Executive shall not (a) make any written or oral statement
that brings the Company or any of its employees, officers or agents into
disrepute, or tarnishes any of their images or reputations or (b) publish,
comment upon or disseminate any statements suggesting or accusing Unicom or
-20-
<PAGE>
ComEd or any of its agents, employees or officers of any misconduct or unlawful
behavior. This Section shall not be deemed to be breached by testimony of
Executive given in any judicial or governmental proceeding which Executive
reasonably believes to be truthful at the time given or by any other action of
Executive which he reasonably believes is taken in accordance with the
requirements of applicable law or administrative regulation.
ARTICLE IX.
MISCELLANEOUS
9.1. Required Withholding. The Company may deduct or withhold from payments
or other benefits otherwise payable to Executive pursuant to the provisions of
this Agreement any amounts that are required by applicable law.
9.2. Remedies. In the event of any Termination of Employment or any breach of
this Agreement by the Company, Executive's exclusive remedies shall be as
specified in Article VII or to enforce any other undertaking of the Company
expressly provided in this Agreement; provided that nothing herein shall deny
Executive the right to seek a final judicial determination (or, if Executive
reasonably determines, based upon the advice of counsel, that it is more likely
than not that each of the Circuit Court of Cook County, Illinois and the United
States District Court for the Northern District of Illinois will decline to
adjudicate the issue, a final decree in an arbitration proceeding conducted in
accordance with the rules of the American Arbitration Association, with such
arbitration proceeding to be conducted in Chicago, Illinois before a panel of
three arbitrators) that any Termination of Employment purportedly made for Cause
was, in fact, made not in good faith or was made without adherence to the
requirements or procedures set forth in this Agreement. If Executive obtains
such a final judicial or arbitral determination, as applicable, the Termination
of Employment shall be treated as a Termination Without Cause for all purposes
of this Agreement.
9.3. Assignment; Successors. This Agreement shall be binding upon and inure
to the benefit of Executive and his Beneficiaries and estate and the Company and
its successors.
9.4. Beneficiary. If Executive dies prior to receiving all of the amounts
payable hereunder pursuant to Article IV, VI (except as may otherwise expressly
be provided in such Article or in the plans referenced therein) or VII, such
amounts shall be paid in a lump-sum payment to the beneficiary ("Beneficiary")
designated by Executive in writing to the Company during his lifetime, which
Executive may change from time to time by new designation filed in like manner
without the consent of any Beneficiary; or if no such Beneficiary is designated,
to his estate.
9.5. Nonalienation of Benefits. Benefits payable under this Agreement shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to
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<PAGE>
actually being received by Executive, and any such attempt to dispose of any
right to benefits payable hereunder shall be void.
9.6. Severability. If all or any part of this Agreement is declared by any
court or governmental authority to be unlawful or invalid, such unlawfulness or
invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
9.7. Amendment; Waiver. This Agreement shall not be amended or modified
except by a written agreement between the Company and Executive. A waiver of any
term, covenant or condition contained in this Agreement shall not result in a
waiver of any other term, covenant or condition, and any waiver of any default
shall not result in a waiver of any later default.
9.8. Notices. All notices hereunder shall be in writing, delivered by hand,
nationally-recognized courier service that guarantees overnight delivery or by
certified mail, return receipt requested, postage prepaid, and addressed as
follows:
If to the Company: Unicom Corporation
Attn: Pamela B. Strobel
Senior Vice President
and General Counsel
37th Floor
One First National Plaza
Chicago, Illinois 60690
If to Executive: John W. Rowe
Unit 3306
950 North Michigan Avenue
Chicago, Illinois 60611
With copy to: Robert W. Kleinman, Esq.
Ross & Hardies
150 North Michigan Avenue
Chicago, Illinois 60601-7567
Either party may from time to time designate a new address by notice given in
accordance with this Section. Notices shall be effective when received by the
addressee.
9.9. Publicity. Until this Agreement has been filed as an exhibit to a
filing by the Company with the Securities and Exchange Commission, neither
Executive nor the Company shall issue or cause the publication of any press
release or other public announcement with respect to
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<PAGE>
this Agreement, nor disclose the contents hereof to any third party, without
obtaining in each case the consent of the other parties hereto, which consent
shall not be withheld or delayed where such release, announcement or disclosure
shall be required by applicable law or administrative regulation.
9.10. Communications. Nothing in this Agreement, including Sections 8.1, 8.6
or 9.9, shall be construed to prohibit Executive from communicating with,
including testifying in any administrative proceeding before, the Nuclear
Regulatory Commission or the United States Department of Labor, or from
otherwise addressing issues related to nuclear safety with any party or taking
any other action protected under Section 211 of the Energy Reorganization Act.
9.11. Legal Expenses. The Company shall pay to Executive all reasonable
legal fees and expenses incurred by Executive in disputing in good faith any
termination of his employment hereunder or in seeking in good faith to obtain or
enforce any benefit or right under this Agreement, provided that Executive shall
have a reasonable basis for his position.
9.12. Joint and Several Liability. The obligations of Unicom and ComEd to
Executive under this Agreement shall be joint and several.
9.13. Articles and Sections. Except where otherwise indicated by the
context, any reference to an "Article" or "Section" shall be to an Article or
Section of this Agreement.
9.14. Counterparts. This Agreement may be executed in multiple counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
9.15. Entire Agreement. This Agreement forms the entire agreement between
the parties hereto with respect to its subject matter, and shall supersede all
prior agreements, promises and representations of the parties regarding
employment or severance, whether in writing or otherwise.
9.16. Applicable Law. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Illinois, without regard to its choice
of law principles.
9.17. Survival. All of Executive's rights hereunder, including his rights
to compensation and benefits prior to the Termination Date, his right to
severance and other benefits subject to the terms and conditions of Article VII
after the Termination Date, and his obligations under Article VIII hereof, shall
survive a Termination of Employment and the termination of this Agreement.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date first
above written.
UNICOM CORPORATION
By:
---------------------------------------
Edward A. Brennan,
Chairman of the Corporate Governance
and Compensation Committee of
the Board of Directors
By:
---------------------------------------
Donald P. Jacobs,
Lead Non-employee Director
COMMONWEALTH EDISON COMPANY
By:
---------------------------------------
Edward A. Brennan,
Chairman of the Corporate Governance
and Compensation Committee of
the Board of Directors
By:
---------------------------------------
Donald P. Jacobs,
Lead Non-employee Director
EXECUTIVE:
-------------------------------------------
John W. Rowe
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<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 March 31, December 31,
No. 1998 1997
- ---- --------- ------------
<S> <C> <C>
1 Net income (loss) before extraordinary item and cumulative effect of
2 change in accounting principle $(169,579) $(160,138)
--------- ---------
3 Net provisions for income taxes and investment tax credits deferred
4 charged to-
5 Operations $ 295,449 $ 307,276
6 Other income (408,260) (405,819)
--------- ---------
7 $(112,811) $ (98,543)
--------- ---------
8 Fixed charges-
9 Interest on debt $ 476,248 $ 487,749
10 Estimated interest component of nuclear fuel and
11 other lease payments, rentals and other interest 72,739 70,468
12 Amortization of debt discount, premium and expense 19,385 21,951
13 ComEd-obligated mandatorily redeemable preferred securities dividend
14 requirements of subsidiary trusts holding solely ComEd's subordinated
15 debt securities 29,640 28,860
--------- ---------
16 $ 598,012 $ 609,028
--------- ---------
17 Preferred and preference stock dividend requirements-
18 Provisions for preferred and preference stock dividends $ 59,506 $ 60,486
19 Taxes on income required to meet provisions for
20 preferred and preference stock dividends 38,981 39,623
--------- ---------
21 $ 98,487 $ 100,109
--------- ---------
22 Fixed charges and preferred and preference stock
23 dividend requirements $ 696,499 $ 709,137
--------- ---------
24 Earned for fixed charges and preferred and preference stock
25 dividend requirements $ 315,622 $ 350,347
--------- ---------
26 Ratios of earnings to fixed charges (line 22 divided by line 13) 0.53 0.58
==== ====
27 Ratios of earnings to fixed charges and preferred and preference
28 stock dividend requirements (line 22 divided by line 20) 0.45 0.49
==== ====
</TABLE>
<PAGE>
Exhibit (23)-1
Unicom Corporation
Form 10-Q File No. 1-11375
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation
by reference of our report in this Form 10-Q for the quarterly period ended
March 31, 1998 (Report), into Unicom Corporation's previously filed prospectuses
dated March 18, 1994, constituting part of Form S-4 Registration Statement File
No. 33-52109, as amended (relating to Common Stock of Unicom Corporation), as
further amended by Post-Effective Amendment No. 1 on Form S-8 (relating to
Commonwealth Edison Company's Employee Savings and Investment Plan) and Post-
Effective Amendment No. 2 on Form S-8 (relating to Unicom Corporation's Employee
Stock Purchase Plan); Form S-8 Registration Statement File No. 33-56991
(relating to Unicom Corporation's Long-Term Incentive Plan), Form S-4
Registration Statement File No. 333-01003 (relating to Common Stock of Unicom
Corporation), Form S-8 Registration Statement File No. 333-04749 (relating to
Unicom Corporation's 1996 Directors' Fee Plan); Form S-8 Registration Statements
File Nos. 333-10613 and 333-26779 (relating to Commonwealth Edison Company's
Employee Savings and Investment Plan) and Form S-8 Registration Statement File
No. 333-39677 (relating to the Unicom Corporation Management Deferred
Compensation Plan). We also consent to the application of our Report to
Commonwealth Edison Company and subsidiary companies' ratios of earnings to
fixed charges and ratios of earnings to fixed charges and preferred and
preference stock dividend requirements for each of the twelve months ended March
31, 1998 and December 31, 1997 appearing in this Form 10-Q.
Arthur Andersen LLP
Chicago, Illinois
May 11, 1998
<PAGE>
Exhibit (23)-2
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 in this Form 10-Q for the quarterly period ended
March 31, 1998 (Report), into Commonwealth Edison Company's (the Company)
previously filed prospectuses as follows: (1) 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); (2)
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); (3) prospectus dated September 19, 1995,
constituting part of Amendment No. 1 to Form S-3 Registration Statement File No.
33-61343, as amended (relating to Company-Obligated Mandatory Redeemable
Preferred Securities of ComEd Financing I); (4) prospectus dated June 13, 1997
constituting part of Form S-4 Registration Statement File No. 333-28369
(relating to Company-Obligated Mandatory Redeemable Preferred Securities of
ComEd Financing II); and (5) Form S-8 Registration Statement File No. 333-33847
(relating to the Commonwealth Edison Company Excess Benefit Savings Plan). 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 March 31, 1998 and
December 31, 1997 appearing in this Form 10-Q.
Arthur Andersen LLP
Chicago, Illinois
May 11, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and Statement of Consolidated Capitalization as of
March 31, 1998 and the related Statements of Consolidated Operations, Retained
Earnings (Deficit) and Cash Flows for the three months ended March 31, 1998 and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000918040
<NAME> UNICOM CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 16,456,748
<OTHER-PROPERTY-AND-INVEST> 2,368,395
<TOTAL-CURRENT-ASSETS> 1,668,066
<TOTAL-DEFERRED-CHARGES> 0<F1>
<OTHER-ASSETS> 1,695,810
<TOTAL-ASSETS> 22,189,019
<COMMON> 4,945,437
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (54,207)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,887,890<F2>
174,328<F3>
506,920<F3>
<LONG-TERM-DEBT-NET> 5,757,279<F4>
<SHORT-TERM-NOTES> 0<F1>
<LONG-TERM-NOTES-PAYABLE> 0<F4>
<COMMERCIAL-PAPER-OBLIGATIONS> 0<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 139,413
30,688<F3>
<CAPITAL-LEASE-OBLIGATIONS> 424,343
<LEASES-CURRENT> 240,895
<OTHER-ITEMS-CAPITAL-AND-LIAB> 10,027,263<F5>
<TOT-CAPITALIZATION-AND-LIAB> 22,189,019
<GROSS-OPERATING-REVENUE> 1,712,235
<INCOME-TAX-EXPENSE> 34,196<F6>
<OTHER-OPERATING-EXPENSES> 1,477,430
<TOTAL-OPERATING-EXPENSES> 1,521,821
<OPERATING-INCOME-LOSS> 190,414
<OTHER-INCOME-NET> (28,331)<F6><F7>
<INCOME-BEFORE-INTEREST-EXPEN> 172,278
<TOTAL-INTEREST-EXPENSE> 118,563
<NET-INCOME> 53,715
0<F7>
<EARNINGS-AVAILABLE-FOR-COMM> 53,715
<COMMON-STOCK-DIVIDENDS> 86,739
<TOTAL-INTEREST-ON-BONDS> 0<F8>
<CASH-FLOW-OPERATIONS> 366,439
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
<FN>
<F1> This item is not disclosed as a separate line item on the Consolidated
Balance Sheet.
<F2> Includes a deduction of $3,340 thousand for preference stock expense of
ComEd.
<F3> Preferred and preference stocks of ComEd.
<F4> $1,023,954 thousand of notes and long-term note to bank is included in
LONG-TERM-DEBT-NET.
<F5> Includes $350,000 thousand of ComEd-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely ComEd's
subordinated debt securities.
<F6> A tax benefit of $10,195 thousand related to nonoperating activities is
included in INCOME-TAX-EXPENSE.
<F7> A $14,547 thousand provision for preferred and preference stock dividends
of ComEd and a $7,428 thousand provision for preferred securities dividends
of subsidiary trusts holding solely ComEd's subordinated debt securities
are included in OTHER-INCOME-NET.
<F8> This item is not disclosed as a separate line item on the Statement of
Consolidated Operations.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and Statement of Consolidated Capitalization as
of March 31, 1998 and the related Statements of Consolidated Operations,
Retained Earnings (Deficit) and Cash Flows for the three months ended March 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000022606
<NAME> Commonwealth Edison Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 16,456,748
<OTHER-PROPERTY-AND-INVEST> 2,181,522
<TOTAL-CURRENT-ASSETS> 1,623,175
<TOTAL-DEFERRED-CHARGES> 0<F1>
<OTHER-ASSETS> 1,692,417
<TOTAL-ASSETS> 21,953,862
<COMMON> 2,677,906
<CAPITAL-SURPLUS-PAID-IN> 2,207,837
<RETAINED-EARNINGS> (47,579)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,838,164
174,328
506,920
<LONG-TERM-DEBT-NET> 5,560,390<F2>
<SHORT-TERM-NOTES> 0<F1>
<LONG-TERM-NOTES-PAYABLE> 0<F2>
<COMMERCIAL-PAPER-OBLIGATIONS> 0<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 136,837
30,688
<CAPITAL-LEASE-OBLIGATIONS> 424,343
<LEASES-CURRENT> 240,896
<OTHER-ITEMS-CAPITAL-AND-LIAB> 10,041,296<F3>
<TOT-CAPITALIZATION-AND-LIAB> 21,953,862
<GROSS-OPERATING-REVENUE> 1,709,613
<INCOME-TAX-EXPENSE> 37,158<F4>
<OTHER-OPERATING-EXPENSES> 1,471,579
<TOTAL-OPERATING-EXPENSES> 1,518,932
<OPERATING-INCOME-LOSS> 190,681
<OTHER-INCOME-NET> (13,479)<F4><F5>
<INCOME-BEFORE-INTEREST-EXPEN> 187,397
<TOTAL-INTEREST-EXPENSE> 115,564
<NET-INCOME> 71,833
14,547
<EARNINGS-AVAILABLE-FOR-COMM> 57,286
<COMMON-STOCK-DIVIDENDS> 85,693
<TOTAL-INTEREST-ON-BONDS> 0<F6>
<CASH-FLOW-OPERATIONS> 413,928
<EPS-PRIMARY> 0<F6>
<EPS-DILUTED> 0<F6>
<FN>
<F1> This item is not disclosed as a separate line item on the Consolidated
Balance Sheet.
<F2> $827,064 thousand of notes is included in LONG-TERM-DEBT-NET.
<F3> Includes $350,000 thousand of company-obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely the Company's
subordinated debt securities.
<F4> A tax benefit of $10,195 thousand related to nonoperating activities is
included in INCOME-TAX-EXPENSE.
<F5> Includes $7,428 thousand of provision for preferred securities dividends of
subsidiary trusts holding solely the Company's subordinated debt
securities.
<F6> This item is not disclosed as a separate line item on the Statement of
Consolidated Operations.
</FN>
</TABLE>
