<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 SEPTEMBER 30, 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 October 31, 1998:
Unicom Corporation 217,173,334 shares
Commonwealth Edison Company 214,236,138 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 SEPTEMBER 30, 1998
This document contains the Quarterly Reports on Form 10-Q for the quarterly
period ended September 30, 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 pages 58-59 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, nine
months and twelve months ended September 30, 1998 and 1997.......... 5
Consolidated Balance Sheets--September 30, 1998 and December 31,
1997................................................................ 6-7
Statements of Consolidated Capitalization--September 30, 1998 and
December 31, 1997................................................... 8
Statements of Consolidated Retained Earnings (Deficit) for the three
months, nine months and twelve months ended September 30, 1998 and
1997................................................................ 9
Statements of Consolidated Cash Flows for the three months, nine
months and twelve months ended September 30, 1998 and 1997.......... 10
Notes to Financial Statements........................................ 11-38
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 39-59
Commonwealth Edison Company and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 60
Statements of Consolidated Operations for the three months, nine
months and twelve months ended September 30, 1998 and 1997.......... 61
Consolidated Balance Sheets--September 30, 1998 and December 31,
1997................................................................ 62-63
Statements of Consolidated Capitalization--September 30, 1998 and
December 31, 1997................................................... 64
Statements of Consolidated Retained Earnings (Deficit) for the three
months, nine months and twelve months ended September 30, 1998 and
1997................................................................ 65
Statements of Consolidated Cash Flows for the three months, nine
months and twelve months ended September 30, 1998 and 1997.......... 66
Notes to Financial Statements........................................ 67-71
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 72
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 73
Item 6. Exhibits and Reports on Form 8-K............................... 74
SIGNATURES............................................................... 75
</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
EEI Edison Electric Institute
EPRI Electric Power Research Institute
EPS Earnings (Loss) per Common 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
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
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 Enterprises
subsidiary
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
Unicom Thermal Unicom Thermal Technologies Inc., a UT Holdings
subsidiary
U.S. EPA U.S. Environmental Protection Agency
UT Holdings UT Holdings Inc., a Unicom Enterprises 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 September 30, 1998 and December 31, 1997, and
the related statements of consolidated operations, retained earnings (deficit)
and cash flows for the three-month, nine-month and twelve-month periods ended
September 30, 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 September 30, 1998 and December 31, 1997, and the
results of their operations and their cash flows for the three-month, nine-
month and twelve-month periods ended September 30, 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
November 10, 1998
4
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months,
nine months and twelve months ended September 30, 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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
---------------------- ---------------------- -----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ----------- ----------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Operating Revenues...................... $2,095,699 $2,071,074 $5,587,080 $5,428,413 $ 7,242,698 $7,065,805
---------- ---------- ---------- ---------- ----------- ----------
Operating Expenses and Taxes:
Fuel................................... $ 349,411 $ 354,584 $ 831,710 $ 972,374 $ 1,098,773 $1,262,710
Purchased power........................ 193,637 95,762 693,726 279,402 814,380 311,952
Operation and maintenance.............. 568,344 576,483 1,693,912 1,789,089 2,344,471 2,364,527
Depreciation and amortization.......... 232,461 250,892 713,944 755,159 963,524 999,140
Taxes (except income).................. 179,385 224,949 571,873 615,129 757,692 798,958
Income taxes........................... 184,368 188,727 296,854 285,227 328,633 365,787
Investment tax credits deferred--net... (6,889) (7,570) (20,937) (23,364) (28,588) (30,399)
---------- ---------- ---------- ---------- ----------- ----------
$1,700,717 $1,683,827 $4,781,082 $4,673,016 $ 6,278,885 $6,072,675
---------- ---------- ---------- ---------- ----------- ----------
Operating Income........................ $ 394,982 $ 387,247 $ 805,998 $ 755,397 $ 963,813 $ 993,130
---------- ---------- ---------- ---------- ----------- ----------
Other Income and (Deductions):
Interest on long-term debt, net of
interest capitalized.................. $ (111,535) $ (120,136) $ (334,929) $ (368,056) $ (454,260) $ (494,321)
Interest on notes payable.............. (6,170) (3,254) (15,186) (8,503) (15,817) (9,459)
Allowance for funds used during
construction.......................... 4,467 10,643 12,325 30,433 24,217 39,106
Income taxes applicable to nonoperating
activities............................ (1,748) 1,996 4,450 4,414 11,265 11,761
Provisions for dividends--
Preferred and preference stocks of
ComEd................................ (14,053) (14,902) (43,062) (45,914) (57,635) (61,467)
ComEd-obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely ComEd's
subordinated debt securities......... (7,428) (7,357) (22,283) (21,433) (29,710) (25,673)
Loss on nuclear plant closure.......... -- -- -- -- (885,611) --
Income tax effects of nuclear plant
closure............................... -- -- -- -- 362,952 --
Miscellaneous--net..................... 6,307 (13,941) (8,318) (34,827) (70,945) (47,691)
---------- ---------- ---------- ---------- ----------- ----------
$ (130,160) $ (146,951) $ (407,003) $ (443,886) $(1,115,544) $ (587,744)
---------- ---------- ---------- ---------- ----------- ----------
Net Income (Loss) before Extraordinary
Item and Cumulative Effect of Change in
Accounting Principle................... $ 264,822 $ 240,296 $ 398,995 $ 311,511 $ (151,731) $ 405,386
Extraordinary Loss, less Applicable
Income Taxes........................... -- -- -- -- (810,335) --
Cumulative Effect of Change in
Accounting Principle................... -- -- -- 196,700 -- 196,700
---------- ---------- ---------- ---------- ----------- ----------
Net Income (Loss)....................... $ 264,822 $ 240,296 $ 398,995 $ 508,211 $ (962,066) $ 602,086
========== ========== ========== ========== =========== ==========
Earnings (loss) per common share before
extraordinary item and cumulative
effect of change in accounting
principle--
Basic.................................. $ 1.22 $ 1.11 $ 1.84 $ 1.44 $ (0.69) $ 1.88
Diluted................................ $ 1.22 $ 1.11 $ 1.83 $ 1.44 $ (0.69) $ 1.87
Extraordinary loss, less applicable
income taxes (basic and diluted)....... $ -- $ -- $ -- $ -- $ (3.75) $ --
Cumulative effect of change in
accounting principle (basic and
diluted) .............................. $ -- $ -- $ -- $ 0.91 $ -- $ 0.91
Earnings (loss) per common share--
Basic.................................. $ 1.22 $ 1.11 $ 1.84 $ 2.35 $ (4.44) $ 2.79
Diluted................................ $ 1.22 $ 1.11 $ 1.83 $ 2.35 $ (4.44) $ 2.78
Cash Dividends Declared per Common
Share.................................. $ 0.40 $ 0.40 $ 1.20 $ 1.20 $ 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>
SEPTEMBER
30, 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 $997 million and
$1,131 million, respectively)..................... $27,622,915 $27,519,365
Less--Accumulated provision for depreciation....... 14,977,452 11,645,985
----------- -----------
$12,645,463 $15,873,380
Nuclear fuel, at amortized cost.................... 890,235 906,043
----------- -----------
$13,535,698 $16,779,423
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 2,026,648 $ 1,855,697
Subsidiary companies............................... 41,365 41,830
Other, at cost..................................... 247,404 216,243
----------- -----------
$ 2,315,417 $ 2,113,770
----------- -----------
Current Assets:
Cash............................................... $ 42,574 $ 18,519
Temporary cash investments......................... 85,489 102,702
Special deposits................................... 1,245 271
Receivables--
Customers........................................ 1,378,381 873,418
Other............................................ 66,014 132,449
Provisions for uncollectible accounts............ (20,792) (17,544)
Coal and fuel oil, at average cost................. 152,324 120,664
Materials and supplies, at average cost............ 250,492 255,338
Deferred income taxes related to current assets and
liabilities....................................... 46,592 179,553
Prepayments and other.............................. 150,990 126,088
----------- -----------
$ 2,153,309 $ 1,791,458
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 4,473,473 $ 1,685,235
Coal reserves...................................... 113,032 194,769
Other.............................................. 97,561 135,095
----------- -----------
$ 4,684,066 $ 2,015,099
----------- -----------
$22,688,490 $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>
SEPTEMBER
30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity................................. $ 5,067,359 $ 4,918,687
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements......... 506,808 507,053
Subject to mandatory redemption requirements...... 157,118 174,328
ComEd-obligated mandatorily redeemable preferred
securities of
subsidiary trusts holding solely ComEd's
subordinated debt securities*...................... 350,000 350,000
Long-term debt...................................... 6,014,714 5,737,348
----------- -----------
$12,095,999 $11,687,416
----------- -----------
Current Liabilities:
Notes payable ...................................... $ 408,646 $ 158,150
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations of
subsidiary companies............................... 281,184 775,296
Accounts payable.................................... 476,612 505,444
Accrued interest.................................... 150,998 169,559
Accrued taxes....................................... 377,991 175,758
Dividends payable................................... 103,369 107,001
Customer deposits................................... 56,266 55,214
Accrued plant closing costs......................... 96,134 135,000
Other............................................... 129,136 165,177
----------- -----------
$ 2,080,336 $ 2,246,599
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,736,723 $ 3,850,308
Nuclear decommissioning liability for retired
plants............................................. 1,226,700 1,301,000
Accumulated deferred investment tax credits......... 573,713 602,122
Accrued spent nuclear fuel disposal fee and related
interest........................................... 719,902 692,673
Obligations under capital leases of subsidiary
companies.......................................... 401,288 437,950
Regulatory liabilities.............................. 622,758 698,750
Other............................................... 1,231,071 1,182,932
----------- -----------
$ 8,512,155 $ 8,765,735
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$22,688,490 $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>
SEPTEMBER 30, DECEMBER
1998 31, 1997
------------ -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Stock Equity:
Common stock, without par value--
Outstanding--217,101,062 shares and 216,659,480
shares, respectively (excludes $7 million as of
September 30, 1998 and December 31, 1997 held by
trustee for Unicom Stock Bonus Deferral Plan).... $ 4,953,467 $ 4,943,211
Preference stock expense of ComEd.................. (3,217) (3,340)
Retained earnings (deficit)........................ 117,109 (21,184)
----------- -----------
$ 5,067,359 $ 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--58,211 shares
and 65,912 shares, respectively................. 1,851 2,096
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding........................... -- --
----------- -----------
$ 506,808 $ 507,053
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--1,756,060 shares and 2,058,560
shares, respectively........................... $ 174,919 $ 205,016
Current redemption requirements for preference
stock included
in current liabilities.......................... (17,801) (30,688)
----------- -----------
$ 157,118 $ 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%...... $ 830,000 $ 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
----------- -----------
$ 4,621,400 $ 4,851,400
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%.................................. 94,159 100,298
Pollution control obligations, due 2007 through
2014--3.60% to 5 7/8%............................. 140,700 142,200
Other long-term debt............................... 1,290,811 1,193,818
Current maturities of long-term debt included in
current liabilities............................... (85,879) (503,909)
Unamortized net debt discount and premium.......... (46,477) (46,459)
----------- -----------
$ 6,014,714 $ 5,737,348
----------- -----------
$12,095,999 $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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- -------------------- ----------------------
1998 1997 1998 1997 1998 1997
-------- ---------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of
Period...................... $(60,832) $1,272,858 $(21,184) $1,177,997 $1,426,479 $1,170,436
Add--Net income (loss)....... 264,822 240,296 398,995 508,211 (962,066) 602,086
-------- ---------- -------- ---------- ---------- ----------
$203,990 $1,513,154 $377,811 $1,686,208 $ 464,413 $1,772,522
-------- ---------- -------- ---------- ---------- ----------
Deduct--
Cash dividends declared on
common stock............. $ 86,842 $ 86,567 $260,355 $ 259,615 $ 346,965 $ 345,936
Other capital stock trans-
actions--net............. 39 108 347 114 339 107
-------- ---------- -------- ---------- ---------- ----------
$ 86,881 $ 86,675 $260,702 $ 259,729 $ 347,304 $ 346,043
-------- ---------- -------- ---------- ---------- ----------
Balance at End of Period
(includes $470 million of
appropriated retained
earnings at September 30,
1998)....................... $117,109 $1,426,479 $117,109 $1,426,479 $ 117,109 $1,426,479
======== ========== ======== ========== ========== ==========
</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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- --------------------- -----------------------
1998 1997 1998 1997 1998 1997
--------- --------- --------- ---------- ---------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cash Flow from Operating
Activities:
Net income (loss)...... $ 264,822 $ 240,296 $ 398,995 $ 508,211 $ (962,066) $ 602,086
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization........ 246,815 264,059 755,593 788,381 1,018,754 1,041,989
Deferred income taxes
and investment tax
credits--net........ (10,773) (5,069) (4,647) (1,178) (348,512) 13,981
Extraordinary loss
related to write-off
of certain net
regulatory assets... -- -- -- -- 810,335 --
Cumulative effect of
change in accounting
principle........... -- -- -- (196,700) -- (196,700)
Loss on nuclear plant
closure............. -- -- -- -- 885,611 --
Payments for revenue
refunds............. -- -- (45,470) -- -- --
Equity component of
allowance for funds
used during
construction........ (1,814) (5,772) (5,358) (16,558) (12,570) (21,614)
Provisions/(payments)
for liability for
separation costs--
net................. (9,853) 24,146 (2,817) 24,948 (11,779) 23,919
Net effect on cash
flows of changes in:
Receivables........ (292,026) 8,555 (435,280) 98,536 (509,733) 101,350
Coal and fuel oil.. 52,848 35,704 (31,660) (4,084) (7,878) 5,521
Materials and
supplies.......... 13,452 (319) 1,559 222 42,996 6,303
Accounts payable
excluding
separation costs--
net............... (124,957) (42,163) (23,915) (86,923) 67,779 47,712
Accrued interest
and taxes......... 100,645 100,780 183,672 123,760 42,009 17,890
Other changes in
certain current
assets and
liabilities....... 29,731 92,201 83,382 192,450 188,004 237,557
Other--net........... 31,410 10,596 76,249 139,635 104,423 172,214
--------- --------- --------- ---------- ---------- -----------
$ 300,300 $ 723,014 $ 950,303 $1,570,700 $1,307,373 $ 2,052,208
--------- --------- --------- ---------- ---------- -----------
Cash Flow from Investing
Activities:
Construction
expenditures.......... $(202,930) $(233,612) $(635,668) $ (695,861) $ (983,117) $ (942,695)
Nuclear fuel
expenditures.......... (28,616) (66,555) (123,583) (157,271) (151,686) (212,203)
Sale of generating
plants................ -- -- 177,454 -- 238,245 --
Equity component of
allowance for funds
used during
construction.......... 1,814 5,772 5,358 16,558 12,570 21,614
Contributions to
nuclear
decommissioning
funds................. -- -- (80,077) (80,181) (114,721) (116,284)
Other investments and
special deposits...... (6,001) 688 (10,863) (34,193) 10,083 (31,891)
--------- --------- --------- ---------- ---------- -----------
$(235,733) $(293,707) $(667,379) $ (950,948) $ (988,626) $(1,281,459)
--------- --------- --------- ---------- ---------- -----------
Cash Flow from Financing
Activities:
Issuance of
securities--
Long-term debt....... $ 347,068 $ 40,000 $ 382,068 $ 357,663 $ 387,068 $ 367,663
ComEd-obligated
mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely
ComEd's subordinated
debt securities..... -- -- -- 150,000 -- 150,000
Capital stock........ 4,141 127 10,908 9,440 17,246 17,191
Retirement and
redemption of
securities--
Long-term debt....... (151,008) (100,283) (525,656) (676,736) (585,660) (777,522)
Capital stock........ (24,270) (37,300) (30,495) (40,539) (34,066) (44,141)
Deposits and
securities held for
retirement and
redemption of
securities............ 995 229 -- -- -- --
Premium paid on early
redemption of long-
term debt............. -- -- -- (9,500) -- (9,500)
Cash dividends paid on
common stock.......... (86,763) (86,565) (260,111) (259,370) (346,678) (345,631)
Proceeds from
sale/leaseback of
nuclear fuel.......... 39,612 22,953 101,038 104,224 146,768 170,925
Nuclear fuel lease
principal payments.... (43,321) (38,206) (204,330) (124,061) (246,681) (177,109)
Increase/(decrease) in
short-term
borrowings............ (81,200) (221,000) 250,496 (86,000) 365,896 (120,800)
--------- --------- --------- ---------- ---------- -----------
$ 5,254 $(420,045) $(276,082) $ (574,879) $ (296,107) $ (768,924)
--------- --------- --------- ---------- ---------- -----------
Increase in Cash and
Temporary Cash
Investments............ $ 69,821 $ 9,262 $ 6,842 $ 44,873 $ 22,640 $ 1,825
Cash and Temporary Cash
Investments at
Beginning of Period.... 58,242 96,161 121,221 60,550 105,423 103,598
--------- --------- --------- ---------- ---------- -----------
Cash and Temporary Cash
Investments at End of
Period................. $ 128,063 $ 105,423 $ 128,063 $ 105,423 $ 128,063 $ 105,423
========= ========= ========= ========== ========== ===========
</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 $9.2 billion and $12.4 billion
at September 30, 1998 and December 31, 1997, respectively. See Note 2
regarding the plant impairment recorded by ComEd in the second quarter of
1998.
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 September 30, 1998 and December 31, 1997
were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Regulatory assets:
Impaired production plant (1)..................... $2,987,647 $ --
Deferred income taxes (2)......................... 702,824 785,354
Nuclear decommissioning costs--Dresden Unit 1 (3). 264,532 268,369
Nuclear decommissioning costs--Zion Units 1 and 2
(4).............................................. 470,488 579,777
Unamortized loss on reacquired debt (5)........... 47,982 51,735
---------- ----------
$4,473,473 $1,685,235
========== ==========
Regulatory liabilities:
Deferred income taxes (2)......................... $ 622,758 $ 698,750
========== ==========
</TABLE>
- --------
(1) Amortized over a transition period which is expected to end by 2006, but
may be extended to 2008 with ICC approval. See Note 2 for additional
information.
(2) Recorded in compliance with SFAS No. 109, Accounting For Income Taxes, for
non-generation related timing differences.
(3) Amortized over the period 1998 to 2011. See "Depreciation, Amortization of
Regulatory Assets and Decommissioning" below for additional information.
(4) Amortized over the period 1998 to 2013. See "Depreciation, Amortization of
Regulatory Assets and Decommissioning" below for additional information.
(5) 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 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 $92 million and $87 million for the three months
ended September 30, 1998 and 1997, respectively, $233 million and $230 million
for the nine months ended September 30, 1998 and 1997, respectively, and $301
million and $315 million for the twelve months ended September 30, 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
September 30, 1998 and December 31, 1997, an asset related to the
12
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
assessments of $144 million and $156 million, respectively, was recorded. As
of September 30, 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.
COAL RESERVES. At September 30, 1998 and December 31, 1997, ComEd had coal
reserves of $221 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 $108 million and $87 million at September 30,
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 regarding 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 eight million as of
September 30, 1998. It includes the city of Chicago, an area of about 225
square miles with an estimated population of approximately three million from
which ComEd derived approximately one-third of its ultimate consumer revenues
in the twelve months ended September 30, 1998. ComEd had 3.4 million electric
customers at September 30, 1998. See Notes 4 and 19 for additional
information.
DEPRECIATION, AMORTIZATION OF REGULATORY ASSETS AND DECOMMISSIONING.
Depreciation, decommissioning and amortization of regulatory assets for the
three months, nine months and twelve months ended September 30, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------- ----------------- -------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Depreciation expense.... $ 178,788 $ 219,918 $612,161 $662,239 $ 830,767 $ 875,247
Decommissioning expense. 20,955 27,156 69,065 81,466 96,221 108,621
Amortization of
regulatory assets...... 32,718 3,818 32,718 11,454 36,536 15,272
--------- --------- -------- -------- --------- ---------
$ 232,461 $ 250,892 $713,944 $755,159 $ 963,524 $ 999,140
========= ========= ======== ======== ========= =========
</TABLE>
ComEd's depreciation is provided on the straight-line basis by amortizing
the cost of depreciable plant and equipment over estimated service lives for
each class of plant. Provisions for depreciation, including nuclear plant,
were at average annual rates of 2.74%, 3.12% and 3.18% for the three months,
nine months and twelve months ended September 30, 1998, respectively, of
average depreciable utility plant and equipment. Provisions for depreciation,
including nuclear plant, were at average annual rates of 3.35% for the three
months and nine months ended September 30, 1997 and 3.33% for the twelve
months ended September 30, 1997 of average depreciable utility plant and
equipment. The decrease for the recent periods ended September 30, 1998 in the
average depreciation rates relates primarily to a reduction in nuclear
depreciation rates due to the partial impairment of production plant, which
was recorded as a component of accumulated depreciation, partially offset by
shortened depreciable lives for certain nuclear stations. The annual rate for
nuclear plant and equipment, excluding separately collected decommissioning
costs and depreciation
13
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
related to the replacement of the steam generators, was 2.88% for periods
ending prior to July 1, 1998. The nuclear depreciation rate applied to gross
depreciable nuclear plant, beginning July 1, 1998, is 2.16% reflecting the
partial impairment of production plant and shortened depreciable lives for
certain nuclear stations. See Note 2 for additional information on the partial
impairment of production plant.
The regulatory asset for impaired production plant is being amortized as it
is recovered through regulated cash flows over a transition period which is
expected to end by 2006, but may be extended to 2008 with ICC approval.
Recovery of the regulatory asset will be realized through future regulatory
revenues, including CTC revenues, and potential gains on generation asset
sales, and will vary from year to year.
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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subcaption "Results of Operations--Decommissioning,"
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 ten operating units have
remaining current NRC license lives ranging from 7 to 29 years. ComEd's 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 to its tariffs. 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.
14
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
In February 1998, the ICC authorized 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 to approximately $11.6
billion.
For the ten operating nuclear units, decommissioning cost accruals 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 such costs are recovered through rates. As of
September 30, 1998, the total decommissioning costs included in the
accumulated provision for depreciation were $1,691 million.
For ComEd's retired nuclear units, the total estimated liability for nuclear
decommissioning in current-year (1998) dollars is recorded as a liability. The
unrecovered portion of the liability was also recorded as a regulatory asset.
The nuclear decommissioning liability for retired plants as of September 30,
1998 was as follows:
<TABLE>
<CAPTION>
ZION
DRESDEN UNITS
UNIT 1 1 AND 2 TOTAL
-------- -------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Amounts recovered through rates and investment
fund earnings.................................... $111,668 $380,012 $ 491,680
Unrecovered portion of the liability.............. 264,532 470,488 735,020
-------- -------- ----------
Nuclear decommissioning liability for retired
plants.......................................... $376,200 $850,500 $1,226,700
======== ======== ==========
</TABLE>
The total estimated liability related to Zion Units 1 and 2, and the
unrecovered portion of that liability, decreased from December 31, 1997 to
September 30, 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. 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. The fair value of funds accumulated
in the external trusts at September 30, 1998 was $2,027 million, which
includes pre-tax unrealized appreciation of $431 million. The earnings on the
external trusts for operating plants accumulate in the fund balance and
accumulated provision for depreciation. Nuclear decommissioning funding as of
September 30, 1998 was as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C>
Amounts recovered through rates and investment fund
earnings for operating plants (included in the accumu-
lated provision for depreciation)...................... $1,690,842
Amounts recovered through rates and investment fund
earnings for retired plants............................ 491,680
Less past accruals not yet contributed to the trusts.... (155,874)
----------
Fair value of external trust funds..................... $2,026,648
==========
</TABLE>
15
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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 8.18% and 9.22% for the three months
ended September 30, 1998 and 1997, respectively, 8.41% and 9.24% for the nine
months ended September 30, 1998 and 1997, respectively, and 8.76% and 9.33%
for the twelve months ended September 30, 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
is capitalizing interest costs on its generation-related construction work in
progress and nuclear fuel in process. Interest costs capitalized were $6
million for the three months and $14 million for the nine months and twelve
months ended September 30, 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 $135 million and $150 million for the three months ended
September 30, 1998 and 1997, respectively, $412 million and $453 million for
the nine months ended September 30, 1998 and 1997, respectively, and $557
million and $605 million for the twelve months ended September 30, 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
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.
16
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
AVERAGE COMMON SHARES OUTSTANDING. The number of average outstanding common
shares used to compute basic and diluted EPS for the three months, nine months
and twelve months ended September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------- ----------------- -------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(THOUSANDS OF SHARES)
<S> <C> <C> <C> <C> <C> <C>
Average Number of Common
Shares Outstanding:
Average Number of Com-
mon Shares--Basic..... 217,024 216,409 216,876 216,277 216,779 216,144
Potentially Dilutive
Common Shares--Trea-
sury Method:
Stock Options......... 647 -- 583 -- 529 --
Other Convertible Se-
curities............. 90 98 90 98 90 98
--------- --------- -------- -------- --------- ---------
Average Number of Com-
mon Shares--Diluted... 217,761 216,507 217,549 216,375 217,398 216,242
========= ========= ======== ======== ========= =========
</TABLE>
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.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded on the
Consolidated Balance Sheets as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings, unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item on the Statements of
Consolidated Operations, and requires Unicom and ComEd to formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
SFAS No. 133 may be implemented prior to June 15, 1999, but such
implementation cannot be applied retroactively. SFAS No. 133 must be applied
to (i) derivative instruments and (ii) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively modified
after December 31, 1997 (and, at the company's election, before January 1,
1998).
Unicom and ComEd have not yet quantified the effects of adopting SFAS No.
133 on their financial statements and have not determined the timing or method
of their adoption of SFAS No. 133. However, adoption of SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on results of operations. See Note 3 for information regarding the
restatement of 1997 interim financial statements for a change in accounting
principle.
17
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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,
nine months and twelve months ended September 30, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- ---------- --------- --------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Supplemental Cash Flow
Information:
Cash paid during the
period for:
Interest (net of
amount capitalized). $98,722 $ 153,487 $ 352,057 $ 413,080 $ 451,027 $ 524,649
Income taxes (net of
refunds)............ $ 23,040 $ 27,183 $ 23,546 $ 82,684 $ 206,663 $ 260,230
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Capital lease obliga-
tions incurred by
subsidiary companies.. $ 40,954 $ 24,760 $ 104,933 $ 110,533 $ 152,812 $ 178,161
</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. Major provisions of the 1997 Act applicable to
ComEd include a 15% residential base rate reduction which became effective
August 1, 1998, an additional 5% residential base rate reduction commencing on
May 1, 2002, and gradual customer access to other electric suppliers. 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. ComEd expects that the 15% residential base rate reduction will
reduce ComEd's operating revenues by approximately $170 million and $390
million in 1998 and 1999, respectively, compared to 1997 rate levels.
Operating revenues were reduced by approximately $80 million for the third
quarter of 1998 due to the rate reduction. 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 $55 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. 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, one-half of the excess
earnings must be refunded to customers. A utility may request a rate increase
during the rate freeze period only when necessary to ensure the utility's
financial viability, but not before January 1, 2000.
18
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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 to be
segregated and used to support the issuance of securities by ComEd or a
special purpose financing entity. The proceeds from such securities 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 which commenced on August 1, 1998. On July
21, 1998, the ICC issued an order under the 1997 Act approving the issuance of
up to $3.4 billion of such securities. ComEd anticipates the issuance will
occur sometime in the fourth quarter of 1998, subject to market conditions.
ComEd plans to use the proceeds of such securities issuance to refinance its
debt and equity, including 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 9 to 14 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 from the issuance of such securities, net of transaction costs, to
redeem preference stock and debt. On October 27, 1998, Unicom announced that
up to $200 million in funds obtained from operations or other sources may be
used to repurchase shares of common stock before or after the receipt of
proceeds from such securities issuances. The proceeds from such securities
issuances are expected to be the ultimate source of funding for the common
stock repurchases.
As a result of the 1997 Act, prices for the supply of electric energy are
expected to change from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover some 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
(basic). 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
19
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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, Amortization of Regulatory Assets and Decommissioning" in Note
1 for additional information.
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 (basic). These costs, as well as deferred
underrecovered energy costs of $19 million (after-tax), or $0.08 per common
share (basic), which ComEd would have been entitled to recover if the FAC had
remained in effect, were recorded as a charge to operating results in the
fourth quarter of 1997.
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
(basic), in December 1997.
The staff of the SEC issued interpretive guidance in the second quarter of
1998 regarding the application of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, when a
regulated enterprise such as an electric utility discontinues regulatory
accounting practices for separable portions of its operations and assets.
Under SFAS No. 121, an asset is considered impaired, and should be written
down to fair value, if its future cash flows are insufficient to recover the
carrying value of the asset. The interpretive guidance concludes that for
purposes of applying SFAS No. 121, supplemental regulated cash flows, such as
a CTC, should be excluded from the cash flows of assets in the portion of the
business not subject to regulatory accounting practices. If such assets are
determined to be impaired, a regulatory asset should be established if such
costs are recoverable through regulated cash flows. The guidance also
addresses the extent to which assets should be grouped to determine
impairment.
ComEd discontinued the application of regulatory accounting principles in
December 1997 for the generation portion of its business and performed a SFAS
No. 121 impairment analysis that concluded that future revenues, including the
collection of the CTC, expected to be recovered from electric supply services
would be sufficient to cover the costs of its generating assets. However,
reflecting the SEC's interpretive guidance, ComEd's revised impairment
evaluation resulted in a plant impairment of $3 billion. Because future CTC
revenues collected through regulated cash flows are expected to provide
recovery of the impaired plant assets, a regulatory asset was recorded for the
same amount. Accordingly, the impairment, recorded in the second quarter of
1998, had no effect on results of operations.The regulatory asset is being
amortized as it is recovered through regulated cash flows over a transition
period that ends in 2006, but may be extended to 2008 with ICC approval.
Recovery of the regulatory asset will be realized through future regulatory
revenues, including CTC revenues, and potential gains on generation asset
sales, and will vary from year to year.
20
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(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 nine months and twelve months ended September 30,
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 (basic). The
results per common share (basic) 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. If the new accounting method had been in effect for the full
twelve months ended September 30, 1997, the pro forma unaudited operating
result would have been $446,491,000, or $2.07 per common share (basic),
excluding the cumulative effect of a change in accounting principle.
(4) RATE MATTERS. Final ICC orders have been issued in fuel reconciliation
proceedings related to ComEd's FAC collections for years prior to 1994 and for
the year 1995. On November 5, 1998, the ICC issued an order in the proceeding
for the year 1994 providing for a refund of approximately $3 million related
to nuclear station performance. The ICC order is subject to appeal. In the
fuel reconciliation proceeding for 1996, an intervenor and the ICC staff have
filed testimony seeking a refund of approximately $78 million and $104
million, respectively, relating to nuclear station performance. The 1997 Act
provides that the fuel reconciliation proceeding for 1996 must be concluded by
the end of 1998. 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.
In February 1995, two of ComEd's wholesale municipal customers filed a
complaint and request for refund with the FERC, alleging that ComEd failed to
properly adjust their rates, as provided for under the terms of their electric
service contracts, to track certain refunds made to ComEd's retail customers
in the years 1992 through 1994. In the third quarter of 1998, the FERC granted
the complaint and directed that refunds be made, with interest. ComEd has
filed a request for rehearing with the FERC and such request is currently
pending.
ComEd's management believes adequate reserves have been established in
connection with the cases discussed above.
(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 (basic). The
decision to close Zion Station was a result of ComEd's ongoing analysis of 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
21
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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. ComEd recorded a reduction to the liability for future closing costs of
$15 million in the third quarter of 1998 to reflect lower than expected
closing costs. See Note 17 for information regarding costs of voluntary
employee separation plans.
ComEd completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has exclusive 15-year
purchased power agreements for the output of the stations. The sales of State
Line and Kincaid Stations were completed in December 1997 and February 1998,
respectively. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Response to Regulatory Changes," for information regarding ComEd's
coal-fired generating plants being offered for sale.
(6) AUTHORIZED SHARES AND VOTING RIGHTS AND STOCK RIGHTS OF CAPITAL STOCK.
At September 30, 1998, Unicom's authorized shares consisted of 400,000,000
shares of common stock. The authorized shares of ComEd preferred and preference
stocks at September 30, 1998 were: preference stock--22,066,060 shares; $1.425
convertible preferred stock--58,211 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 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 the ICC's order approving ComEd's proposed issuance of
up to $3.4 billion of securities and the planned use of the proceeds to
refinance debt and equity, as permitted under the 1997 Act.
22
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(7) COMMON EQUITY. At September 30, 1998, shares of Unicom common stock were
reserved for the following purposes:
<TABLE>
<S> <C>
Long-Term Incentive Plan........................................ 2,805,928
Employee Stock Purchase Plan.................................... 455,055
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 90,253
1996 Directors' Fee Plan........................................ 170,981
---------
3,922,217
=========
</TABLE>
Common stock issued during the three months, nine months and twelve months
ended September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
--------------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
---------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Shares of Common Stock
Issued:
Long-Term Incentive
Plan.................. 167,847 -- 371,638 45,144 534,598 204,083
Employee Stock Purchase
Plan.................. -- -- 52,512 114,964 133,551 213,589
Employee Savings and
Investment Plan....... -- -- -- 274,203 -- 316,703
Exchange for ComEd com-
mon stock not held by
Unicom................ 1,160 1,569 7,700 12,254 7,816 16,790
1996 Directors' Fee
Plan.................. 3,055 3,243 9,732 10,823 13,084 13,245
---------- -------- -------- -------- --------- ---------
172,062 4,812 441,582 457,388 689,049 764,410
========== ======== ======== ======== ========= =========
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Amount of Common Stock
Issued:
Total issued........... $ 4,162 $ 114 $ 10,918 $ 9,426 $ 17,260 $ 17,298
Held by trustee for
Unicom Stock Bonus De-
ferral Plan........... 1,295 (44) (652) (2,431) (697) (2,463)
Other.................. (22) 12 (10) 14 (14) (90)
---------- -------- -------- -------- --------- ---------
$ 5,435 $ 82 $ 10,256 $ 7,009 $ 16,549 $ 14,745
========== ======== ======== ======== ========= =========
</TABLE>
At September 30, 1998 and December 31, 1997, 76,276 and 76,868, respectively,
of ComEd common stock purchase warrants 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.
Unicom's retained earnings account had a deficit balance of $21 million at
December 31, 1997. As of September 30, 1998 and December 31, 1997, $470
million and $331 million, respectively, of retained earnings had been
appropriated for future dividend payments.
See Note 2 regarding the ICC's order approving ComEd's proposed issuance of
up to $3.4 billion of securities and the planned use of the proceeds 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 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 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.
23
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Stock options transactions through September 30, 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 nine months ended September 30,
1998.............................................. 1,379,525 35.234
Exercised during the nine months ended September
30, 1998.......................................... (361,512) 24.190
Expired/cancelled during the nine months ended Sep-
tember 30, 1998................................... (95,427) 24.741
---------
Outstanding as of September 30, 1998............... 3,213,964 28.643
=========
</TABLE>
Of the stock options outstanding at September 30, 1998, 977,223 have vested
with a weighted average exercise price of $24.277.
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........................................ 4.54% 7.20% 6.30%
Expected volatility................................... 21.95% 22.29% 20.98%
Risk-free interest rate............................... 5.58% 6.25% 6.64%
</TABLE>
The estimated weighted average fair value for each stock option granted in
1998, 1997 and 1996 was $6.62, $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 participate in the ESPP. Unicom issued
133,551 shares and 213,589 shares of common stock for the twelve months ended
September 30, 1998 and 1997, respectively, under the ESPP at a weighted
average annual purchase price of $25.55 and $19.65, 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 (basic), and $1 million (after-tax), or $0.01 per
common share (basic), for the twelve months ended September 30, 1998 and 1997,
respectively.
24
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(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 September 30, 1998 and 1997. The series of ComEd preference stock
without mandatory redemption requirements outstanding at September 30, 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.
(10) COMED PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS.
During the twelve months ended September 30, 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 September 30, 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 240,000 23,838 $101
$8.85 187,500 18,750 $101
$9.25 450,000 45,000 $103 through July 31, 1999; and $101 thereafter
$6.875 700,000 69,475 Non-callable
--------- --------
1,756,060 $174,919
========= ========
</TABLE>
- --------
(1) Per share plus accrued and unpaid dividends, if any.
25
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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
$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 September 30, 1998 will aggregate to $4 million in 1998,
$18 million in 1999, $88 million in 2000 and $18 million in each year 2001 and
2002. During each of the twelve months ended September 30, 1998 and 1997,
338,215 shares and 438,215 shares, respectively, of ComEd preference stock
subject to mandatory redemption requirements were reacquired to meet sinking
fund requirements plus any optional additional sinking fund payments.
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 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 ten 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 subordinate 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
26
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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 September 30, 1998 are
summarized as follows: 1998--$80 million; 1999--$150 million; 2000--$462
million; 2001--$108 million; and 2002--$305 million. Unicom Enterprises' note
payable to bank of $100 million will mature in 1999.
At September 30, 1998, ComEd's outstanding first mortgage bonds maturing
through 2002 were as follows:
<TABLE>
<CAPTION>
SERIES PRINCIPAL AMOUNT
----------------------------- ----------------------
(THOUSANDS OF DOLLARS)
<S> <C>
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
--------
$830,000
========
</TABLE>
27
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Other long-term debt outstanding at September 30, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
PRINCIPAL
DEBT SECURITY AMOUNT INTEREST RATE
- ------------------------- ---------- -------------------------------------------------------
(THOUSANDS
OF
DOLLARS)
<S> <C> <C>
Unicom--
Loans Payable:
Loan due January 1, 2003 $ 6,775 Interest rate of 8.31%
Loan due January 1, 2004 7,690 Interest rate of 8.44%
----------
$ 14,465
----------
ComEd--
Notes:
Medium Term Notes, Se-
ries 3N due various
dates through October
15, 2004 $ 296,000 Interest rates ranging from 9.00% to 9.20%
Notes due January 15,
2004 150,000 Interest rate of 7.375%
Notes due October 15,
2005 235,000 Interest rate of 6.40%
Notes due January 15,
2007 150,000 Interest rate of 7.625%
Notes due July 15, 2018 225,000 Interest rate of 6.95%
----------
$1,056,000
----------
Purchase Contract Obli-
gation
due April 30, 2005 $ 346 Interest rate of 3.00%
----------
Total ComEd $1,056,346
----------
Unicom Enterprises--
Long-Term Note Payable
to Bank
due November 15, 1999 $ 100,000 Prevailing interest rate of 6.45% at September 30, 1998
----------
Unicom Thermal--
Guaranteed Senior Note
due May 30, 2012 $ 120,000 Interest rate of 7.38%
----------
Total Unicom $1,290,811
==========
</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.
In July 1998, Unicom Thermal issued $120 million of guaranteed senior
unsecured 7.38% Notes due in May 2012, the proceeds of which were used to
refinance existing debt. The Notes are guaranteed by Unicom and include
certain covenants with respect to Unicom and Unicom Thermal's 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
Thermal may incur, and (iv) a requirement that Unicom own, directly or
indirectly, 51% of the outstanding stock of Unicom Thermal and at least 80% of
the outstanding stock of ComEd.
See Note 2 regarding the ICC's order approving the proposed issuance of up
to $3.4 billion of securities and the planned use of the proceeds to refinance
debt and equity, as permitted under the 1997 Act.
28
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(13) LINES OF CREDIT. ComEd had total bank lines of credit of $342 million
and unused bank lines of credit of $334 million at September 30, 1998. On
October 8, 1998, ComEd terminated the then existing $342 million lines of
credit and entered into new lines of credit totaling $1 billion. Of that
amount, $500 million expires on October 7, 1999 and $500 million expires on
October 8, 2003. 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. 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 $100 million was unused as of September 30, 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. 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. On July 30, 1998, ComEd filed a
complaint against the United States in the United States Court of Federal
Claims seeking to recover damages caused by the DOE's failure to honor its
contractual obligation to begin disposing of spent nuclear fuel in January
1998. See "Depreciation, Amortization of Regulatory Assets 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. Pursuant to the
contract, ComEd 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
29
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
instruments on the financial position or results of operations of Unicom and
subsidiary companies is primarily dependent on the treatment authorized under
future ComEd ratemaking proceedings.
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 September 30, 1998 and
December 31, 1997, was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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.......... $ 38,297 $ 16 $ 38,313 $ 33,524 $ 2 $ 33,526
U.S. Government and
Agency issues........ 199,319 30,928 230,247 170,240 15,882 186,122
Municipal bonds....... 396,947 27,730 424,677 306,104 20,598 326,702
Corporate bonds....... 246,431 11,440 257,871 231,738 4,293 236,031
Common stock.......... 710,867 355,086 1,065,953 667,657 385,851 1,053,508
Other................. 3,769 5,818 9,587 17,300 2,508 19,808
---------- -------- ---------- ---------- -------- ----------
$1,595,630 $431,018 $2,026,648 $1,426,563 $429,134 $1,855,697
========== ======== ========== ========== ======== ==========
</TABLE>
At September 30, 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....................................... $ 28,154 $ 28,168
1 through 5 years................................... 198,856 207,009
5 through 10 years.................................. 235,404 256,659
Over 10 years....................................... 408,393 449,622
</TABLE>
The net earnings (losses) of the nuclear decommissioning funds, which are
recorded as increases (decreases) to the accumulated provision for
depreciation, for the three months, nine months and twelve months ended
September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------------ ------------------------
1998 1997 1998 1997 1998 1997
--------- --------- ----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Gross proceeds from
sales of securities.... $ 451,896 $ 549,296 $ 1,400,360 $ 1,671,773 $ 1,892,110 $ 2,123,301
Less cost based on spe-
cific identification... (441,379) (520,940) (1,334,763) (1,620,713) (1,802,350) (2,063,003)
--------- --------- ----------- ----------- ----------- -----------
Realized gains on sales
of securities.......... $ 10,517 $ 28,356 $ 65,597 $ 51,060 $ 89,760 $ 60,298
Other realized fund
earnings net of
expenses............... 10,545 9,479 23,393 32,260 30,255 41,228
--------- --------- ----------- ----------- ----------- -----------
Total realized net earn-
ings of the funds...... $ 21,062 $ 37,835 $ 88,990 $ 83,320 $ 120,015 $ 101,526
Unrealized gains (loss-
es).................... (112,678) 71,308 1,884 201,747 (1,122) 252,757
--------- --------- ----------- ----------- ----------- -----------
Total net earnings
(losses) of the funds. $ (91,616) $ 109,143 $ 90,874 $ 285,067 $ 118,893 $ 354,283
========= ========= =========== =========== =========== ===========
</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
subsidiary trusts holding solely ComEd's
30
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
subordinated debt securities and long-term debt were 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 September 30, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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.... $ 681,727 $ 13,983 $ 695,710 $ 712,069 $ 11,970 $ 724,039
ComEd-obligated
mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely
ComEd's subordinated
debt securities...... $ 350,000 $ 21,305 $ 371,305 $ 350,000 $ 21,701 $ 371,701
Long-term debt........ $5,865,782 $472,569 $6,338,351 $5,913,942 $380,890 $6,294,832
</TABLE>
Long-term notes payable and a guaranteed senior note, which are not included
in the above table, amounted to $235 million and $327 million at September 30,
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
September 30, 1998 and December 31, 1997; therefore, the carrying value is
equal to the fair value.
(16) PENSION AND POSTRETIREMENT BENEFITS. As of September 30, 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 September
30, 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 ten 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 September 30, 1998 and December 31, 1997 postretirement benefit
liabilities and related data were determined using the January 1, 1997
actuarial valuations.
31
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Reconciliations of the beginning and ending balances of the projected
pension benefit obligation and the accumulated postretirement benefit
obligation and the funded status of these plans for the nine months ended
September 30, 1998 and the twelve months ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30, 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............ 93,000 27,000 100,000 34,000
Interest cost........... 208,000 56,000 261,000 76,000
Plan participants' con-
tributions............. -- 2,000 -- 3,000
Curtailment gain........ -- -- (5,000) --
Actuarial loss (gain)... 20,000 -- 346,000 (23,000)
Benefits paid........... (174,000) (33,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,221,000 $1,136,000 $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................. 103,000 35,000 631,000 130,000
Employer contribution... 10,000 -- 1,000 11,000
Plan participants' con-
tributions............. -- 2,000 -- 3,000
Benefits paid........... (174,000) (33,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $3,645,000 $ 772,000 $3,706,000 $ 768,000
---------- ---------- ---------- ----------
Plan assets less than
benefit obligation..... $ (576,000) $ (364,000) $ (368,000) $ (316,000)
Unrecognized net actuar-
ial loss (gain)........ 303,000 (377,000) 132,000 (406,000)
Unrecognized prior serv-
ice cost (asset)....... (61,000) 49,000 (64,000) 52,000
Unrecognized transition
obligation (asset)..... (104,000) 328,000 (114,000) 345,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (438,000) $ (364,000) $ (414,000) $ (325,000)
========== ========== ========== ==========
</TABLE>
The fair value of pension plan assets excludes $18 million and $17 million
held in grantor trust as of September 30, 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>
32
<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, nine months and twelve months ended September 30, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- -------------------- --------------------
1998 1997 1998 1997 1998 1997
PENSION COSTS --------- --------- --------- --------- --------- ---------
- ------------- (THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Service cost............. $ 31,000 $ 25,000 $ 93,000 $ 75,000 $ 118,000 $ 94,000
Interest cost on pro-
jected benefit
obligation.............. 69,000 66,000 208,000 195,000 274,000 258,000
Expected return on plan
assets.................. (86,000) (76,000) (257,000) (232,000) (335,000) (305,000)
Amortization of transi-
tion asset.............. (3,000) (3,000) (9,000) (9,000) (13,000) (13,000)
Amortization of prior
service asset........... (1,000) (1,000) (3,000) (3,000) (4,000) (4,000)
Recognized loss.......... 1,000 1,000 1,000 1,000 2,000 2,000
Curtailment gain......... -- -- -- -- (5,000) --
--------- --------- --------- --------- --------- ---------
Net periodic benefit
cost................... $ 11,000 $ 12,000 $ 33,000 $ 27,000 $ 37,000 $ 32,000
========= ========= ========= ========= ========= =========
<CAPTION>
OTHER POSTRETIREMENT
BENEFIT COSTS
- --------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost............. $ 9,000 $ 8,000 $ 27,000 $ 25,000 $ 36,000 $ 34,000
Interest cost on accumu-
lated benefit
obligation.............. 19,000 17,000 56,000 57,000 75,000 77,000
Expected return on plan
assets.................. (18,000) (14,000) (52,000) (45,000) (68,000) (58,000)
Amortization of transi-
tion obligation......... 6,000 6,000 17,000 17,000 22,000 22,000
Amortization of prior
service cost............ 1,000 1,000 3,000 3,000 4,000 5,000
Recognized gain.......... (5,000) (6,000) (14,000) (10,000) (17,000) (10,000)
Severance plan cost...... -- 4,000 2,000 6,000 4,000 7,000
--------- --------- --------- --------- --------- ---------
Net periodic benefit
cost................... $ 12,000 $ 16,000 $ 39,000 $ 53,000 $ 56,000 $ 77,000
========= ========= ========= ========= ========= =========
</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 September 30,
1998 and 1997 included $4 million and $7 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 decrease in 0.5% annual increments to 5% for the years 2005 and 2001,
respectively, and to remain 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>
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
33
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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 $9 million and $8 million for the three months
ended September 30, 1998 and 1997, respectively, $24 million for each of the
nine months ended September 30, 1998 and 1997 and $33 million and $31 million
for the twelve months ended September 30, 1998 and 1997, respectively.
(17) SEPARATION PLAN COSTS. O&M expenses included $9 million and $26 million
for the three months ended September 30, 1998 and 1997, respectively, $33
million for each of the nine months ended September 30, 1998 and 1997 and $38
million for each of the twelve months ended September 30, 1998 and 1997 for
costs related to voluntary separation offers to certain employees of ComEd and
the Indiana Company, as well as certain one-time, employee-related costs. Such
costs resulted in charges of $6 million (after-tax), or $0.03 per common share
(basic), and $16 million (after-tax), or $0.07 per common share (basic), for
the three months ended September 30, 1998 and 1997, respectively, $20 million
(after-tax), or $0.09 per common share (basic), for each of the nine months
ended September 30, 1998 and 1997 and $23 million (after-tax), or $0.11 per
common share (basic), for each of the twelve months ended September 30, 1998
and 1997.
(18) INCOME TAXES. The components of the net deferred income tax liability
at September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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........................ $3,995,241 $4,062,801
Overheads capitalized.............................. 128,894 131,509
Repair allowance................................... 222,769 231,697
Regulatory assets recoverable through future rates. 702,824 785,354
Deferred income tax assets:
Postretirement benefits............................ (329,809) (305,242)
Unamortized investment tax credits................. (195,620) (206,112)
Regulatory liabilities to be settled through future
rates............................................. (622,758) (698,750)
Nuclear plant closure.............................. (52,450) (194,244)
Other--net......................................... (158,960) (136,258)
---------- ----------
Net deferred income tax liability................... $3,690,131 $3,670,755
========== ==========
</TABLE>
The $19 million increase in the net deferred income tax liability from
December 31, 1997 to September 30, 1998 is comprised of an increase of $25
million in deferred income tax expense and a $6 million decrease in regulatory
assets net of regulatory liabilities pertaining to income taxes for the
period. The amount of accelerated cost recovery and liberalized depreciation
included in deferred income tax liabilities as of September 30, 1998, includes
amounts related to the regulatory asset for impaired production plant. 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.
34
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of net income tax expense charged (credited) to continuing
operations for the three months, nine months and twelve months ended September
30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED NINE MONTHS ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Operating income:
Current income taxes... $188,579 $186,368 $320,887 $262,445 $ 305,729 $320,424
Deferred income taxes.. (4,211) 2,359 (24,033) 22,782 22,904 45,363
Investment tax credits
deferred--net......... (6,889) (7,570) (20,937) (23,364) (28,588) (30,399)
Other (income) and de-
ductions, primarily de-
ferred income taxes ... 1,981 (1,974) (11,556) (4,092) (415,089) (11,322)
-------- -------- -------- -------- --------- --------
Net income taxes charged
(credited) to continu-
ing operations......... $179,460 $179,183 $264,361 $257,771 $(115,044) $324,066
======== ======== ======== ======== ========= ========
</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, nine months and twelve months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED NINE MONTHS ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) before
extraordinary item and
cumulative effect of
change in accounting
principle.............. $264,822 $240,296 $398,995 $311,511 $(151,731) $405,386
Net income taxes charged
(credited) to
continuing operations.. 179,460 179,183 264,361 257,771 (115,044) 324,066
Provision for dividends
on ComEd preferred and
preference stocks..... 14,053 14,902 43,062 45,914 57,635 61,467
-------- -------- -------- -------- --------- --------
Pre-tax income (loss)
before extraordinary
item, cumulative effect
and provision for
dividends.............. $458,335 $434,381 $706,418 $615,196 $(209,140) $790,919
======== ======== ======== ======== ========= ========
Effective income tax
rate................... 39.2% 41.3% 37.4% 41.9% 55.0% 41.0%
======== ======== ======== ======== ========= ========
</TABLE>
The principal differences between net income taxes charged (credited) to
continuing operations and the amounts computed at the federal statutory rate
of 35% for the three months, nine months and twelve months ended September 30,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS TWELVE MONTHS
ENDED NINE MONTHS ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------ -------------------
1998 1997 1998 1997 1998 1997
-------- -------- -------- -------- --------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes
computed at statutory
rate................... $160,417 $167,048 $247,246 $243,214 $ (73,199) $304,717
Equity component of
AFUDC which was ex-
cluded from taxable
income................. (102) (2,020) (300) (5,795) (2,824) (7,565)
Amortization of invest-
ment tax credits, net
of deferred income tax-
es..................... (4,517) (7,570) (18,246) (23,364) (40,221) (30,399)
State income taxes, net
of federal income tax-
es..................... 21,040 25,286 33,693 39,737 (3,510) 47,150
Differences between book
and tax accounting,
primarily property-
related deductions..... 2,622 (3,561) 1,968 3,979 4,710 10,163
-------- -------- -------- -------- --------- --------
Net income taxes charged
(credited) to continu-
ing operations......... $179,460 $179,183 $264,361 $257,771 $(115,044) $324,066
======== ======== ======== ======== ========= ========
</TABLE>
35
<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, nine months and twelve months ended September 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------- ----------------- -------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Illinois electricity ex-
cise tax............... $ 17,483 $ 67,595 $119,411 $175,005 $ 172,757 $ 228,175
Illinois invested capi-
tal.................... -- 26,258 -- 78,275 21,229 104,172
Illinois electricity
distribution tax....... 29,950 -- 81,580 -- 81,580 --
Municipal utility gross
receipts............... 53,001 51,626 134,108 130,696 171,506 170,502
Real estate............. 34,559 37,466 99,638 110,746 140,401 146,811
Municipal compensation.. 15,319 23,884 59,404 60,808 76,882 79,343
Other--net.............. 29,073 18,120 77,732 59,599 93,337 69,955
--------- --------- -------- -------- --------- ---------
$ 179,385 $ 224,949 $571,873 $615,129 $ 757,692 $ 798,958
========= ========= ======== ======== ========= =========
</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.
Effective August 1, 1998, as provided for by the 1997 Act, the Illinois
electricity excise tax and certain municipal utility taxes are recorded as
liabilities. Previously, similar taxes were presented on the Statements of
Consolidated Operations as revenue and expense. The reduction in operating
revenues and taxes (except income taxes) due to the change in presentation for
such taxes was approximately $50 million for the three months, nine months and
twelve months ended September 30, 1998. This change in the presentation for
such taxes did not have an effect on results of operations.
(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. With respect to the commercial paper/bank borrowing portion,
$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
September 30, 1998, ComEd's obligation to the lessor for leased nuclear fuel
amounted to approximately $579 million. As a result of the cessation of
nuclear generation operations at Zion Station, ComEd repurchased approximately
$100 million of nuclear fuel assemblies held under the nuclear fuel lease
arrangements at Zion Station in June 1998. See Note 5 for additional
information regarding the cessation of nuclear generation operations 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
September 30, 1998 for capital leases are estimated to aggregate $662 million,
including $54 million in 1998, $197 million in 1999, $151 million in 2000,
$103 million in 2001, $67 million in 2002 and $90 million in 2003-2006. The
estimated interest component of such rental payments aggregates $86 million.
The estimated portions of obligations due within one year under capital leases
of $178 million and $241 million at September 30, 1998 and December 31, 1997,
respectively, were included in current liabilities on the Consolidated Balance
Sheets.
36
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Future minimum rental payments at September 30, 1998 for operating leases
are estimated to aggregate $340 million, including $10 million in 1998, $41
million in 1999, $39 million in 2000, $32 million in 2001, $28 million in 2002
and $190 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. ComEd's net plant investment, including
construction work in progress, in Quad Cities Station on the Consolidated
Balance Sheets was $2 million at September 30, 1998, after reflecting the
accounting impairment recorded in the second quarter of 1998. See Note 2 for
additional information.
(22) COMMITMENTS AND CONTINGENT LIABILITIES. Purchase commitments,
principally related to construction and nuclear fuel, approximated $309
million at September 30, 1998, comprised of $268 million for ComEd, $35
million for UT Holdings and $6 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. See "Coal Reserves" in Note 1 for additional information
regarding ComEd's coal reserves.
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 Masters
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
37
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
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. ComEd was dismissed as a
defendant in both actions. With respect to Cotter, in 1994 a federal jury
returned nominal dollar verdicts against Cotter 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. On
July 15, 1998, a jury verdict was rendered in Dodge v. Cotter (United States
District Court for the District of Colorado, Civil Action No. 91-Z-1861), a
case relating to 14 of the plaintiffs in the 1991 cases. The verdict against
Cotter included compensatory and punitive damages totaling approximately $3
million (not including prejudgment interest, which has not yet been
calculated, and which Cotter anticipates may bring the total award to under $6
million), together with medical monitoring. The matter is currently on appeal.
Although the other 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.
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. 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 September 30,
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
September 30, 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.
38
<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. These
changes are attributable to changes in technology and changes in regulation.
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. Major
provisions of the 1997 Act applicable to ComEd include a 15% residential base
rate reduction which became effective August 1, 1998, an additional 5%
residential base rate reduction commencing on May 1, 2002, and gradual
customer access to other electric suppliers. 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. ComEd
expects that the 15% residential base rate reduction will reduce ComEd's
operating revenues by approximately $170 million and $390 million in 1998 and
1999, respectively, compared to 1997 rate levels. Operating revenues were
reduced by approximately $80 million for the third quarter 1998 due to the
rate reduction. 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 $55 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. 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.
39
<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, one-half of the excess earnings must be
refunded to customers. A utility may request a rate increase during the rate
freeze period only 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 to be
segregated and used to support the issuance of securities by ComEd or a special
purpose financing entity. The proceeds from such securities 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 which commenced on August 1, 1998. On July 21, 1998,
the ICC issued an order under the 1997 Act approving the issuance of up to $3.4
billion of such securities. ComEd anticipates the issuance will occur sometime
in the fourth quarter of 1998, subject to market conditions. ComEd plans to use
the proceeds of such securities issuance to refinance its debt and equity,
including 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
9 to 14 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 from the
issuance of such securities, net of transaction costs, to redeem preference
stock and debt. On October 27, 1998, Unicom announced that up to $200 million
in funds obtained from operations or other sources may be used to repurchase
shares of common stock before or after the receipt of proceeds from such
securities issuances. The proceeds from such securities issuances are expected
to be the ultimate source of funding for the common stock repurchases.
As a result of the 1997 Act, prices for the supply of electric energy are
expected to change from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover some 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
"Response to Regulatory Changes" below for additional information.
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 FERC to introduce a greater level of competition into the
wholesale marketplace for electric energy. Under the FERC Order, utilities are
required 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
40
<PAGE>
parties have access to the same information as to system availability and
other requirements. 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.
RESPONSE TO REGULATORY CHANGES. Unicom has announced several business and
operational objectives designed to focus efforts in responding to the energy
market changes that are expected to develop from the 1997 Act. These
objectives contemplate that ComEd will seek additional improvements in its
transmission and distribution operations in order to meet customers'
expectations for reliable delivery and will seek to refocus its generation
activities, with a concentration on improved nuclear generation, and that
Unicom and ComEd will seek to expand their offerings of energy-related
products and services. See Unicom and ComEd's Current Report on Form 8-K dated
July 6, 1998 for more information regarding the objectives announced by
Unicom.
Under the 1997 Act, the role of electric utilities in the supply and
delivery of energy is expected to change. Utilities, such as ComEd,
traditionally have been responsible for providing both adequate supply and
reliable delivery of electricity to customers within their service areas. In
the future, ComEd will continue to be obligated to provide a reliable delivery
system. However, ComEd will be obligated to supply electricity only to those
customers that it continues to serve under tariffs for electricity, but not
for those customers who choose to rely on the marketplace. Nonetheless, during
the transition period to a competitive supply marketplace, ComEd must provide
both an adequate supply and reliable delivery. Given the tight capacity
situation in ComEd's market, ComEd will continue working to restore and
maintain its available capacity as well as working to assist in the
development of a competitive supply marketplace in Illinois.
ComEd has a large commitment to, and investment in, nuclear generating
capacity. ComEd has installed a new management team responsible for improving
nuclear operations. Such improvements will be aimed at increasing levels of
energy generation, or capacity factors, at ComEd's nuclear generating units
while simultaneously improving ComEd's record of meeting NRC requirements and
INPO performance standards. Increased capacity factors generally result in
lower unit production costs and an improved opportunity to generate and sell
electricity in a competitive marketplace. Efforts will also be made to control
capital and operating costs through increased efficiencies, such as the
reduction of downtime and expense associated with generating unit maintenance
and refueling outages.
ComEd has also evaluated the recoverability of its generating plant
investment as a result of the 1997 Act. This evaluation, based upon
interpretative guidance issued by the SEC, resulted in a conclusion that the
investment had been impaired and should be reduced. See Note 2 of Notes to
Financial Statements for additional information. Notwithstanding these
efforts, there will continue to be an ongoing analysis of the ability of
ComEd's various nuclear plants to generate and deliver electric energy safely
at competitive prices in the competitive market for energy. Although short-
term system reliability and capacity constraints are likely to support the
continued operations of ComEd's nuclear units in the near term, expected
longer term developments are likely to make decision-making a function of
economic considerations. In the absence of the short-term reliability and
capacity constraints, if a generating plant cannot produce power safely at a
cost below the competitive market price, it will be disposed of or closed.
Plant impairment adjustments have reduced the carrying value of nuclear plants
and depreciation rates reflecting shortened estimated useful lives for certain
stations
41
<PAGE>
will reduce the carrying value further during the next several years. However,
closure of a plant could involve additional charges associated with the write-
off of its then current carrying value. In January 1998, Unicom and ComEd
decided to cease nuclear generating operations at ComEd's Zion Station. The
related retirement resulted in a charge in the fourth quarter of 1997 of $523
million (after-tax), or $2.42 per common share (basic), reflecting both a
write down of the plant's carrying value, as well as a liability for future
closing costs. A portion of Zion Station is used to provide voltage support in
the transmission system that serves ComEd's northern region. See Note 5 of
Notes to Financial Statements for additional information.
ComEd is also undertaking steps to offer for sale approximately 5,600
megawatts of coal-fired generating capacity, representing six generating
stations located in Illinois. Such plants have an aggregate book value of
approximately $1.1 billion. As a part of such sales, ComEd expects to enter
into short-term power purchase agreements with the purchasers in order to
assure the availability of power during the period that the wholesale power
market is developing in Illinois. Non-binding proposals from prospective
qualified buyers are due in late 1998, with final, binding proposals due mid-
February 1999. The closing of the sale is anticipated for the fourth quarter
of 1999. In addition, ComEd continues to examine its other operations and
assets with a view to rationalizing their investment and operating costs
against their ability to contribute to the revenues and profits of ComEd. As a
result of such evaluation, additional asset sales may be undertaken.
In response to customer expectations and more stringent reliability
standards provided for by the 1997 Act, ComEd's management expects, subject to
approval by the Board of Directors of the complete capital budget, to increase
capital expenditures on its transmission and distribution systems by
approximately $307 million over the next three years. This amount is in
addition to the estimated $1.1 billion that is already planned to be spent on
the transmission and distribution systems over the same time period. A
significant portion of such additional expenditures is intended to increase
the reliability of ComEd's distribution system by replacing certain equipment
and increasing automation to identify distribution problems faster, and more
quickly restore power to customers. ComEd's management is currently reviewing
its construction program for 1999 and thereafter.
ComEd joined with eight Midwestern utilities to form a regional Midwest ISO
in January 1998. To date, four other utilities have joined the Midwest ISO.
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.
The Midwest ISO will have operational control over the transmission system and
will have authority to require modification in the operation of generators
connected to that system during system emergencies. ComEd will retain
ownership of its transmission system. The formation of the Midwest ISO was
approved by FERC in September 1998. It is anticipated that the Midwest ISO
Board of Directors will be elected by the end of 1998.
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>
42
<PAGE>
Such estimated expenditures include $95 million toward the replacement of
the steam generators at ComEd's Byron Unit 1, which were replaced in February
1998, and Braidwood Unit 1, which are expected to be replaced prior to 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. ComEd's management is currently
reviewing its construction program for the years 1999 and thereafter. See
"Changes in the Electric Utility Industry," subcaption "Response to Regulatory
Changes" above, for information regarding capital spending for the
transmission and distribution systems.
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,
can be obtained in sufficient quantities to meet such forecasted needs.
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $268 million at September 30, 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 $ 488
Decker Coal Co. .................................. 1998-2014 478
Other commitments ................................ 1998-2000 53
------
$1,019
======
</TABLE>
--------
(1)In millions of dollars, excluding transportation costs. No estimate
of future cost escalation has been made.
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 the proposed issuance by ComEd 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, 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 may 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. On
October 8, 1998, ComEd had $1 billion of unused bank lines of credit, which
may be borrowed at various interest rates. The interest rate is set at the
time of a borrowing and is based on 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. See Note 13 of Notes to Financial
Statements for 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, nine months and twelve months ended September 30, 1998. Cash
flow from operating activities decreased temporarily for the three months,
nine months and twelve months ended September 30, 1998, compared to the same
periods ended September 30, 1997, as a result of the transition to a new
customer information and billing system in the third quarter of 1998.
43
<PAGE>
During the first nine months of 1998, ComEd sold and leased back $101
million of nuclear fuel through its existing nuclear fuel lease facility. In
July 1998, ComEd issued $225 million principal amount of 6.95% Notes due July
15, 2018, the proceeds of which were used for general corporate purposes,
including the refinancing of existing debt. See the Statements of Consolidated
Cash Flows and Note 7 of Notes to Financial Statements for information
regarding common stock activity.
As of November 10, 1998, ComEd has an effective "shelf" registration
statement with the SEC for the future sale of up to an additional $280 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 October 1998, Moody's rating outlook on ComEd's securities is "Stable"
and S&P's rating outlook is "Positive." Duff & Phelps removed ComEd's
securities from "Rating Watch-Down" in September 1998.
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.
See "Changes in the Electric Utility Industry," subcaption "The 1997 Act"
above, regarding the ICC's order approving ComEd's proposed issuance of up to
$3.4 billion of securities and the planned use of 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 slightly to 48.9% at September 30, 1998 from 48.5% at December
31, 1997. Unicom's retained earnings account had a deficit balance of $21
million at December 31, 1997. As of September 30, 1998 and December 31, 1997,
$470 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 $19 million at December 31, 1997. As of September 30,
1998 and December 31, 1997, $546 million and $384 million, respectively, of
retained earnings had been appropriated for future dividend payments.
YEAR 2000 CONVERSION. Unicom, including ComEd, uses various software
applications and embedded systems throughout its businesses that will be
affected by so-called "Year 2000 issues." These issues may prevent an
application or system from correctly processing dates up to the year 2000 and
beyond. A failure to correct any critical Year 2000 processing problems prior
to January 1, 2000 could have material adverse operational and financial
consequences if the affected systems either cease to function or produce
erroneous data. At this time, Unicom believes the major risks associated with
the inability of systems and software to process Year 2000 data correctly are
a system failure or miscalculation causing disruption of operations, including
among other things, an inability to operate ComEd's nuclear or fossil
generating plants, disruption in the operation of its transmission and
distribution systems or an inability to access interconnections with the
systems of neighboring utilities. Such failures could materially and adversely
affect Unicom's results of operations, financial position and cash flows.
44
<PAGE>
Unicom management has established a Year 2000 project team, currently
composed of over 300 members, including members of Unicom's senior management,
to address Year 2000 issues. The team is focused on three elements that are
integral to the project: business continuity, project management and risk
management. Business continuity involves the continuation of reliable electric
supply and service in a safe and cost-effective manner. Project management
involves defining and meeting the project scope, schedule and budget. Risk
management involves customer management, contingency planning and legal
issues.
In addition to its internal efforts, Unicom is working with various industry
groups, including NERC, EPRI and EEI to coordinate electric utility industry
Year 2000 efforts with the Clinton Administration's Year 2000 Conversion
Council, the DOE and Congress. The DOE has asked NERC to report on the
integrity of the transmission system for North America and to coordinate and
assess the preparation of the electric systems in North America for the Year
2000. NERC submitted its initial status report and coordination plan to the
DOE in September 1998, and a full status report is due by July 1999, as to the
measures that are being taken to prepare electric power supply and delivery
systems for transition into the Year 2000.
Since July 1996, Unicom has been working to identify and address Year 2000
issues. Unicom's approach to identifying and addressing noncompliant software
applications and embedded systems consists of the following stages: inventory,
analysis, renovation, testing and deployment. In addition, Unicom is engaged
in contingency planning for Year 2000 problems. The first stage is to
inventory all applications and systems. The analysis stage involves assessing
whether software applications and embedded systems are Year 2000 compliant.
The renovation stage involves remediating or upgrading applications and
systems to make them Year 2000 ready. The testing stage determines whether the
renovated applications and systems are Year 2000 ready. The deployment stage
is when the tested applications and systems are implemented. Unicom also has
begun to develop contingency plans to address the possibility that the
applications and systems may not be Year 2000 ready at the end of this
process. An independent consultant has been engaged to assist Unicom in the
assessment of the process being used to address the Year 2000 issue.
Unicom's Year 2000 project focuses on those facets of its business that are
required to deliver reliable electric service. The project encompasses the
computer systems that support core business functions such as customer
information and billing, finance, procurement, supply and personnel as well as
the components of metering, transmission, distribution and generation support.
The project also focuses on embedded systems, instrumentation and control
systems in facilities and plants. In accordance with business plans, Unicom
has replaced certain of its financial, human resources and customer service
and billing software, and is planning to replace its payroll system in early
1999, with new software that is Year 2000 compliant, and that addresses
Unicom's strategic needs as it enters a less regulated environment.
The following table summarizes the status as of October 2, 1998 of Unicom's
progress toward achieving Year 2000 readiness. The figures set forth in the
table represent the estimated extent to which Unicom has completed each phase
of the Year 2000 project for software applications and embedded systems.
<TABLE>
<CAPTION>
SOFTWARE EMBEDDED
APPLICATIONS SYSTEMS
------------ --------
<S> <C> <C>
Inventory........................................... 99% 97%
Analysis............................................ 58% 70%
Renovation.......................................... 47% 5%
Testing............................................. 35% 7%
Deployment.......................................... 31% 4%
</TABLE>
45
<PAGE>
The following is a brief summary of estimates of progress of the Year 2000
project and certain projected completion dates in each of Unicom's four
critical business areas--nuclear generation, fossil generation, transmission
and distribution and corporate information services:
. Nuclear Generation--Software applications inventory is 90% complete and
analysis is underway. Embedded systems inventory is 100% complete and
analysis is 84% complete. Eight of the ten operating nuclear units are
expected to be Year 2000 ready in the first half of 1999. If Year 2000
modifications are necessary, the two remaining units are expected to be
made Year 2000 ready during refueling outages previously scheduled for
the fourth quarter of 1999.
. Fossil Generation--Software applications and embedded systems inventories
are 100% complete. Analysis is 32% complete for software applications and
56% complete for embedded systems. Deployment of software applications
and embedded systems is expected to be completed by May 30, 1999.
. Transmission and Distribution--Software applications and embedded systems
inventories are 100% complete. Analysis is 33% complete for software
applications and 56% complete for embedded systems. Testing and
deployment are each 20% complete for software applications. Deployment of
software applications and embedded systems is expected to be completed by
May 30, 1999.
. Corporate Information Services--Inventory is 100% complete. Analysis is
93% complete. Renovation is 88% complete. Deployment is 57% complete.
Deployment of software applications and embedded systems is expected to
be completed by December 31, 1998.
Unicom's current schedule is subject to change, depending on developments
that may arise through unforeseen business circumstances, and through
remediation and testing phases of its compliance effort. Unicom also depends
upon third parties, including customers, suppliers, government agencies and
financial institutions, to reliably deliver its products and services. Unicom
has begun implementing additional initiatives to assess the degree to which
third parties with whom it has business relationships are addressing Year 2000
issues. These initiatives include analysis of the Year 2000 compliance
programs of Unicom's critical vendors and obtaining Year 2000 warranties in
certain new contracts and licenses. Unicom also has introduced protocols for
assuring that software and embedded systems remain Year 2000 compliant on a
continuing basis. Unicom's contingency planning is addressing mechanisms for
preventing or mitigating interruption caused by its suppliers. Unicom also has
an outreach program in place for communicating Year 2000 project information
to residential and business customers.
Unicom estimates that the total cost of remediating or upgrading software
which would not otherwise be replaced in accordance with its business plans is
approximately $20 million, and the total cost of remediating or upgrading
embedded systems is approximately $20-$40 million. Approximately $12.7 million
has been expended as of September 30, 1998 for external labor, hardware and
software costs, and for the costs of Unicom employees who are dedicated full-
time to the Year 2000 project. All of such costs are expensed as incurred. The
foregoing amounts do not include the cost of new software applications
installed as a result of strategic replacement projects described earlier.
Such replacement projects were not accelerated because of Year 2000 issues.
The cost of the project and the dates on which Unicom plans to complete its
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third parties' Year 2000
readiness and other factors. Further, Unicom expects to incur additional costs
after 1999 to remediate and replace less critical software applications and
embedded systems.
Unicom has existing contingency plans in place for events such as extreme
heat, storms, equipment failures and accidents. Unicom is preparing Year 2000
contingency plans based on the framework of existing emergency management
system preparation and scenario development.
46
<PAGE>
Unicom has begun the process of developing contingency plans to address the
most reasonably likely worst case scenarios that could occur in the event that
various Year 2000 issues are not resolved in a timely manner. Unicom expects
to submit the first draft of contingency plans to NERC by December 31, 1998,
as NERC has requested. Final plans are due to be submitted to NERC by June 30,
1999. Contingency planning is an ongoing process and will continue through the
fourth quarter of 1999.
Unicom is using an approach in its contingency planning process that has
been recognized by NERC and EEI. The phases of the process include: business
impact analysis, contingency planning and testing. Unicom's business impact
analysis requires business unit personnel to evaluate the impact of mission-
critical systems failures on Unicom's core business operations, focusing on
specific failure scenarios and how they can be mitigated. The necessary
conditions for enacting the plans will be documented along with the
appropriate personnel responsible in each of the business units should a Year
2000 failure occur. Additionally, Unicom will participate in the NERC
industry-wide readiness drills scheduled for the spring and fall of 1999.
Based on Unicom's current schedule for completion of Year 2000 tasks, it
believes that its planning is adequate to secure Year 2000 readiness of its
critical systems. Nevertheless, achieving Year 2000 readiness is subject to
various risks and uncertainties, many of which are described above. Unicom is
not able to predict all the factors that could cause actual results to differ
materially from its current expectations as to its Year 2000 readiness.
However, if Unicom, or third parties with whom it has significant business
relationships, fails to achieve Year 2000 readiness with respect to critical
systems, there could be a material adverse effect on Unicom's results of
operations, financial position and cash flows.
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. See "Energy Risk Management Contracts" in Note 1 of Notes
to Financial Statements regarding the accounting for energy risk management
contracts.
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, 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, active energy
47
<PAGE>
management systems and energy infrastructure services. In 1997, Unicom Energy
Services entered into a joint venture with Sonat Marketing Company L.P. to
market natural gas and related services to larger 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,
the province of Ontario, Canada and Puerto Rico. 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 September 30, 1998, Unicom Energy Services had
purchase commitments of approximately $6 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 and the related
distribution piping and plants in other cities. As of September 30, 1998, UT
Holdings' purchase commitments, principally related to construction, were
approximately $35 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 on
November 15, 1999, of which $100 million was unused as of September 30, 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.
In July 1998, Unicom Thermal issued $120 million of guaranteed senior
unsecured 7.38% Notes due in May 2012, the proceeds of which were used to
refinance existing debt. The Notes are guaranteed by Unicom and include
certain covenants with respect to Unicom and Unicom Thermal's 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 federal and state 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.
RATE MATTERS. See "Changes in the Electric Utility Industry," subcaption
"The 1997 Act" above, for information regarding the effect of the 1997 Act on
rate matters. See "Nuclear Matters" below for information regarding fuel
reconciliation proceedings for the years 1994 and 1996.
48
<PAGE>
NUCLEAR MATTERS. Nuclear operations have been, and remain, an important
focus of ComEd--given the impact of such operations on overall O&M expenses
and the ability of nuclear power plants to produce electric energy at a
relatively low marginal cost. ComEd operates five 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. See "Changes in the Electric Utility Industry,"
subcaption "Response to Regulatory Changes" above, for information regarding
ComEd's cessation of nuclear generation operations at its Zion Station.
ComEd's LaSalle Station is currently on the NRC's list of plants that
require increased regulatory scrutiny by the NRC. Dresden Station had been
included on the list since 1992 and LaSalle and Zion Stations were added in
January 1997. On July 29, 1998, the NRC removed Dresden Station from the list
because of improved performance at the station, and also administratively
removed Zion Station from the list because of ComEd's decision to cease
further nuclear operations at the plant. The listing of LaSalle Station 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. In January 1998, the NRC noted a declining
performance trend at Quad Cities Station. In March 1998, the NRC stated that
weaknesses were observed with respect to certain operations, maintenance and
engineering activities at Quad Cities Station. On July 29, 1998, the NRC
stated that there has not been sufficient operational data to enable it to
assess Quad Cities Station performance. 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 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 nuclear generating
stations while sustaining performance improvement at each site. 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 ten years. It also noted concerns regarding
"ComEd's ability to establish lasting and effective programs that result in
sustained performance improvement." 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.
ComEd has devoted, and intends to continue to devote, significant resources
to the management and operations of its nuclear generating stations. In recent
years, it has increased and reinforced the Nuclear Generation Group executive
leadership and station management with executives and managers drawn from
other utilities which have resolved similar operational and performance
issues. These efforts include the appointment of a new Chief Nuclear Officer
in late 1997. ComEd 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. Although performing such improvements can result in
longer unit outages, the improvements are expected to result in improved
operational performance when completed. LaSalle Units 1 and 2 were shut down
for extensive improvement work in September 1996. LaSalle Unit 1 was returned
to service in August 1998 after the NRC determined that ComEd had made
sufficient improvements at LaSalle Unit 1 for the unit to resume operations.
LaSalle Unit 2 is expected to restart during the second quarter of 1999. The
restart of LaSalle Unit 2 requires the resolution of material condition issues
similar to those of LaSalle Unit 1.
49
<PAGE>
The NERC forecasted the possibility of electric energy shortages in the
summer of 1998 in light of continued outages at nuclear plants operated by
ComEd and other utilities in the Midwest power grid. ComEd took numerous steps
to support the reliability of its system during the summer of 1998. Such steps
included maximizing available on-system generating capacity during periods of
peak demand, arrangements to purchase 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. As a result of a unique
combination of heat, storms and equipment problems affecting utilities
throughout the Midwest region, on June 25, 1998, ComEd declared a NERC
generation deficiency alert Level 3, which is a statement that firm load loss
is possible. As of November 10, 1998, a firm load loss had not been
experienced. See "Results of Operations," subcaption "Purchased Power" below,
regarding the increased purchased power expense 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 related to ComEd's FAC collections for
years prior to 1994 and for the year 1995. On November 5, 1998, the ICC issued
an order in the proceeding for the year 1994 providing for a refund of
approximately $3 million related to nuclear station performance. The ICC order
is subject to appeal. In the fuel reconciliation proceeding for 1996, an
intervenor and the ICC staff have filed testimony seeking a refund of
approximately $78 million and $104 million, respectively, relating to nuclear
station performance. The 1997 Act provides that the fuel reconciliation
proceeding for 1996 must be concluded by the end of 1998. 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. ComEd's management believes adequate reserves have been
established in connection with the FAC cases discussed above.
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 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,
Amortization of Regulatory Assets 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."
50
<PAGE>
RESULTS OF OPERATIONS
Unicom's basic and diluted earnings (loss) per common share for the three
months, nine months and twelve months ended September 30, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------- ----------------- ---------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings (Loss)
per Common Share....... $1.22 $1.11 $1.84 $2.35 $(4.44) $2.79
========= ========= ======== ======== ========== =========
Diluted Earnings (Loss)
per Common Share....... $1.22 $1.11 $1.83 $2.35 $(4.44) $2.78
========= ========= ======== ======== ========== =========
</TABLE>
The earnings for the nine months and twelve months ended September 30, 1997
also include the one-time positive impact of a change in accounting principle
of $197 million (after-tax), or $0.91 per common share (basic). Restated basic
earnings per common share, excluding the one-time positive effect of the
change in accounting principle, were $1.11, $1.44 and $1.88 for the three
months, nine months and twelve months ended September 30, 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. All EPS computations shown below
reflect the impact on Unicom's basic EPS.
NET INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998. The increase in
ComEd's net income in the recent three-month period reflects, among other
factors, increased kilowatthour sales which increased both operating revenues
and energy costs, compared to the same period in 1997. Also contributing to
the increase in net income were reduced O&M expenses and lower depreciation
and amortization expense.
Kilowatthour sales increased 4% for the three months ended September 30,
1998, compared to the same period in 1997, driven largely by increased sales
to retail customers due to warmer weather experienced during the recent
period, as well as continued economic growth in ComEd's service territory.
Operating revenues increased 1% during the recent three-month period, compared
to the same period in 1997. See "Operating Revenues" below for additional
information.
Fuel and purchased power costs increased 21% in the third quarter of 1998,
compared to the third quarter of 1997, reflecting increased demand for
electricity, as well as the effects of higher purchased power prices. See
"Purchased Power" below for additional information.
O&M expenses decreased 2% for the third quarter of 1998, compared to the
same period in 1997, as discussed in "Operation and Maintenance Expenses"
below.
The third quarter of 1998 includes an 8% decrease in depreciation and
amortization expense, as discussed in "Depreciation and Amortization" below,
and a $9 million (after-tax) reduction to the estimated liability for closing
costs related to the Zion nuclear generating station, both of which increased
operating results.
51
<PAGE>
NET INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998. The decrease in
ComEd's net income in the recent nine-month period reflects, among other
factors, the one-time positive impact of a change in accounting principle of
$197 (after-tax), reflected in the September 30, 1997 results, and increased
fuel and purchased power costs, partially offset by increased kilowatthour
sales, decreased O&M expenses and lower depreciation and amortization expense,
compared to the same period last year.
Kilowatthour sales increased 3% for the nine months ended September 30,
1998, compared to the same period in 1997, reflecting increased sales to
retail customers due to warmer summer weather experienced during the recent
period, as well as continued economic growth in ComEd's service territory.
Operating revenues increased 3% during the recent nine-month period, compared
to the same period in 1997. See "Operating Revenues" below for additional
information.
Fuel and purchased power costs increased 22% during the nine months ended
September 30, 1998, compared to the same period in 1997, reflecting the
increase in purchased power price levels and increased purchases from other
utilities. See "Purchased Power" below for additional information.
O&M expenses decreased 6% for the nine months ended September 30, 1998,
compared to the same period in 1997, as discussed in "Operation and
Maintenance Expenses" below.
The recent nine months ended also includes a 6% decrease in depreciation and
amortization expense, as discussed in "Depreciation and Amortization" below,
and a $9 million (after-tax) reduction to the estimated liability for closing
costs related to the Zion nuclear generating station, both of which increased
operating results.
In the fourth quarter of 1997, ComEd changed its 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 nine months and twelve months ended September 30,
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.
NET INCOME (LOSS) FOR THE TWELVE MONTHS ENDED SEPTEMBER 30, 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 enactment of the 1997 Act. The results for the twelve months
ended September 30, 1998 also included a write-off in connection with the
closure of Zion 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 was refunded to customers during the first six
months of 1998. 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.
52
<PAGE>
Also, the results for the twelve months ended September 30, 1998 included
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.
In the fourth quarter of 1997, ComEd changed its 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 nine months and twelve months ended September 30,
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 included 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.
ComEd's kilowatthour sales increased 4% in the twelve months ended September
30, 1998, compared to the same period last year, driven largely by increased
sales to retail customers due to warmer summer weather experienced during the
recent twelve-month period, as well as continued economic growth in ComEd's
service territory. Operating revenues increased 2% in the recent twelve-month
period. See "Operating Revenues" below for additional information.
Also reducing operating results for the recent twelve-month period was a 21%
increase in fuel and purchased power costs. See "Purchased Power" below for
additional information.
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 cost 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 $22 million, $153 million and $167 million for
the three months, nine months and twelve months ended September 30, 1998,
respectively, compared to the same periods ended September 30, 1997. The
increase was primarily due to an increase in kilowatthour sales to retail
customers of 4%, 3% and 4% for the three months, nine months and twelve months
ended September 30, 1998, respectively, compared to the same periods last
year. The increase in operating revenues was partially offset by approximately
$80 million for a 15% residential base rate reduction which became effective
on August 1, 1998. The increase in kilowatthour sales to retail customers
during the recent periods was primarily due to warmer summer weather in the
recent periods, compared to the same periods last year, as well as continued
economic growth in ComEd's service territory. Operating revenues were reduced
in the third quarter of 1998 due to a change in the presentation for certain
state and municipal taxes on the Statements of Consolidated Operations and
reserves for various federal and state litigation matters. See Note 19 of
Notes to Financial Statements for additional information regarding the change
in presentation for certain taxes on the Statements of Consolidated
Operations.
53
<PAGE>
FUEL COSTS. Changes in fuel expense for the three months, nine months and
twelve months ended September 30, 1998, compared to the same periods ended
September 30, 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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Cost of fuel consumed (per million Btu):
Nuclear..................................... $ 0.54 $ 0.54 $ 0.58 $ 0.56 $ 0.59 $ 0.56
Coal........................................ $ 2.59 $ 2.19 $ 2.35 $ 2.33 $ 2.28 $ 2.32
Oil......................................... $ 3.71 $ 4.57 $ 3.49 $ 4.03 $ 3.56 $ 3.77
Natural gas................................. $ 2.27 $ 2.47 $ 2.38 $ 2.53 $ 2.53 $ 2.56
Average all fuels........................... $ 1.29 $ 1.21 $ 1.28 $ 1.31 $ 1.31 $ 1.28
Net generation of electric energy (millions of
kilowatthours)............................... 25,110 24,610 60,600 65,690 80,770 88,859
Fuel sources of kilowatthour generation:
Nuclear..................................... 63% 61% 62% 59% 59% 60%
Coal........................................ 31 35 31 38 34 37
Oil......................................... -- -- 1 -- 1 --
Natural gas................................. 6 4 6 3 6 3
--------- --------- -------- -------- --------- ---------
100% 100% 100% 100% 100% 100%
========= ========= ======== ======== ========= =========
</TABLE>
The decreases in the net generation of electric energy for the nine months
and twelve months ended September 30, 1998, compared to the same periods ended
September 30, 1997, are primarily due to the sales of State Line and Kincaid
Stations in December 1997 and February 1998, respectively, and lower nuclear
plant availability. 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
September 30, 1998, ComEd had coal reserves of $221 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," subcaption "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, respectively.
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 costs increased $98
million, $414 million and $502 million for the three months, nine months and
twelve months ended September 30, 1998, respectively, compared to the same
periods ended September 30, 1997. Such increases include $45 million for the
three months and $120 million for the nine months and twelve months ended
September 30, 1998 for the agreements entered into in connection with the
sales of State Line and Kincaid Stations in December 1997 and February 1998,
respectively. The increases in purchased power costs in the recent nine-month
and twelve-month periods also reflect the effects of an extraordinary
combination of heat, storms and equipment problems experienced throughout the
Midwest in late June 1998 which resulted in unprecedented purchased power
price levels. In addition, the increases for the nine months and twelve months
54
<PAGE>
ended September 30, 1998 reflect 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.
The number and average cost of kilowatthours purchased were as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
------ ------ -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kilowatthours
(millions)............. 4,025 3,005 18,474 11,987 23,158 13,508
Cost per kilowatthour... 4.81c 3.19c 3.76c 2.33c 3.52c 2.31c
</TABLE>
Purchased power costs increased significantly in the year 1998, compared to
the year 1997, due to higher costs for power purchased from other utilities,
purchase power agreements entered into in connection with the sales of State
Line and Kincaid Stations in December 1997 and February 1998, respectively,
and increased kilowatthour sales. The market price for electricity is subject
to price volatility associated with changes in supply and demand in the
electric supply markets. ComEd utilizes energy put and call option contracts
and energy swap arrangements to limit market price risk associated with
forward commodity contracts.
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, as well as cost control
efforts.
During the three months, nine months and twelve months ended September 30,
1998, the aggregate level of O&M expenses decreased 2%, 6% and 2%,
respectively, compared to the same periods ended September 30, 1997.
O&M expenses associated with nuclear generating stations decreased $31
million, $163 million and $154 million during the three months, nine months
and twelve months ended September 30, 1998, respectively, compared to the same
periods ended September 30, 1997, principally due to 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. See "Changes in the Electric Utility Industry," subcaption
"Response to Regulatory Changes" above, regarding the permanent cessation of
nuclear operations at Zion Station.
O&M expenses associated with nuclear generating stations have 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 is also 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
55
<PAGE>
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, nine months and twelve months ended September 30,
1998, O&M expenses associated with fossil generating stations decreased $12
million and increased $2 million and $10 million, respectively, compared to
the same periods ended September 30, 1997. The decrease related to fossil
generating stations for the recent three months ended September 30, 1998 is
primarily due to lower plant refurbishment costs. The increases related to
fossil generating stations for the recent nine months and twelve months ended
September 30, 1998 is primarily due to increases in plant refurbishment costs,
partially offset by the sales of State Line and Kincaid Stations in December
1997 and February 1998, respectively.
O&M expenses associated with ComEd's transmission and distribution system
increased $5 million, $13 million and $12 million for the three months, nine
months and twelve months ended September 30, 1998, respectively, compared to
the same periods ended September 30, 1997. The increases in the recent three-
month, nine-month and twelve-month periods are primarily due to higher
maintenance costs, including costs associated with storm damage. O&M expenses
associated with customer-related activities increased $4 million, $15 million
and $24 million for the three months, nine months and twelve months ended
September 30, 1998, compared to the same periods ended September 30, 1997,
primarily due to increased marketing initiatives and customer service
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, resulting in charges of $9
million and $26 million for the three months ended September 30, 1998 and
1997, respectively, $33 million for each of the nine months ended September
30, 1998 and 1997 and $38 million for each of the twelve months ended
September 1998 and 1997.
Other employee-related expenses, excluding the effects of employee
separation plans and certain other one-time, employee-related costs, increased
$31 million, $35 million and $24 million for the three months, nine months and
twelve months ended September 30, 1998, respectively, compared to the same
periods last year. The increases for the recent periods are primarily due to
accruals for estimated incentive compensation recorded in the second and third
quarters of 1998. In 1997, employee incentive compensation was recorded in the
fourth quarter.
O&M expenses for the twelve months ended September 30, 1998 also include $25
million for the additional write-off of obsolete materials and supplies
recorded in the fourth quarter of 1997. O&M expenses associated with certain
administrative and general costs increased $10 million, decreased $4 million
and increased $17 million for the three months, nine months and twelve months
ended September 30, 1998, respectively, compared to the same periods ended
September 30, 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,
and costs associated with legal 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 AND AMORTIZATION. Depreciation expense decreased for the three
months, nine months and twelve months ended September 30, 1998, compared to
the same periods ended September 30, 1997. The decreases in the recent three-
month, nine-month and twelve-month periods reflect the retirement of Zion
Station and the plant impairment recorded by ComEd in the second quarter of
1998, partially offset by plant additions and shortened depreciable lives for
certain
56
<PAGE>
nuclear stations. The decreases in the recent three-month, nine-month and
twelve-month periods also reflect the sales of State Line and Kincaid Stations
in December 1997 and February 1998, respectively. Depreciation expense
includes depreciation related to the replacement of the steam generators at
Byron Unit 1 and Braidwood Unit 1 of $6 million and $15 million for the three
months ended September 30, 1998 and 1997, respectively, $29 million and $44
million for the nine months ended September 30, 1998 and 1997, respectively,
and $44 million and $52 million for the twelve months ended September 30, 1998
and 1997, respectively.
The amortization of the regulatory asset, principally related to impaired
production plant recorded by ComEd in the second quarter of 1998, partially
offset the reductions in depreciation expense. Such amortization was $33
million for the three months and nine months ended September 30, 1998 and $37
million for the twelve months ended September 30, 1998. See Note 1 of Notes to
Financial Statements, under "Depreciation, Amortization of Regulatory Assets
and Decommissioning," for additional information.
INTEREST ON DEBT. Changes in interest on long-term debt and notes payable
for the three months, nine months and twelve months ended September 30, 1998,
compared to the same periods ended September 30, 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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
--------------------- --------------------- ---------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt outstand-
ing:
Average amount (mil-
lions)................ $5,823 $6,148 $5,852 $6,313 $5,906 $6,375
Average interest rate.. 7.37% 7.65% 7.40% 7.65% 7.47% 7.64%
Notes payable outstand-
ing:
Average amount (mil-
lions)................ $ 412 $ 216 $ 343 $ 192 $ 266 $ 160
Average interest rate.. 5.94% 5.96% 5.92% 5.91% 5.94% 5.91%
</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. If current electric utility
industry accounting practices for such decommissioning costs are changed,
annual provisions for decommissioning could increase and the estimated cost
for decommissioning 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 portion of its
business. As a result, beginning in 1998, ComEd is capitalizing interest costs
on its generation-related construction work in progress and nuclear fuel in
process. Interest costs capitalized were $6 million for the three months and
$14 million for the nine months and twelve months ended September 30, 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
September 30, 1998 and December 31, 1997 were 0.75 and 0.58, respectively.
ComEd's ratios of earnings to fixed
57
<PAGE>
charges and preferred and preference stock dividend requirements for the
twelve months ended September 30, 1998 and December 31, 1997 were 0.64 and
0.49, respectively. Earnings for the twelve months ended September 30, 1998
and December 31, 1997 were inadequate to cover fixed charges by approximately
$143 million and $259 million, respectively, and fixed charges and preferred
and preference stock dividend requirements by approximately $238 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.
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 and collections of
future CTC revenues 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--The 1997 Act," 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," subcaptions "Liquidity and Capital Resources--
UTILITY OPERATIONS--Construction Program," "Liquidity and Capital Resources--
UNREGULATED OPERATIONS--Construction Program" and "Changes in the Electric
Utility Industry--Response to Regulatory Changes," (3) statements regarding
the estimated return to service of certain nuclear generating units in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Regulation--Nuclear Matters," (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
of Financial Statements, under "Depreciation, Amortization of Regulatory
Assets and Decommissioning," (5) statements regarding cleanup costs associated
with MGPs and other remediation sites in Note 22 of Notes to Financial
Statements, and (6) statements regarding the risks and uncertainties relating
to Year 2000 issues set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Liquidity and
Capital Resources--Year 2000 Conversion," including the projected completion
dates in each of Unicom's four critical business areas, Unicom's dependence
upon the Year 2000 readiness of third parties with whom it has significant
business relationships, the estimated costs of remediating or upgrading
embedded systems and software that would not otherwise be replaced in
accordance with Unicom's business plans and Unicom's Year 2000 contingency
planning process. 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 and collections of future CTC revenues 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, cleanup costs and Year 2000 conversion costs are
subject to changes in the
58
<PAGE>
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. The statements regarding expectations for Year 2000 readiness and
Unicom's Year 2000 contingency planning process are subject to the risk that
Year 2000 remediation efforts of Unicom and other parties with whom it has
significant business relationships are not successful. 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.
59
<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 September 30, 1998 and December
31, 1997, and the related statements of consolidated operations, retained
earnings (deficit) and cash flows for the three-month, nine-month and twelve-
month periods ended September 30, 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 September 30, 1998 and December 31,
1997, and the results of their operations and their cash flows for the three-
month, nine-month and twelve-month periods ended September 30, 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
November 10, 1998
60
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months,
nine months and twelve months ended September 30, 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 NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
---------------------- ---------------------- -----------------------
1998 1997 1998 1997 1998 1997
---------- ---------- ---------- ---------- ----------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Electric Operating Reve-
nues................... $2,089,547 $2,068,044 $5,576,132 $5,422,786 $ 7,226,434 $7,059,237
---------- ---------- ---------- ---------- ----------- ----------
Electric Operating Ex-
penses and Taxes:
Fuel................... $ 349,411 $ 354,584 $ 831,710 $ 972,374 $ 1,098,773 $1,262,710
Purchased power........ 193,637 95,762 693,726 279,402 814,380 311,952
Operation.............. 387,887 424,165 1,068,114 1,252,986 1,529,588 1,648,966
Maintenance............ 169,536 143,261 603,666 520,758 772,637 695,682
Depreciation and amor-
tization.............. 231,008 249,801 709,774 752,523 958,400 995,926
Taxes (except income).. 178,800 224,467 570,365 613,717 755,814 796,760
Income taxes--
Current--Federal..... 168,239 150,583 287,417 213,260 288,506 273,358
--State.............. 28,995 41,151 53,863 63,191 55,958 64,165
Deferred--Federal--
net................. (10,920) 6,328 (29,937) 24,851 1,325 34,954
--State--net......... 4,134 (5,082) 1,543 (6,687) 10,774 4,110
Investment tax credits
deferred--net......... (6,889) (7,570) (20,937) (23,364) (28,588) (30,399)
---------- ---------- ---------- ---------- ----------- ----------
$1,693,838 $1,677,450 $4,769,304 $4,663,011 $ 6,257,567 $6,058,184
---------- ---------- ---------- ---------- ----------- ----------
Electric Operating In-
come................... $ 395,709 $ 390,594 $ 806,828 $ 759,775 $ 968,867 $1,001,053
---------- ---------- ---------- ---------- ----------- ----------
Other Income and (Deduc-
tions):
Interest on long-term
debt, net of interest
capitalized........... $ (107,356) $ (117,572) $ (324,693) $ (362,044) $ (441,178) $ (487,107)
Interest on notes pay-
able.................. (6,170) (3,254) (15,186) (8,503) (15,817) (9,459)
Allowance for funds
used during construc-
tion--
Borrowed funds....... 2,653 4,871 6,967 13,875 11,647 17,492
Equity funds......... 1,814 5,772 5,358 16,558 12,570 21,614
Income taxes
applicable to
nonoperating
activities............ (1,748) 1,996 4,450 4,414 11,265 11,761
Provision for
dividends on company-
obligated mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely the
Company's
subordinated debt
securities............ (7,428) (7,357) (22,283) (21,433) (29,710) (25,673)
Loss on nuclear plant
closure............... -- -- -- -- (885,611) --
Income tax effect of
nuclear plant
closure............... -- -- -- -- 362,952 --
Miscellaneous--net..... 8,597 (14,101) 916 (35,351) (60,056) (47,508)
---------- ---------- ---------- ---------- ----------- ----------
$ (109,638) $ (129,645) $ (344,471) $ (392,484) $(1,033,938) $ (518,880)
---------- ---------- ---------- ---------- ----------- ----------
Net Income (Loss) before
Extraordinary Item and
Cumulative Effect of
Change in Accounting
Principle.............. $ 286,071 $ 260,949 $ 462,357 $ 367,291 $ (65,071) $ 482,173
Extraordinary Loss, less
Applicable Income
Taxes.................. -- -- -- -- (810,335) --
Cumulative Effect of
Change in Accounting
Principle.............. -- -- -- 196,700 -- 196,700
---------- ---------- ---------- ---------- ----------- ----------
Net Income (Loss)....... $ 286,071 $ 260,949 $ 462,357 $ 563,991 $ (875,406) $ 678,873
Provision for Dividends
on Preferred and
Preference Stocks...... 14,053 14,902 43,062 45,914 57,635 61,467
---------- ---------- ---------- ---------- ----------- ----------
Net Income (Loss) on
Common Stock........... $ 272,018 $ 246,047 $ 419,295 $ 518,077 $ (933,041) $ 617,406
========== ========== ========== ========== =========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
61
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 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 $997 million and
$1,131 million, respectively).................... $27,622,915 $27,519,365
Less--Accumulated provision for depreciation...... 14,977,452 11,645,985
----------- -----------
$12,645,463 $15,873,380
Nuclear fuel, at amortized cost................... 890,235 906,043
----------- -----------
$13,535,698 $16,779,423
----------- -----------
Investments:
Nuclear decommissioning funds..................... $ 2,026,648 $ 1,855,697
Subsidiary companies.............................. 48,793 48,605
Other investments, at cost........................ 39,725 39,002
----------- -----------
$ 2,115,166 $ 1,943,304
----------- -----------
Current Assets:
Cash.............................................. $ 20,338 $ --
Temporary cash investments........................ 73,513 72,634
Special deposits.................................. 1,245 271
Receivables--
Customers....................................... 1,375,098 873,418
Other........................................... 62,588 130,537
Provisions for uncollectible accounts........... (20,722) (17,544)
Coal and fuel oil, at average cost................ 152,108 120,664
Materials and supplies, at average cost........... 244,365 255,338
Deferred income taxes related to current assets
and liabilities.................................. 51,774 179,493
Prepayments and other............................. 146,973 125,507
----------- -----------
$ 2,107,280 $ 1,740,318
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets................................. $ 4,473,473 $ 1,685,235
Coal reserves..................................... 113,032 194,769
Other............................................. 84,001 115,354
----------- -----------
$ 4,670,506 $ 1,995,358
----------- -----------
$22,428,650 $22,458,403
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
62
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ------------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity............................... $ 5,028,967 $ 4,866,438
Preferred and preference stocks without mandatory
redemption requirements.......................... 506,808 507,053
Preference stock subject to mandatory redemption
requirements..................................... 157,118 174,328
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
the Company's subordinated debt securities*...... 350,000 350,000
Long-term debt.................................... 5,782,824 5,562,883
----------- -----------
$11,825,717 $11,460,702
----------- -----------
Current Liabilities:
Notes payable..................................... $ 408,646 $ 158,150
Current portion of long-term debt, redeemable
preference stock and capitalized lease
obligations...................................... 278,609 772,831
Accounts payable.................................. 470,101 490,124
Accrued interest.................................. 147,951 167,807
Accrued taxes..................................... 423,588 198,556
Dividends payable................................. 102,221 106,083
Customer deposits................................. 56,266 55,214
Accrued plant closing costs....................... 96,134 135,000
Other............................................. 125,506 164,897
----------- -----------
$ 2,109,022 $ 2,248,662
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................. $ 3,724,750 $ 3,839,607
Nuclear decommissioning liability for retired
plants........................................... 1,226,700 1,301,000
Accumulated deferred investment tax credits....... 573,713 602,122
Accrued spent nuclear fuel disposal fee and re-
lated interest................................... 719,902 692,673
Obligations under capital leases.................. 401,288 437,950
Regulatory liabilities............................ 622,758 698,750
Other............................................. 1,224,800 1,176,937
----------- -----------
$ 8,493,911 $ 8,749,039
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$22,428,650 $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.
63
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Stock Equity:
Common stock, $12.50 par value per share--
Outstanding--214,236,101 shares and 214,228,077
shares, respectively............................ $ 2,677,951 $ 2,677,851
Premium on common stock and other paid-in capital. 2,223,708 2,223,564
Capital stock and warrant expense................. (15,681) (15,805)
Retained earnings (deficit)....................... 142,989 (19,172)
----------- -----------
$ 5,028,967 $ 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--58,211 shares and 65,912 shares, re-
spectively...................................... 1,851 2,096
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding............................ -- --
----------- -----------
$ 506,808 $ 507,053
----------- -----------
Preference Stock Subject to Mandatory Redemption Re-
quirements:
Preference stock, cumulative, without par value--
Outstanding--1,756,060 shares and 2,058,560
shares, respectively............................ $ 174,919 $ 205,016
Current redemption requirements for preference
stock included in current liabilities............ (17,801) (30,688)
----------- -----------
$ 157,118 $ 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%..... $ 830,000 $ 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
----------- -----------
$ 4,621,400 $ 4,851,400
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%................................. 94,159 100,298
Pollution control obligations, due 2007 through
2014--3.60% to 5 7/8%............................ 140,700 142,200
Other long-term debt.............................. 1,056,346 1,016,889
Current maturities of long-term debt included in
current liabilities.............................. (83,304) (501,445)
Unamortized net debt discount and premium......... (46,477) (46,459)
----------- -----------
$ 5,782,824 $ 5,562,883
----------- -----------
$11,825,717 $11,460,702
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
64
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- -------------------- ----------------------
1998 1997 1998 1997 1998 1997
-------- ---------- -------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Balance at Beginning of
Period................... $(43,295) $1,258,599 $(19,172) $1,157,956 $1,418,848 $1,144,307
Add--Net income (loss).... 286,071 260,949 462,357 563,991 (875,406) 678,873
-------- ---------- -------- ---------- ---------- ----------
$242,776 $1,519,548 $443,185 $1,721,947 $ 543,442 $1,823,180
-------- ---------- -------- ---------- ---------- ----------
Deduct--
Dividends declared on--
Common stock.......... $ 85,695 $ 85,691 $257,082 $ 257,072 $ 342,773 $ 342,759
Preferred and
preference stocks.... 13,870 14,621 42,836 45,611 57,385 61,140
Other capital stock
transactions--net..... 222 388 278 416 295 433
-------- ---------- -------- ---------- ---------- ----------
$ 99,787 $ 100,700 $300,196 $ 303,099 $ 400,453 $ 404,332
-------- ---------- -------- ---------- ---------- ----------
Balance at End of Period
(includes $546 million of
appropriated retained
earnings at September 30,
1998).................... $142,989 $1,418,848 $142,989 $1,418,848 $ 142,989 $1,418,848
======== ========== ======== ========== ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
65
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ---------------------- -----------------------
1998 1997 1998 1997 1998 1997
--------- --------- ---------- ---------- ---------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Cash Flow from Operating
Activities:
Net income (loss)...... $ 286,071 $ 260,949 $ 462,357 $ 563,991 $ (875,406) $ 678,873
Adjustments to
reconcile net income
(loss) to net cash
provided by operating
activities:
Depreciation and
amortization........ 245,362 262,969 751,423 785,745 1,013,281 1,038,775
Deferred income taxes
and investment tax
credits--net........ (13,348) (6,181) (9,008) (5,796) (352,101) 7,684
Extraordinary loss
related to write-off
of certain net
regulatory assets... -- -- -- -- 810,335 --
Cumulative effect of
change in accounting
principle........... -- -- -- (196,700) -- (196,700)
Loss on nuclear plant
closure............. -- -- -- -- 885,611 --
Payments for revenue
refunds............. -- -- (45,470) -- -- --
Equity component of
allowance for funds
used during
construction........ (1,814) (5,772) (5,358) (16,558) (12,570) (21,614)
Provisions/(payments)
for liability for
separation costs--
net................. (9,853) 24,146 (2,817) 24,948 (11,779) 23,919
Net effect on cash
flows of changes in:
Receivables........ (281,151) 11,093 (430,553) 101,174 (510,533) 103,390
Coal and fuel oil.. 53,064 35,704 (31,444) (4,084) (7,662) 5,521
Materials and
supplies.......... 14,324 (319) 7,686 222 49,123 6,303
Accounts payable
excluding
separation costs--
net............... (131,869) (40,195) (15,106) (99,888) 63,103 36,759
Accrued interest
and taxes......... 107,217 107,242 205,176 140,847 57,864 29,820
Other changes in
certain current
assets and
liabilities....... 31,780 89,395 83,468 187,978 189,403 238,633
Other--net........... 42,824 23,178 100,510 136,537 141,890 176,820
--------- --------- ---------- ---------- ---------- -----------
$ 342,607 $ 762,209 $1,070,864 $1,618,416 $1,440,559 $ 2,128,183
--------- --------- ---------- ---------- ---------- -----------
Cash Flow from Investing
Activities:
Construction
expenditures.......... $(198,155) $(212,445) $ (618,277) $ (638,289) $ (949,613) $ (878,268)
Nuclear fuel
expenditures.......... (28,616) (66,555) (123,583) (157,271) (151,686) (212,203)
Sale of generating
plants................ -- -- 177,454 -- 238,245 --
Equity component of
allowance for funds
used during
construction.......... 1,814 5,772 5,358 16,558 12,570 21,614
Contributions to
nuclear
decommissioning
funds................. -- -- (80,077) (80,181) (114,721) (116,284)
Other investments and
special deposits...... 658 4,690 (288) (24,610) 19,618 (21,244)
--------- --------- ---------- ---------- ---------- -----------
$(224,299) $(268,538) $ (639,413) $ (883,793) $ (945,587) $(1,206,385)
--------- --------- ---------- ---------- ---------- -----------
Cash Flow from Financing
Activities:
Issuance of
securities--
Long-term debt........ $ 222,068 $ -- $ 222,068 $ 297,663 $ 222,068 $ 297,663
Company-obligated
mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely the
Company's
subordinated debt
securities........... -- -- -- 150,000 -- 150,000
Capital stock......... 20 50 244 288 244 302
Retirement and
redemption of
securities--
Long-term debt........ (51,009) (100,283) (423,192) (674,765) (483,195) (775,551)
Capital stock......... (24,270) (37,300) (30,495) (40,539) (34,066) (44,141)
Deposits and
securities held for
retirement and
redemption of
securities............ 995 229 -- -- -- --
Premium paid on early
redemption of long-
term debt............. -- -- -- (9,500) -- (9,500)
Cash dividends paid on
capital stock......... (110,729) (111,450) (326,063) (322,363) (430,615) (427,892)
Proceeds from
sale/leaseback of
nuclear fuel.......... 39,612 22,953 101,038 104,224 146,768 170,925
Nuclear fuel lease
principal payments.... (43,321) (38,206) (204,330) (124,061) (246,681) (177,109)
Increase/(decrease) in
short-term
borrowings............ (81,200) (221,000) 250,496 (86,000) 365,896 (120,800)
--------- --------- ---------- ---------- ---------- -----------
$(47,834) $(485,007) $ (410,234) $ (705,053) $ (459,581) $ (936,103)
--------- --------- ---------- ---------- ---------- -----------
Increase/(decrease) in
Cash and Temporary Cash
Investments............ $ 70,474 $ 8,664 $ 21,217 $ 29,570 $ 35,391 $ (14,305)
Cash and Temporary Cash
Investments at
Beginning of Period.... 23,377 49,796 72,634 28,890 58,460 72,765
--------- --------- ---------- ---------- ---------- -----------
Cash and Temporary Cash
Investments at End of
Period................. $ 93,851 $ 58,460 $ 93,851 $ 58,460 $ 93,851 $ 58,460
========= ========= ========== ========== ========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
66
<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 "Average Common Shares Outstanding" 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 $133 million and $147 million for the three months ended
September 30, 1998 and 1997, respectively, $404 million and $446 million for
the nine months ended September 30, 1998 and 1997, respectively, and $545
million and $597 million for the twelve months ended September 30, 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,
nine months and twelve months ended September 30, 1998 and 1997 was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------ ----------------- -------------------
1998 1997 1998 1997 1998 1997
------------------ -------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Supplemental Cash Flow
Information:
Cash paid during the
period for:
Interest (net of
amount capitalized). $ 96,567 $150,582 $342,687 $405,835 $439,112 $516,489
Income taxes (net of
refunds)............ $ 23,040 $ 27,183 $ 23,546 $ 82,684 $ 222,230 $264,408
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Capital lease obliga-
tions incurred........ $ 40,954 $ 24,760 $104,933 $110,533 $ 152,812 $178,161
</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.
If the new accounting method had been in effect for the full twelve months
ended September 30, 1997, the pro forma unaudited operating result would have
been $461,812,000, excluding the cumulative effect of a change in accounting
principle.
(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.
(6) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK. At September 30,
1998, the authorized shares of capital stock were: common stock--250,000,000
shares; preference stock--22,066,060 shares; $1.425 convertible preferred
stock--58,211 shares; and prior preferred stock--
67
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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 of Notes to Financial Statements regarding the ICC's
order approving ComEd's proposed issuance of up to $3.4 billion of securities
and the planned use of the proceeds to refinance debt and equity, as permitted
under the 1997 Act.
(7) COMMON EQUITY. At September 30, 1998, shares of common stock were
reserved for the following purposes:
<TABLE>
<S> <C>
Conversion of $1.425 convertible preferred stock................... 59,375
Conversion of warrants............................................. 25,425
------
84,800
======
</TABLE>
Shares of common stock issued for the three months, nine months and twelve
months ended September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ----------------- --------------------
1998 1997 1998 1997 1998 1997
--------- ---------- -------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Conversion of $1.425
convertible preferred
stock.................. 652 1,607 7,848 9,261 7,848 10,245
Conversion of warrants.. 52 39 176 351 187 490
-------- ---------- -------- -------- --------- ----------
704 1,646 8,024 9,612 8,035 10,735
======== ========== ======== ======== ========= ==========
</TABLE>
At September 30, 1998 and December 31, 1997, 76,276 and 76,868,
respectively, of common stock purchase warrants 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 had a deficit balance of $19 million at December
31, 1997. As of September 30, 1998 and December 31, 1997, $546 million and
$384 million, respectively, of retained earnings had been appropriated for
future dividend payments.
See Unicom's Note 2 of Notes to Financial Statements regarding the ICC's
order approving ComEd's proposed issuance of up to $3.4 billion of securities
and the planned use of the proceeds 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.
(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.
68
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(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 BENEFITS 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 September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 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........................ $3,979,573 $4,051,191
Overheads capitalized.............................. 128,894 131,509
Repair allowance................................... 222,769 231,697
Regulatory assets recoverable through future rates. 702,824 785,354
Deferred income tax assets:
Postretirement benefits............................ (329,782) (305,220)
Unamortized investment tax credits................. (195,620) (206,112)
Regulatory liabilities to be settled through future
rates............................................. (622,758) (698,750)
Nuclear plant closure.............................. (52,450) (194,244)
Other--net......................................... (160,474) (135,311)
---------- ----------
Net deferred income tax liability................... $3,672,976 $3,660,114
========== ==========
</TABLE>
The $13 million increase in the net deferred income tax liability from
December 31, 1997 to September 30, 1998 is comprised of an increase of $19
million in deferred income tax expense and a $6 million decrease in regulatory
assets net of regulatory liabilities pertaining to income taxes for the
period. The amount of accelerated cost recovery and liberalized depreciation
included in deferred income tax liabilities as of September 30, 1998, includes
amounts related to the regulatory asset for impaired production plant. 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.
The components of net income tax expense charged (credited) to continuing
operations for the three months, nine months and twelve months ended September
30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Electric operating in-
come:
Current income taxes... $ 197,234 $ 191,734 $341,280 $276,451 $ 344,464 $ 337,523
Deferred income taxes.. (6,786) 1,243 (28,394) 18,164 12,099 39,064
Investment tax credits
deferred--net......... (6,889) (7,570) (20,937) (23,364) (28,588) (30,399)
Other (income) and
deductions, primarily
deferred income taxes.. 1,982 (1,971) (11,557) (4,093) (415,089) (11,320)
--------- --------- -------- -------- --------- ---------
Net income taxes charged
(credited) to
continuing operations.. $ 185,541 $ 183,436 $280,392 $267,158 $ (87,114) $ 334,868
========= ========= ======== ======== ========= =========
</TABLE>
69
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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, nine months and twelve months ended
September 30, 1998 and 1997:
<TABLE>
<CAPTION>
TWELVE
THREE MONTHS ENDED NINE MONTHS ENDED MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------ -------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Pre-tax book income
(loss) (thousands)..... $471,612 $444,385 $742,749 $634,449 $(152,185) $817,041
Effective income tax
rate................... 39.3% 41.3% 37.8% 42.1% 57.2% 41.0%
</TABLE>
The principal differences between net income taxes charged (credited) to
continuing operations and the amounts computed at the federal statutory rate
of 35% for the three months, nine months and twelve months ended September 30,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------ --------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Federal income taxes
computed at statutory
rate................... $ 165,064 $170,550 $259,962 $249,952 $ (53,265) $ 313,859
Equity component of
AFUDC which was
excluded from taxable
income................. (102) (2,020) (300) (5,795) (2,824) (7,565)
Amortization of invest-
ment tax credits, net
of deferred income tax-
es..................... (4,517) (7,570) (18,246) (23,364) (40,221) (30,399)
State income taxes, net
of federal income tax-
es..................... 21,689 25,285 35,350 39,736 2,723 47,145
Differences between book
and tax accounting,
primarily property-re-
lated deductions....... 3,407 (2,809) 3,626 6,629 6,473 11,828
--------- --------- -------- -------- --------- ---------
Net income taxes charged
(credited) to
continuing operations.. $ 185,541 $ 183,436 $280,392 $267,158 $ (87,114) $ 334,868
========= ========= ======== ======== ========= =========
</TABLE>
(19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes,
for the three months, nine months and twelve months ended September 30, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED TWELVE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30 SEPTEMBER 30
------------------- ----------------- -------------------
1998 1997 1998 1997 1998 1997
--------- --------- -------- -------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Illinois electricity ex-
cise tax............... $ 17,483 $ 67,595 $119,411 $175,005 $ 172,757 $ 228,175
Illinois invested capi-
tal.................... -- 26,258 -- 78,275 21,229 104,172
Illinois electricity
distribution tax....... 29,950 -- 81,580 -- 81,580 --
Municipal utility gross
receipts............... 53,001 51,626 134,108 130,696 171,506 170,502
Real estate............. 34,199 37,091 98,558 109,653 139,084 145,037
Municipal compensation.. 15,319 23,884 59,404 60,808 76,882 79,343
Other--net.............. 28,848 18,013 77,304 59,280 92,776 69,531
--------- --------- -------- -------- --------- ---------
$ 178,800 $ 224,467 $570,365 $613,717 $ 755,814 $ 796,760
========= ========= ======== ======== ========= =========
</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.
Effective August 1, 1998, as provided for by the 1997 Act, the Illinois
electricity excise tax and certain municipal utility taxes are recorded as
liabilities. Previously, similar taxes were presented on the Statements of
Consolidated Operations as revenue and expense. The reduction in operating
revenues and taxes (except income taxes) due to the change in presentation for
such taxes was approximately $50 million for the three months, nine months and
twelve months ended September 30, 1998. This change in the presentation for
such taxes did not have an effect on results of operations.
70
<PAGE>
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
(20) LEASE OBLIGATIONS. See the first and second paragraphs of Unicom's Note
20 of Notes to Financial Statements.
Future minimum rental payments at September 30, 1998 for operating leases
are estimated to aggregate $309 million, including $10 million in 1998, $39
million in 1999, $37 million in 2000, $31 million in 2001, $27 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.
71
<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.
FORWARD-LOOKING INFORMATION. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Forward-Looking Information," which is incorporated herein by this reference.
72
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since January 1, 1998, civil penalties were imposed on ComEd on four
occasions for violations of NRC regulations in amounts aggregating $583,000.
To ComEd's knowledge, there are no enforcement issues currently outstanding.
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. ComEd was dismissed as a defendant in both actions. With respect to
Cotter, in 1994 a federal jury returned nominal dollar verdicts against Cotter
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. On July 15, 1998, a jury verdict was rendered in Dodge v.
Cotter (United States District Court for the District of Colorado, Civil
Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991
cases. The verdict against Cotter included compensatory and punitive damages
totaling approximately $3 million (not including prejudgment interest, which
has not yet been calculated, and which Cotter anticipates may bring the total
award to under $6 million), together with medical monitoring. The matter is
currently on appeal. Although the other 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.
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 September 30,
1998, which could have such an effect.
73
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------------
<C> <S>
(10)-1 Commonwealth Edison Company Excess Benefit Savings Plan.
(10)-2 Key Management Severance Plan for Unicom Corporation and
Commonwealth Edison Company.
(10)-3 Unicom Corporation Stock Bonus Deferral Plan.
(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 July 6, 1998 was filed by Unicom and
ComEd announcing Unicom Directions, a statement of objectives adopted for
the purpose of improving operations, restructuring its finances and
operations, and renewing its competitive and cultural focus. Among other
things, these objectives contemplate that ComEd will undertake steps to
offer for sale its coal-fired generation plants, representing an
approximate aggregate capacity of 5,600 megawatts.
A Current Report on Form 8-K dated October 27, 1998 was filed by Unicom
and ComEd announcing that up to $200 million in funds obtained from
operations or other sources may be used to repurchase shares of common
stock either before or after the receipt of funds from the issuance of
certain asset-backed securities known as "transitional funding
instruments". The transitional funding instruments are expected to be the
ultimate source of funding for the stock repurchases.
74
<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 10th day of November, 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)
75
<PAGE>
EXHIBIT INDEX
Exhibits filed with or incorporated by reference in Form 10-Q for the
quarterly period ended September 30, 1998:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ --------------------------------------------------------------------
<C> <S>
(10)-1 Commonwealth Edison Company Excess Benefit Savings Plan.
(10)-2 Key Management Severance Plan for Unicom Corporation and Commonwealth
Edison Company.
(10)-3 Unicom Corporation Stock Bonus Deferral Plan.
(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
Commonwealth Edison Company
Form 10-Q File No. 1-1839
COMMONWEALTH EDISON COMPANY
EXCESS BENEFIT SAVINGS PLAN
<PAGE>
COMMONWEALTH EDISON COMPANY
EXCESS BENEFIT SAVINGS PLAN
ARTICLE I
Amendment and Restatement; Purpose
Amendment and Restatement; Purpose. The Commonwealth Edison Company Excess
Benefit Savings Plan, as established, effective August 1, 1994 and as amended by
the First Amendment, effective January 1, 1995 and the Second Amendment,
effective September 1, 1997 (the "Excess Savings Plan"), is hereby amended and
restated, effective October 1, 1998, except as specifically otherwise provided
herein. The rights and benefits of any Participant whose employment terminates
prior to October 1, 1998 shall be determined under the terms of the Excess
Savings Plan as in effect on the date of such termination of employment.
Commonwealth Edison Company (the "Company") sponsors the Commonwealth
Edison Employee Savings and Investment Plan (the "ESIP") for the benefit of its
employees and those of certain affiliated entities which have adopted the ESIP
(collectively, the "Employers"). The Excess Savings Plan is intended to provide
benefits equal to the benefits that would be paid under the ESIP but for the
application of any of Sections 401(a)(17), 402(g), 401(k), 401(m) or 415 of the
Internal Revenue Code of 1986, as amended (the "Code") and any other similar
provisions set forth in the Code that limit or reduce such benefits (hereinafter
collectively referred to as the "Limitations").
Unicom Corporation has sponsored the Management Deferred Compensation Plan
(MDCP) to provide for payment of deferred compensation to a select group of
management or highly compensated employees within the meaning of sections
201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act
of 1974, as amended (ERISA) and Department of Labor Regulation 29 CFR Section
2520.104-23. Effective January 1, 1999, the Company hereby assumes the
liabilities and obligations of Unicom Corporation with respect to the MDCP.
ARTICLE II
Definitions
All capitalized terms used herein shall have the respective meanings
assigned to such terms under the ESIP, except as otherwise set forth in Section
1.1 or below:
(a) "Compensation" means: (i) with respect to any Participant who is an
active employee of the Company or an Employer, for purposes of an election
under Section 4.1 such individual's compensation taken into account under
the ESIP, and for purposes of an election under Section 4.2(a), the
Participant's annual base salary in effect for the period with respect to
which the election is made, and (ii) with
<PAGE>
respect to any Participant making an election under Section 4.2(b), the
amount of such individual's severance benefit with respect to which
participation in the Excess Savings Plan is authorized.
(b) "Eligible Employee" means, for any Plan Year:
(i) any officer of the Company or any Employer;
(ii) any employee of an Employer who is included on the Executive
payroll (or an equivalent payroll) of such Employer;
(iii) any employee of an Employer who is on the management payroll of
the Company classified at salary level 12 or above (or at an
equivalent level on the Company's payroll should such classifications
be revised), or at an equivalent level on the payroll of another
Employer; or
(iv) any employee of an Employer who is entitled to benefits under a
severance pay plan that provides for participation hereunder.
(c) "Participant" means, for any Plan Year, an Eligible Employee who elects
to participate in the Excess Savings Plan in accordance with the provisions
of Article IV.
ARTICLE III
Eligibility and Participation
3.1 Eligibility. Each individual who was a Participant under the Excess
Savings Plan on the day before the effective date of this amendment and
restatement shall continue to be a Participant hereunder. Each other Eligible
Employee may elect to participate in the Excess Savings Plan by filing a
deferral election in accordance with the provisions of Article IV.
3.2 Participation. An Eligible Employee who elects to participate in
accordance with the provisions of Article IV shall become a Participant in the
Excess Savings Plan on the effective date of such election.
3.3 Termination of Participation. Each Participant shall remain a
Participant until such individual is no longer entitled to benefits hereunder.
2
<PAGE>
ARTICLE IV
Elections
4.1 Excess ESIP Contribution Election.
(a) Election. Each Eligible Employee who, for any Plan Year, has in
effect an election to reduce his or her Compensation and have the amount of
the reduction contributed to the ESIP may also elect to participate in the
Excess Savings Plan for such Plan Year by filing an election with the
Committee in such form as the Committee shall specify. For periods ending
on or before December 31, 1998, an election made under this Section 4.1
shall authorize the Participant's Employer to reduce the Participant's
Compensation by a whole percentage not in excess of ten. Effective with
respect to Plan Years beginning on or after January 1, 1999, an election
made under this Section 4.1 shall authorize the Participant's Employer to
reduce the Participant's Compensation by the same percentage of
Compensation elected by the Participant as Before Tax Contributions under
the ESIP. Each such election shall also be deemed to authorize the
reduction of the Participant's Compensation by an amount equal to the
amount that would have been credited to the Participant's Before Tax
Contributions Account pursuant to the deemed election contained in Section
3.2 of the ESIP but for the application of the Limitations.
(b) Election Due Dates. An election to participate under this Section 4.1
shall be made (i) for the Plan Year in which an Eligible Employee first
becomes eligible to participate, within 30 days after such individual
becomes so eligible, and (ii) for any other Plan Year, at such time as the
Plan Administrator shall designate; but no later than December 31 of the
preceding calendar year; provided, however, that any Eligible Employee may
elect, no later than September 30, 1998, to become a Participant for the
fourth calendar quarter of 1998. Any election made under this Section 4.1
shall apply only with respect to Compensation payable after the effective
date of the election, as indicated thereon, and after the date on which the
Participant's Compensation is no longer reduced by reason of contributions
to his or her Before Tax Contributions Account under the ESIP due to the
application of ESIP provisions which reduce or disallow contributions
thereto on account of one or more of the Limitations.
4.2 Additional Deferral Elections.
(a) Salary Deferral Elections. Effective with respect to Plan Years
beginning on or after January 1, 1999, each Eligible Employee may elect to
participate in the Excess Savings Plan for a Plan Year by filing a salary
deferral election with the Committee in such form as the Committee shall
specify. An election under this Section 4.2(a) shall authorize the
Participant's Employer to reduce the amount of such individual's
Compensation for the Plan Year with respect to which the election is made
by such whole percentage as he or she shall specify not in excess of 50.
(b) Severance Benefit Elections. Effective beginning June 1, 1998, each
Eligible Employee who is entitled to benefits under a severance plan of an
Employer
3
<PAGE>
which provides for participation in the Excess Savings Plan may,
for any Plan Year, elect to participate in the Excess Savings Plan by
filing a deferral election with the Committee in such form as the Committee
shall specify. An election made under this Section 4.2(b) shall authorize
the Employer to reduce the amount of the Participant's Compensation for the
Plan Year with respect to which the election is made by such percentage as
he or she shall specify.
(c) Election Due Dates. An election to participate under this Section 4.2
shall be made (i) for the calendar year in which an Eligible Employee first
becomes entitled to benefits under a severance plan or otherwise eligible
to participate in the Excess Savings Plan, within 30 days after such
individual becomes so entitled or eligible, as applicable, and (ii) for any
other Plan Year, at such time as the Plan Administrator shall designate;
but no later than December 31 of the preceding calendar year. Any election
made under this Section 4.2 shall apply only with respect to Compensation
payable after the effective date of the election, as indicated thereon.
4.3 Irrevocability of Elections. An election made under this Article IV
with respect to any Plan Year shall become irrevocable on December 31 of the
preceding Plan Year, and shall continue in effect for the entire Plan Year with
respect to which it is made.
ARTICLE V
Accounts
5.1 Employee Accounts. There shall be established on the books of the
Company and of each Employer an Employee Account in the name and on behalf of
each Participant who is an employee of the Company or such Employer, as
applicable. Each Employee Account shall be credited with the amounts by which a
Participant's Compensation is reduced under Section 4.1, and the amounts, if
any, by which a Participant's Compensation is reduced under Section 4.2(a) or
Section 4.2(b), as applicable, as of the date such amounts would have been paid
to the Participant but for the election.
5.2 Employer Accounts. There shall be established on the books of the
Company and of each Employer an Employer Account in the name and on behalf of
each Participant who has made an election under Section 4.1 or Section 4.2(b)
and who is an employee of the Company or such Employer, as applicable. Each
Employer Account shall be credited with an amount equal to the Employer Matching
Contributions that would have been allocated to the Participant's Employer
Contribution Account under Section 4.3 of the ESIP in respect of amounts
credited to the Participant's Employee Account under Section 5.1 had such
amounts been allocated to such Participant's Before Tax Contribution Account
under the ESIP, but after taking into account any such matching contributions
made under Section 4.3 of the ESIP in respect of contributions by the
Participant to his or her After Tax Contributions Account, as of the date on
which the related amount is credited to his or her Employee Account.
Notwithstanding the preceding, effective for matching contributions made (i)
with respect to any Participant who is an officer or on the executive payroll of
an Employer, on or after October 1, 1998, and (ii) with respect to any other
Participant, on or
4
<PAGE>
after January 1, 1999, the amount credited to the Participant's Employer Account
as matching contributions shall be credited as units of Unicom Corporation
common stock valued as of the date on which such contributions are credited. For
purposes of the preceding sentence, a Participant who is entitled to benefits
under the severance plan of an Employer shall be deemed to have the payroll
classification in effect on the date such individual became entitled to benefits
under such severance pay plan.
5.3 Vesting. Amounts credited to a Participant's Employee Account or
Employer Account pursuant to the terms of this Excess Savings Plan shall be
fully vested and not subject to forfeiture for any reason.
5.4 Earnings Elections. Each Account shall be divided into a separate
subaccount with respect to each earnings election made by a Participant pursuant
to this Section 5.4.
(a) Investment Benchmarks. The Committee shall from time to time
designate two or more investment benchmarks, the rates of return or loss of
which, based upon a Participant' earnings election, shall be used to
determine the rate of return or loss to be credited to the subaccounts
established within the Participant's Accounts pursuant to this Section 5.4.
A Participant's earnings election shall specify the percentages of the
Participant's Accounts allocated to the subaccounts with respect to each
investment benchmark selected by the Participant, for periods ending on or
before December 31, 1998, in increments of 5% (or multiples thereof), and
for periods beginning on or after January 1, 1999, in whole percentages.
If, for any period, no earnings election is in effect pursuant to this
Section 5.4, the Participant's Accounts shall be credited with interest on
the balance thereof as of the end of each calendar month at an annual rate
equal to the imbedded rate of interest then being accrued by the Company on
its long-term debt, as determined from time to time by the Controller of
the Company.
(b) Changes in Earnings Elections. For periods ending on or before
December 31, 1998, a Participant may change his or her earnings election as
of the first business day of any calendar month by delivering to the
Participant's Employer, at such time as may be specified by the Committee,
a revised earnings election. For periods beginning on or after January 1,
1999, a Participant may change his or her earnings election at any time. A
revised earnings election may apply to the then balance of a Participant's
Account, to the future amounts to be credited thereto on account of the
Participant's election(s) under this Plan or both. Notwithstanding the
preceding to the contrary, a Participant shall not be entitled to make an
earnings election with respect to amounts credited to the Participant's
Employer Account on or after (i) with respect to a Participant who is an
officer or on the executive payroll of an Employer, October 1, 1998, and
(ii) with respect to any other Participant, January 1, 1999.
ARTICLE VI
Distributions
5
<PAGE>
6.1 Distributions Commencing On or After January 1, 1999.
(a) Automatic Form. Distribution of a Participant's Accounts shall be
made in a single lump sum as soon as practicable following the
Participant's termination of employment for any reason, including
retirement, but no later than 30 days after the date of such termination of
employment. The termination of employment of any Participant who is
receiving severance benefits under a plan of an Employer shall be deemed to
occur on the last day of the period for which severance benefits are paid.
(b) Election to Receive Installment Payments. Any Participant the value
of whose Accounts is anticipated to be at least $5,000 as of the date of
his or her termination of employment may elect to receive distribution of
his or her Accounts in up to 15 annual installments in lieu of receiving
payment in a lump sum by filing an election with the Committee in such form
as the Committee may permit; provided that such election must be made at
least one year prior to the date the Participant's employment terminates
and provided further, that in the case of a Participant whose termination
of employment occurs prior to December 31, 1999, such election may be made
within 30 days after such Participant's termination of employment but shall
not become effective until the first day of the calendar year which begins
after the date which is 12 months after the date of such election.
Notwithstanding the preceding, any Participant who, as of the date his
employment terminates, has not filed an election to receive distribution of
his Accounts in installments may elect installment payments commencing in
the year of termination; provided that such Participant has also elected to
begin receiving a distribution of his accrued benefit under the ESIP in
installment payments. In such case, distribution of his Excess Savings
Plan Accounts shall be made at the same time and over the same period as
the distribution of his ESIP accounts.
(c) Timing and Amount of Installment Payments. Installment payments shall
be made annually as soon as practicable after such annual payment date as
the Participant shall specify in his or her election. The amount of each
installment payment shall be determined:
(i) for the year in which installment payments are to commence, by
dividing the balance of the Participant's Accounts as of the last day
of the of calendar year in which the Participant's employment
terminates by the total number of installment payments to be made over
the payment period elected (the "Installment Period");
(ii) except as provided in clause (iii) below, for each subsequent calendar
year, by dividing the balance of the Participant's Accounts as of
December 31 (but subtracting from such balance the amount of the
installment payment to be made on the next following January 1) by the
total number of payments remaining to be made in the Installment
Period (excluding the installment payment to be made on the next
following January 1); and
6
<PAGE>
(iii) for the final calendar year in which installment payments are to be
made, by dividing the balance of the Participant's Accounts as of the
payment date by the number of payments remaining to be made in the
Installment Period (including the installment payment which is then
being made);
provided, however, (I) if an installment payment calculated under
subparagraph (i) above is to commence on January 1, such installments shall
continue until the second succeeding January 1, (II) no installment shall
exceed the balance of the Participant's Accounts immediately before the
date of payment, and (III) the final installment shall be equal to the then
remaining balance of the Participant's Accounts.
6.2 Distributions Commencing Before December 31, 1998. Distribution
of the balance of a Participant's Accounts commencing prior to December 31, 1998
shall be calculated in the manner specified in paragraph 6 of the Plan as in
effect prior to this amendment and restatement, and shall be made at the time
and in the manner specified below:
(a) Retirement or Disability. If a Participant's employment terminates
under circumstances entitling the Participant to a normal or early
retirement pension under the Commonwealth Edison Company Service Annuity
System or on account of the Participant's "disability" as defined therein,
and as of the date of such termination the balance of the Participant's
Accounts is at least $25,000, the balance of the Participant's Accounts
shall be distributed to the Participant in installments, payable on or
about the first day of each calendar quarter commencing with the first
calendar quarter beginning after the date on which the Participant's
employment terminates and continuing for fifteen years (the "Installment
Period"). Notwithstanding the foregoing, a Participant may elect to have
such installments payable over ten years or five years, computed in the
same manner as installments payable over 15 years, or to have the balance
of his or her Account distributed in a single lump sum as of the first day
of the calendar quarter next following the date the Participant's
employment terminates.
(b) Other Distributions. If a Participant's employment shall terminate for
any reason other than those described in Section 6.2(a) or on account of
death, or if, as of the date of a Participant's termination of employment,
the balance of the Participant's Accounts is less then $25,000, the balance
of the Participant's Accounts shall be distributed to the Participant in a
lump sum as soon as is practicable after the last day of the calendar
quarter coinciding with or next following such termination of employment.
6.3 Distributions in the Event of Death. If a Participant's employment is
terminated on account of the Participant's death, the balance of the
Participant's Accounts shall be distributed to the Participant's beneficiary
determined pursuant to Section 6.4 in a single lump sum as soon as practicable
following the end of the first calendar quarter coinciding with or next
following the Participant's death. If a Participant dies after installment
distributions have begun to be made, such installment distributions shall
continue to the Participant's beneficiary determined pursuant to Section 6.4.
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<PAGE>
6.4 Beneficiaries. If a Participant shall die while any amount remains
credited to the Accounts established on his behalf pursuant to Article V of this
Excess Savings Plan, such amounts shall be paid as provided in Section 6.3
hereof to the beneficiary or beneficiaries designated by the Participant in
writing delivered to the Committee. Any Participant may revoke or change his or
her beneficiary designation at any time in writing delivered to the Committee.
If a Participant does not designate a beneficiary under this Excess Savings
Plan, or if no designated beneficiary survives the Participant, the balance of
his or her Accounts shall be paid to the person or persons entitled to his or
her accrued benefit under the terms of the ESIP (or who would be so entitled if
there were then an amount remaining unpaid under the ESIP).
6.5 Withholding. Notwithstanding any provision of this Excess Savings Plan
to the contrary, amounts payable hereunder shall be reduced by any amounts
required to be deducted or withheld by the Company under federal or state law,
including income tax withholding.
6.6 Facility of Payment. Whenever and as often as any Participant entitled
to payments under the Excess Savings Plan shall be incompetent or, in the
opinion of the Committee would fail to derive benefit from distribution of funds
under the Excess Savings Plan, the Committee, in its sole and exclusive
discretion, may direct that any or all payments hereunder be made (a) directly
to or for the benefit of such Participant, (b) to the Participant's legal
guardian or conservator; or (c) to relatives of the Participant. The decision of
the Committee in such matters shall be final, binding and conclusive upon each
Employer and Participant and every other person or party interested or
concerned. An Employer and the Committee shall not be under any duty to see to
the proper application of such payments made to a Participant, conservator,
guardian or relatives of a Participant.
ARTICLE VII
Application of ERISA, Funding
7.1 Application of ERISA. Amounts deferred pursuant to an election made
under Section 4.1 of the Excess Savings Plan are intended to be an excess
benefit plan within the meaning of Section 3(36) of the Employee Retirement
Income Security Act of 1974, as amended (ERISA). Amounts deferred pursuant to an
election made under Section 4.2 are intended to constitute an unfunded plan
maintained primarily for the purpose of providing deferred compensation to a
select group of management or highly compensated employees within the meaning of
sections 201(2), 301(a) (3) and 401 (a) (1) of ERISA and Department of Labor
Regulation Section 2520.104-23.
7.2 Funding. The Excess Savings Plan shall not be a funded plan, and
neither the Company nor any of the Employers shall be under any obligation to
set aside any funds for the purpose of making payments under this Excess Savings
Plan. Any payments hereunder shall be made out of the general assets of the
Company and the Employers.
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<PAGE>
7.3 Trust. The Company shall establish a trust for the purpose of
administering assets of the Company and the Employers to be used for the purpose
of satisfying their obligations under the Excess Savings Plan and those
obligations formerly under the MDCP which have been herein assumed by the
Company. Any such trust shall be established in such manner so as to be a
"grantor trust" of which the Company is the grantor, within the meaning of
section 671 et. seq. of the Code. The existence of any such trust shall not
relieve the Company or any Employer of their liabilities under the Excess
Savings Plan, but the obligation of the Company and the Employers under the
Excess Savings Plan shall be deemed satisfied to the extent paid from the trust.
ARTICLE VIII
Administration
8.1 Committee. The Excess Savings Plan shall be administered by the
administrative committee created under the ESIP (the "Committee"). The Committee
shall have the same duties and powers and shall be subject to the same
limitations as those applicable to the Committee under Article 11 of the ESIP.
The Committee shall have no power to add to, subtract from or modify any of the
terms of the Excess Savings Plan, or to change or add to any benefits provided
under the Excess Savings Plan, or to waive or fail to apply any requirements of
eligibility for a benefit under the Excess Savings Plan. The Committee's
decisions in any matter involving the Excess Savings Plan shall be final,
binding and conclusive.
8.2 Administration. The provisions of Article 11 of the ESIP (other than
Sections 11.3 and 11.7) are hereby incorporated by reference, and shall be
applicable as if such provisions were set forth herein.
8.3 Expenses. All costs and expenses incurred in administering the Excess
Savings Plan, including the expenses of the Committee, the fees of counsel and
any agents of the Committee and other administrative expenses shall be paid by
the Company and the Employers. The Committee, in its sole discretion, having
regard to the nature of a particular expense, shall determine the portion of
such expense which is to be borne by the Company or a particular Employer.
ARTICLE IX
Amendment and Termination
Amendment and Termination. The Company intends to maintain the Excess
Savings Plan indefinitely. However, the Excess Savings Plan shall be subject to
the same reserved powers of amendment and termination by the Company or such
senior officer to whom it has delegated its amendment authority as the ESIP
(without regard to any limitations imposed on such powers by the Code or ERISA),
except that no such amendment or termination shall reduce or otherwise adversely
affect the rights of
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<PAGE>
Participants in respect of amounts accrued hereunder as of the date of such
amendment or termination without their written consent.
ARTICLE X
Miscellaneous
10.1 FICA Taxes. For each calendar year in which a Participant's
Compensation is reduced pursuant to this Excess Savings Plan, his or her
Employer shall withhold from the Participant's compensation which is not
deferred pursuant to an election made hereunder the taxes imposed under Section
3121 of the Code in respect of amounts credited to the Participant's Accounts
for such year.
10.2 Nonassignment of Benefits. Notwithstanding anything contained in the
ESIP to the contrary, it shall be a condition of the payment of benefits under
this Excess Savings Plan that neither such benefits nor any portion thereof
shall be assigned, alienated or transferred to any person voluntarily or by
operation of any law, including any assignment, division or awarding of property
under state domestic relations law (including community property law). If any
person shall endeavor or purport to make any such assignment, alienation or
transfer, amounts otherwise provided hereunder shall cease to be payable to any
person.
10.3 No Guarantee of Employment. Nothing contained in this Excess Savings
Plan shall be construed as a contract of employment between any Employer and any
employee or as conferring a right on any employee to be continued in the
employment of any Employer, or as a limitation of the right of an Employer to
discharge any of its Employees, with or without cause.
10.4. Adoption by Employers. Any business entity which is or becomes an
"Employer" under the ESIP may, with the consent of the Company, become an
Employer under this Excess Savings Plan by delivery to the Company of a
resolution of its board of directors or duly authorized committee to such
effect, which resolution shall specify the date for which this Excess Savings
Plan shall be effective with respect to the employees of such business entity.
10.5 Gender and Number. Except when the context indicates to the contrary,
when used herein, masculine terms shall be deemed to include the feminine and
singular the plural.
10.6 Headings. The headings of Articles and Sections are included solely
for convenience of reference, and if there is any conflict between such headings
and the text of the Excess Savings Plan, the text shall control.
10.7 Invalidity. If any provision of this Excess Savings Plan shall be held
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provisions hereof, and the Excess Savings Plan shall be enforced and
construed as if such provisions, to the extent invalid or unenforceable, had not
been included.
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<PAGE>
10.8 Successors and Assigns. The provisions of the Excess Savings Plan
shall bind and inure to the benefit of the Company and each Employer and their
successors and assigns, as well as each Participant and his successors.
10.9 Law Governing. Except as provided by any federal law, the provisions
of the Excess Savings Plan shall be construed in accordance with and governed by
the laws of the state of Illinois.
EXECUTED this 30th day of September, 1998.
COMMONWEALTH EDISON COMPANY
By: ___________________________________
S. Gary Snodgrass
Senior Vice President
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<PAGE>
Exhibit (10)-2
Unicom Corporation and Commonwealth Edison Company
Form 10-Q File Nos. 1-11375 and 1-1839
Summary Plan Description
of the
UNICOM CORPORATION
KEY MANAGEMENT
SEVERANCE PLAN
JUNE 15, 1998
<PAGE>
UNICOM CORPORATION
KEY MANAGEMENT SEVERANCE PLAN
1. ESTABLISHMENT AND PURPOSE OF THE PLAN
The Unicom Corporation Key Management Severance Plan (the "Plan") was
established by Unicom Corporation ("Unicom") to provide certain key employees of
Commonwealth Edison Company ("ComEd") and other subsidiaries of Unicom (jointly
and severally referred to herein as the "Company") certain severance benefits in
the event the employment of such employees terminates under the circumstances
described herein. This document serves as both the Plan document and the summary
plan description which is required to be provided to participants under the
Employee Retirement Income Security Act of 1974 (ERISA).
2. ELIGIBILITY
Each individual who is on the executive payroll of ComEd or on the equivalent
payroll of any other subsidiary of Unicom (an "Executive") shall be eligible for
benefits hereunder in the event such Executive has a Termination of Employment.
3. PARTICIPATION
Each eligible Executive shall become a participant in the Plan
("Participant") upon his or her execution of an agreement with the Company in
such form as the Company, in its sole discretion, shall require or permit (the
"Severance Agreement"). Each Severance Agreement shall include covenants not to
compete which are substantially in the form attached hereto and made a part
hereof as Exhibit I. As a condition of becoming a Participant hereunder, each
Executive shall also be required to execute, no later than the date of the
Participant's Termination of Employment or, if later, the date which is 45 days
after the date the Executive is provided with a copy of the Plan, a waiver and
release of claims against the Company ("Waiver and Release").
4. BENEFITS
Benefits under the Plan shall be those described in this Section 4;
provided, however, that if, under the terms of an offer of employment or
employment agreement with the Company made on or before June 1, 1998, a
Participant would be entitled to benefits which exceed the level of benefits
under the Plan, the terms of such offer of employment or other agreement shall
control.
4.1 Severance Pay. Each Participant shall receive severance pay at a monthly
rate equal to 1/12 of the sum of the Participant's annual base salary in effect
as of the date of Termination of Employment (plus Deferred Compensation Units,
if any) plus the Severance Incentive (as defined in Paragraph 6.4). Payment
shall be made biweekly for the duration of the applicable Salary Continuation
Period, as indicated below, commencing no later than the second paydate which
occurs after the date of the Participant's Termination of Employment, but in no
event earlier than the date which is eight days after
<PAGE>
the date the Participant returns an executed Waiver and Release to the Plan
Administrator. Payment will be made in accordance with the Company's normal
payroll practices, net of applicable taxes and other deductions.
<TABLE>
<CAPTION>
Participant Title Salary Continuation Period
----------------- --------------------------
<S> <C>
Senior Vice President and above 24 months
Other Officers 18 months
Executives (non-officers) 12 months
</TABLE>
4.2 Incentive Programs. A Participant's Annual Incentive Awards and Long Term
Performance Unit Awards made or payable under the Unicom Corporation Long Term
Incentive Plan (the "LTIP") with respect to the calendar year in which occurs
the Participant's Termination of Employment shall be prorated by multiplying the
amount of such Awards, determined as described below, by a fraction the
numerator of which is the number of days of the Participant's active employment
during such calendar year and the denominator of which is 365. The amount of any
such Awards shall be determined based upon achievement of applicable performance
goals, in accordance with the terms of the applicable incentive program for such
calendar year; provided, however, that a Long Term Performance Unit Award shall
be payable hereunder with respect to any Participant (other than a Participant
who is or who, as of the last day of his or her Salary Continuation Period would
be, eligible to begin receiving retirement benefits under the Commonwealth
Edison Company Service Annuity System (the "Pension Plan")) only if such
Participant was an active employee for at least 24 months of the performance
period with respect to such Award. Payment of Awards under this Section 4.2
shall be made in a lump sum net of applicable taxes and other deductions at such
time as the Awards for such calendar year are payable to active employees.
4.3 Stock Options. No Participant shall be entitled to participate in any grants
of stock options under the LTIP made after such Participant's Termination of
Employment. Except as provided below, any stock options granted to a Participant
prior to such Participant's Termination of Employment shall be exercisable only
to the extent such options are exercisable as of the date of such Termination of
Employment and shall thereafter be exercised in accordance with the provisions
of the LTIP. Stock options which remain unexercisable as of the date of a
Participant's Termination of Employment shall be forfeited. Notwithstanding the
preceding, with respect to any Participant who, as of the date of such
Participant's Termination of Employment (or, if later, the last day of such
Participant's Salary Continuation Period) is eligible to begin receiving
retirement benefits under the Pension Plan, any stock options granted to such
Participant which have not become exercisable prior to the date of the
Termination of Employment shall become fully exercisable on such date, and shall
remain exercisable until the expiration of the option term(s).
4.4 Health Care Coverage. Each Participant shall continue to participate in the
health care plans sponsored by ComEd during the Salary Continuation Period. The
premium for such coverage shall be the premium level in effect for active
employees during such period. Coverage under this Paragraph 4.4 shall be
provided for the duration of the Salary
2
<PAGE>
Continuation Period in lieu of continuation coverage under the Consolidated
Omnibus Budget Reconciliation Act of 1985 (COBRA) for the same period. At the
end of the Salary Continuation Period, COBRA continuation coverage may be
elected for the remaining balance of the statutory coverage period, if any;
provided, however that a Participant who has attained at least age 50 (but not
age 55) as of the last day of the Salary Continuation Period and who has
completed (or who, pursuant to the terms of an offer of employment or employment
agreement, is credited with) at least 10 years of service under the terms of the
Pension Plan shall be entitled to elect retiree health coverage under the ComEd
health care plans on the same terms and subject to the same conditions as
individuals who have attained age 55 and are eligible to begin receiving early
retirement benefits under the Pension Plan.
4.5 Retirement Plans. During the Salary Continuation Period, each Participant
shall accrue credited service under the Commonwealth Edison Supplemental
Management Retirement Plan (the "SERP"). The amount of any payment made under
Section 4.1 to the Participant during such period shall be taken into account
for purposes of the SERP, and each Participant may also elect to participate in
the Commonwealth Edison Excess Benefit Savings Plan during the Salary
Continuation Period with respect to the portion of any such payment which is
attributable to base salary. A Participant in the Plan shall not accrue service
or otherwise actively participate in any tax-qualified retirement plan sponsored
by ComEd or the Company during the Salary Continuation Period, and shall not be
entitled to commence to receive benefits under any such plan until after the
expiration of the Salary Continuation Period.
4.6 Life Insurance and Disability Coverage. Continued coverage under the life
insurance and long term disability plans sponsored by the Company shall be
extended to each Participant through the last day of the Salary Continuation
Period applicable to such Participant on the same terms and subject to the same
conditions as are applicable to active employees.
4.7 Deferred Compensation Plans. The elections, if any, made by an Executive
under any deferred compensation plan sponsored by the Company shall remain in
effect through the last day of such participant's Salary Continuation Period,
but such individual shall not be entitled to make any additional elections
during such period.
4.8 Executive Perquisites. Executive perquisites shall terminate effective as
of the date of a Participant's Termination of Employment, and any Company-owned
property shall be required to be returned to the Company no later than such
date; provided, however, that each Participant who is an officer of the Company
shall be entitled to financial counseling services for a period of 24 months
following the date of such Participant's Termination of Employment.
4.9 Outplacement Services. Each Participant shall be entitled to outplacement
services at the expense of the Company for such period and subject to such terms
and conditions as the Plan Administrator, in its sole discretion, determines are
appropriate.
5. TERMINATION OF PARTICIPATION; CESSATION OF BENEFITS
3
<PAGE>
A Participant's benefits under the Plan shall terminate on the last day of
the Participant's Salary Continuation Period or, if earlier, on such date as the
Company discovers that the Participant has breached any of the restrictive
covenants contained in the Severance Agreement between the Executive and the
Company which is a condition precedent to the payment of benefits hereunder. In
the event of any such breach, the Company may require the repayment of amounts
paid prior to such breach in accordance with Paragraph 4.1, and shall
discontinue the payment of any additional amounts under Section 4 of the Plan.
6. DEFINITIONS
In addition to terms previously defined, when used in the Plan, the
following capitalized terms shall have the following meanings unless the context
clearly indicates otherwise:
6.1 "Cause" means, with respect to any Executive:
(a) the Executive's willful commission of acts(s) or omissions(s) which
have, have had, or are likely to have a material adverse effect on the
business, operations, financial condition or reputation of the Company or
any of its affiliates;
(b) the Executive's conviction (including a plea of guilty or nolo
contendere) of a felony or any crime of fraud, theft, dishonesty or moral
turpitude; or,
(c) the Executive's material violation of any statutory or common law duty
of loyalty to the Company or any of its affiliates.
6.2 "Good Reason" means a material reduction of an Executive's salary,
incentive compensation or benefits; or a material reduction or material
adverse alteration in the nature of the Executive's position,
responsibilities or authority.
6.3 "Salary Continuation Period" means the period indicated in Section 4.1
during which benefits are payable under the Plan.
6.4. "Severance Incentive" means the average of the Annual Incentive Awards
paid to a Participant with respect to each of the two calendar years
preceding the year in which occurs the Participant's Termination of
Employment.
6.5 "Termination of Employment" means:
(a) a termination of the Executive's employment by the Company or any
subsidiary for reasons other than for Cause as defined below; or
(b) a resignation by the Executive for Good Reason.
A termination of employment for Cause or an Executive's resignation other
than for Good Reason shall not be a Termination of Employment for purposes
of the Plan.
4
<PAGE>
7. FUNDING
Nothing in the Plan shall be interpreted as requiring Unicom to set aside
any of its assets for the purpose of funding its obligations under the Plan. No
person entitled to benefits under the Plan shall have any right, title or claim
in or to any specific assets of Unicom, but shall have the right only as a
general creditor of Unicom to receive benefits from Unicom on the terms and
conditions provided in the Plan.
8. ADMINISTRATION OF THE PLAN
The Plan shall be administered by the Director of Compensation Planning of
ComEd (the "Plan Administrator"). The Plan Administrator may delegate any
administrative duties, including, without limitation, duties with respect to the
processing, review, investigation, approval and payment of severance pay and
provision of severance benefits, to designated individuals or committees. Unicom
shall be a "named fiduciary" under the Plan for purposes of ERISA.
The Plan Administrator shall promulgate any rules and regulations necessary
to carry out the purposes of the Plan or to interpret the terms and conditions
of the Plan; provided, however, that no rule, regulation or interpretation shall
be contrary to the provisions of the Plan. The rules, regulations and
interpretations made by the Plan Administrator shall be applied on a uniform
basis and shall be final and binding on any Executive or former Executive of the
Company or any successor in interest of either.
9. CLAIMS PROCEDURE
The Plan Administrator shall determine the rights of any Executive or
former Executive of the Company to any severance pay or benefits hereunder. The
Plan Administrator has the sole and absolute power and authority to interpret
and apply the provisions of this Plan to a particular circumstance, make all
factual and legal determinations, construe uncertain or disputed terms and make
eligibility and benefit determinations in such manner and to such extent as the
Plan Administrator in his or her sole discretion may determine. Any Executive or
former Executive of the Company who believes that he or she is entitled to
receive severance pay or benefits under the Plan, including severance pay or
benefits other than those initially determined by the Plan Administrator, may
file a claim in writing with the Plan Administrator. No later than 90 days after
the receipt of the claim the Plan Administrator shall either allow or deny the
claim in writing.
A denial of a claim, in whole or in part, shall be written in a manner
calculated to be understood by the claimant and shall include the specific
reason or reasons for the denial; specific reference to pertinent Plan
provisions on which the denial is based; a description of any additional
material or information necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary; and an explanation
of the claims review procedure.
5
<PAGE>
A claimant whose claim is denied (or his or her duly authorized
representative), may, within 60 days after receipt of the denial of his or her
claim, request a review upon written application to an officer designated by
Unicom and specified in the claim denial; review pertinent documents; and submit
issues and comments in writing.
The designated officer shall notify the claimant of his or her decision on
review within 60 days after receipt of a request for review unless special
circumstances require an extension of time for processing, in which case a
decision shall be rendered as soon as possible, but not later than 120 days
after receipt of a request for review. Notice of the decision on review shall be
in writing. The officer's decision on review shall be final and binding on any
claimant or any successor in interest.
10. AMENDMENT OR TERMINATION OF PLAN
Notwithstanding anything in the Plan to the contrary, Unicom's Senior Vice
President of Corporate Resources or another designated officer of the Company
may amend, modify or terminate the Plan at any time by written instrument;
provided, however, that no amendment, modification or termination shall deprive
any Participant of any payment or benefit that the Plan Administrator previously
has determined is payable under the Plan.
11. MISCELLANEOUS
11.1 Limitation on Rights. Participation in the Plan is limited to the
individuals described in Section 3, and the Plan shall not apply to any previous
or subsequent workforce reductions implemented by the Company or to any other
voluntary or involuntary terminations of employment.
11.2 Headings. Headings of sections in this document are for convenience only,
and do not constitute any part of the Plan.
11.3 Severability. If any provision of this Plan or the rules and regulations
made pursuant to the Plan are held to be invalid or illegal for any reason, such
illegality or invalidity shall not affect the remaining portions of this Plan.
11.4 Governing Law. The Plan shall be construed and enforced in accordance with
ERISA and the laws of the State of Illinois to the extent such laws are not
preempted by ERISA.
11.5 Successors and Assigns. This Plan shall be binding upon and inure to the
benefit of Unicom and its successors and assigns and shall be binding upon and
inure to the benefit of a Participant and his or her legal representatives,
heirs and assigns. No rights, obligations or liabilities of a Participant
hereunder shall be assignable without the prior written consent of Unicom. In
the event of the death of a Participant after he or she has signed the Waiver
and Release, but prior to receipt of severance pay or benefits to which
6
<PAGE>
he or she is entitled hereunder, the severance pay described in Paragraph 4.1
shall be paid to his or her estate, and the Participant's dependents who are
covered under the ComEd health care plans shall be entitled to continued rights
under Paragraph 4.4; provided that the estate or other successor of the
Participant has not revoked such Waiver and Release.
12. ADMINISTRATIVE INFORMATION
Plan Sponsor: Unicom Corporation
Address : 227 West Monroe Street, 12th Floor
Chicago, Illinois 60606
Employer Identification
Number: 36-3961038
Plan Administrator: Director, Compensation Planning
Address and Telephone: Commonwealth Edison Company
PO Box 767
Chicago, Illinois 60690-0767
(312) 394-4015
Agent for Service of
Legal Process: Director, Compensation Planning
Commonwealth Edison Company
PO Box 767
Chicago, Illinois 60690-0767
Plan Number: 501
Type of Plan: severance benefit plan (welfare)
Plan Year: calendar year
13. ERISA RIGHTS
As a Participant in the Plan, you are entitled to certain rights and
protections under ERISA. ERISA provides that all plan participants shall be
entitled to:
Examine, without charge, at the Plan Administrator's office at 10 S.
Dearborn Street, Chicago, Illinois 60603 all Plan documents and copies of
all documents filed by the Plan with the U.S. Department of Labor; and
Obtain copies of all Plan documents and other Plan information upon written
request to the Plan Administrator. The Plan Administrator may make a
reasonable charge for the copies.
In addition to creating rights for Participants, ERISA imposes duties
upon the
7
<PAGE>
people who are responsible for the operation of the Plan. The people who operate
the Plan, called "fiduciaries" of the Plan, have a duty to act prudently and in
the interest of you and other Participants and beneficiaries. No one, including
your employer, your union, or any other person, may fire you or otherwise
discriminate against you in any way to prevent you from obtaining your interest
in the Plan or from exercising your rights under ERISA. If your claim for a
benefit from the Plan is denied in whole or in part, you must receive a written
explanation of the reason for the denial. You have the right to have your claim
reviewed and reconsidered. Under ERISA, there are steps you can take to enforce
the above rights. For instance, if you request materials from the Plan and do
not receive them within 30 days, you may file suit in a federal court. In such a
case, the court may require the Plan Administrator to provide the materials and
pay you up to $110 a day until you receive the materials, unless the materials
were not sent because of reasons beyond the control of the Plan Administrator.
If you have a claim for benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal court. If it should happen that
Plan fiduciaries misuse the Plan's money, or if you are discriminated against
for asserting your rights, you may seek assistance from the U.S. Department of
Labor, or you may file suit in a federal court. The court will decide who should
pay court costs and legal fees. If you are successful, the court may order the
person you have sued to pay these costs and fees. If you lose and the court
finds your claim to be frivolous, the court may order you to pay these costs and
fees. If you have any questions about the Plan, you should contact the Plan
Administrator. If you have any questions about this statement or about your
rights under ERISA, you should contact the nearest Area Office of the U.S.
Labor- Management Services Administration, Department of Labor.
June 15, 1998
8
<PAGE>
EXHIBIT I
NON-COMPETITION COVENANTS
1. 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 Unicom Corporation,
Commonwealth Edison Company or any affiliate thereof (the "Company"), or
which was learned, discovered, developed, conceived, originated or prepared
during or as result of your performance of any services 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;
(d) information 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; and
(e) 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.
2. Nondisclosure of Confidential Information. You agree that you will not use
for your own benefit, in any manner, or disclose any Confidential Information
obtained during your employment with the Company at any time, to any other
person, firm or corporation without the Company's prior written consent, except
as may be required by the lawful order of a court or agency of competent
jurisdiction. You agree to take all reasonable steps to safeguard such
Confidential Information and to protect such information against disclosure,
misuse, loss and theft. Your obligations under this paragraph with respect to
any specific Confidential Information shall cease when that specific portion of
Confidential Information becomes publicly known.
<PAGE>
Exhibit I
3. Non-Competition.
(a) You agree that for a period of two years beginning on the date of
termination of employment, without the prior written approval of the
Company you will 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 below).
(b) You agree that for a period of two years beginning on the date of
termination of employment, without the prior written consent of the
Company, you will 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 you from making an investment in any
Competitive Business if such investment does not represent more than
1% of market value of the outstanding capital stock or debt (as
applicable) of such Competitive Business.
"Competitive Business" means, as of any date, any individual or entity (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 separation date which represents for any calendar year or is
projected by the Company (as reflected in a business plan adopted by the
Company before the separation date) to yield during any year during the
first three-fiscal year period commencing on or after the separation 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.
4. Non-Solicitation. You agree that for a period of two years beginning on the
date of termination of employment, you will not, directly or indirectly:
(a) encourage any 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
employee or cause any individual or entity to do any of the
foregoing;
(c) establish a business with, or encourage others to establish a
business with, any employee; or
2
<PAGE>
Exhibit I
(d) interfere with the relationship of the Company with, or
endeavor to entice away from the Company any individual or entity
who or which at any time during the period commencing one year
prior to the date of termination of employment was a material
customer or material supplier of, or maintained a material
business relationship with, the Company.
5. Reasonableness of Restrictive Covenants.
You acknowledge that the covenants contained in Sections 2, 3 and 4 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. You further acknowledge such covenants
are essential elements of this [A]greement and that, but for such
covenants, the Company would not have entered into this [A]greement. You
further acknowledge that you have consulted with legal counsel and have
been advised concerning the reasonableness and propriety of such covenants.
You acknowledge that your observance of the covenants contained in Sections
2, 3 and 4 will not deprive you of the ability to earn a livelihood or to
support your dependents.
6. 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 2, 3 and 4 the parties agree that it
would be impossible to measure solely in money the damages which the
Company would suffer you were to breach any of your obligations under
such paragraphs. You acknowledge that any breach of any provision of
such paragraphs would irreparably injure the Company. Accordingly, you
agree that if you breach any of the provisions of such paragraphs, the
Company shall be entitled, in addition to any other remedies to which
the Company may be entitled under this letter 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 you
hereby waive 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
Sections 2, 3 and 4 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.
3
<PAGE>
Exhibit (10)-3
Unicom Corporation
Form 10-Q File No.1-11375
UNICOM CORPORATION
STOCK BONUS DEFERRAL PLAN
<PAGE>
UNICOM CORPORATION
STOCK BONUS DEFERRAL PLAN
ARTICLE I
Amendment and Restatement; Purpose
Amendment and Restatement; Purpose. The Unicom Corporation Stock Bonus
Deferral Plan, as previously established, and as amended by the First Amendment,
effective January 1, 1996 (the "Plan"), is hereby amended and restated,
effective September 30, 1998, except as specifically otherwise provided herein.
The rights and benefits of any Participant (as defined below) whose employment
terminated prior to September 30, 1998 shall be determined under the terms of
the Plan as in effect on the date of such termination of employment.
Unicom Corporation (the "Company") maintains the Plan in order to provide
to certain key employees of the Company and participating affiliates
(collectively, the "Employers") the opportunity to defer the receipt of all or
any portion of any incentive awards payable pursuant to the Unicom Corporation
Long Term Incentive Plan (the "LTIP"), or of any similar award payable under any
other incentive program sponsored by an Employer.
In addition, the Employers have entered into certain agreements with key
employees (collectively, the "Agreements") which provide for a certain level of
incentive award or provide for payment of amounts that would have been payable
as long term awards under the LTIP had the employee been employed by the
Employer for the full period with respect to which the award is payable ("Award
Equivalents"). The Company intends by this amendment and restatement to provide
to such employees an opportunity to defer the receipt of any such guaranteed
incentive award, or of all or any portion of such Award Equivalents, or both, as
applicable.
ARTICLE II
Eligibility and Participation
Eligibility and Participation. Each individual who was a Participant in
the Plan on the day before the effective date of this amendment and restatement
shall continue to be a Participant hereunder. Each other employee of an
Employer who, on the applicable election date described in Section 3.1, is
described below, upon making a deferral election in accordance with the
provisions of Article III shall become a participant ("Participant") in this
Plan on the effective date of such election:
<PAGE>
(a) an officer of the Company or any affiliate (including, but not limited
to Commonwealth Edison Company ("ComEd"), Unicom Energy Services Inc.,
Unicom Resources Inc. or Unicom Thermal Technologies Inc);
(b) included on the Executive payroll of the Company or ComEd or the
equivalent payroll of another Employer; or
(c) classified as management personnel in salary level 12 or above on the
payroll system of the Company, ComEd or a comparable classification on
the payroll of another Employer (or at an equivalent level on the
Company's payroll should such classifications be revised).
ARTICLE III
Deferral Elections
3.1 Deferral Elections.
(a) Deferral Elections. On or before the election due date set forth
below, while this Plan is in effect, each Participant may elect to defer
the receipt of all or a portion of any incentive award or Award Equivalent
to which he may become entitled under the LTIP, any other incentive plan
sponsored by an Employer or under the terms of an Agreement, as applicable;
provided, however, that if an election to defer is made with respect to the
portion of any award or Award Equivalent which would be payable in cash,
such election shall be treated as a request to convert such portion into
shares of common stock of the Company ("Unicom Stock") (determined as
provided under the terms of the award or Award Equivalent for the stock
portion of the payment amount), and such shares shall be deliverable in
lieu of any such cash upon the expiration of any such deferral election (as
such election may be extended as hereinafter provided). Any such election
shall become irrevocable on December 31 of the calendar year in which made.
(b) Election Due Dates. The election due date shall be (i) for any award
or Award Equivalents payable in 1999 with respect to which no election has
been made as of the effective date of this amendment and restatement,
December 31, 1998, (ii) for awards or award equivalents payable after
December 31, 1998, on such date as the Committee or its delegate shall
specify but no later than December 31 of the preceding calendar year, and
(iii) for an individual who first becomes an eligible employee after an
applicable election due date, within 30 days after the date on which such
individual is notified of his or her eligibility, but not later than
December 31 of the calendar year preceding the year in which the award or
Award Equivalent becomes payable.
(c) Effect of Elections. Effective beginning January 1, 1999 and subject
to paragraph (d) of this Section 3.1, an election made pursuant to
paragraph (b) hereof shall provide that the incentive award or Award
Equivalent subject to such election
2
<PAGE>
shall not be paid to the Participant at the time provided under the terms
of the award program or Agreement, as applicable, but shall instead be paid
to the Participant on the January 15 following the third anniversary of the
end of the performance period with respect to which the award or award
equivalent is payable, or if earlier, as soon as practicable following the
date of the Participant's death, retirement or termination of employment,
or commencement of a leave of absence on account of disability.
(d) Subsequent Payment Elections. Notwithstanding the foregoing, at any
time prior to the first day of the calendar year in which an award or Award
Equivalent is otherwise payable pursuant to a deferral election made under
paragraph (b) of this Section 3.1 or a subsequent payment election pursuant
to this paragraph (d), a Participant may irrevocably elect to defer further
the payment of such award or Award Equivalent for another three-year cycle,
subject to the terms of paragraphs (b) and (c) hereof.
3.2 Termination of Participation. Each Participant shall remain a
Participant until such individual is no longer entitled to benefits hereunder.
ARTICLE IV
Accounts
Deferred Stock Accounts. Unicom (or in the case of any Participant employed
by another Employer, such Employer) shall establish on its books an account (a
"Deferred Stock Account") on behalf of each Participant who has made a deferral
election pursuant to Section 3.1(b). Each Deferred Stock Account shall be
divided into a separate subaccount (a "class year subaccount") to which shall be
credited the amount deferred pursuant to Section 3.1(b). Each class year
subaccount shall also be credited with the amount ("dividend equivalents") equal
to the dividends declared from time to time on the number of shares of Unicom
Stock credited to such subaccount. Unless the Participant has elected, in the
time and manner set forth in Section 5.2 below, to receive current payment in
respect of such dividend equivalents, such dividend equivalents shall be
credited to the appropriate class year subaccount of the participant's Deferred
Stock Account to which such dividend equivalents relate as a number of
additional shares of Unicom Stock determined by dividing the aggregate amount of
such dividend equivalents by the purchase price used under the Unicom
Corporation Dividend Reinvestment and Employee Stock Purchase Plan related to
each such dividend. Deferred Stock Accounts shall be for bookkeeping purposes
only, and neither Unicom nor any Employer shall be obligated to set aside or
segregate any actual shares of Unicom Stock or any other assets in respect of
such accounts.
3
<PAGE>
ARTICLE V
Time and Manner of Payment
5.1 Distribution. Distribution of a balance in a class year subaccount
shall be made as soon as practicable after the last day of the deferral period
specified in the Participant's election made pursuant to Section 3.1 or, if
earlier, as soon as practicable after the date of the Participant's termination
of employment, retirement, death or leave of absence on account of disability.
The net shares of Unicom Stock (including any fractional share) determined by
reference to the closing price per share of Unicom Stock, as reported on the New
York Stock Exchange on the business day immediately preceding the date of
distribution and reduced by any amount required by law to be deducted or
withheld, including income tax withholding, shall be credited to an account
established on behalf of the Participant at First Chicago Trust Company.
5.2 Election to Receive Current Payment of Dividend Equivalents. Not
later than December 31 of a calendar year, each Participant may elect to receive
from the Company (or in the case of a Participant employed by an Employer, such
Employer) current payment of an amount equal to the dividend equivalents
allocable to the Participant's Deferred Stock Account during all subsequent
calendar years. Any such election may be revoked at any time, but such
revocation shall not be effective until the calendar year following the year in
which such revocation is made. Notwithstanding the preceding, dividend
equivalents attributable to a dividend declared prior to the distribution of a
Participant's Deferred Stock Account balance but payable after the date of such
distribution shall be paid in cash as soon as practicable after the dividend
payment date.
5.3 Beneficiaries. If a Participant shall die while any shares of Unicom
Stock remain credited to the Deferred Stock Account established on his or her
behalf under Article IV, such amount shall be distributed as provided in Section
5.1 to the beneficiary or beneficiaries as the Participant may, from time to
time, designate in writing delivered to the Committee (as defined in Section 7.1
below). A Participant may revoke or change his or her beneficiary designation at
any time in writing delivered to the Committee. If a Participant does not
designate a beneficiary under this Plan, or if no designated beneficiary
survives the Participant, the balance of the Participant's Deferred Stock
Account shall be distributed to the person or persons entitled to his accrued
benefit under the Commonwealth Edison Employee Savings and Investment Plan (or
who would be so entitled if there were then an account on behalf of the
Participant under such plan).
ARTICLE VI
Application of ERISA, Funding
6.1 Application of ERISA. The Plan is intended to constitute an unfunded
plan maintained primarily for the purpose of providing deferred compensation to
a select group of management or highly compensated employees within the meaning
of sections 201(2), 301(a) (3) and 401 (a) (1) of ERISA and Department of Labor
Regulation Section 2520.104-23.
4
<PAGE>
6.2 Funding. The Plan shall not be a funded plan, and neither the Company
nor any of the Employers shall be under any obligation to set aside any funds
for the purpose of making payments under this Plan. Any payments hereunder
shall be made out of the general assets of the Company and the Employers.
6.3 Trust. The Company shall establish a trust for the purpose of
administering assets of the Company and the Employers to be used for the purpose
of satisfying their obligations under the Plan. Any such trust shall be
established in such manner so as to be a "grantor trust" of which the Company is
the grantor, within the meaning of section 671 et. seq. of the Code. The
existence of any such trust shall not relieve the Company or any Employer of
their liabilities under the Plan, but the obligation of the Company and the
Employers under the Plan shall be deemed satisfied to the extent paid from the
trust.
ARTICLE VII
Administration
7.1 Committee. The Plan shall be administered by the Compensation
Committee of the Board of Directors of Unicom Corporation (the "Committee"). The
Committee shall have the same duties and powers, and shall be subject to the
same limitations, as those applicable to the Committee under Article V of the
LTIP. The Committee shall have no power to add to, subtract from or modify any
of the terms of the Plan, or to change or add to any benefits provided under the
Plan, or to waive or fail to apply any requirements of eligibility for a benefit
under the Plan. The Committee's decisions in any matter involving the Plan shall
be final, binding and conclusive.
7.2 Administration. The administrative provisions of the Section 5.1 of
the LTIP are hereby incorporated by reference, and shall be applicable as if
such provisions were set forth herein.
7.3 Expenses. All costs and expenses incurred in administering the Plan,
including the expenses of the Committee, the fees of counsel and any agents of
the Committee and other administrative expenses shall be paid by the Company and
the Employers. The Committee, in its sole discretion, having regard to the
nature of a particular expense, shall determine the portion of such expense
which is to be borne by the Company or a particular Employer.
5
<PAGE>
ARTICLE VIII
Amendment and Termination
Amendment and Termination. The Company intends to maintain the Plan
indefinitely. However, the Plan shall be subject to the same reserved powers of
amendment and termination by the Committee or such senior officer to whom it has
delegated its amendment authority as the LTIP (without regard to any limitations
imposed on such powers by the Code or ERISA), except that no such amendment or
termination shall reduce or otherwise adversely affect the rights of
Participants in respect of amounts accrued hereunder as of the date of such
amendment or termination without their written consent.
ARTICLE IX
Miscellaneous
9.1 FICA Taxes. Notwithstanding Section 3.1, the amount deferred for any
calendar year pursuant to an election made thereunder shall be reduced by an
amount which, after the payment of applicable federal and state income taxes and
the tax imposed under Section 3121 of the Code in respect of amounts deferred,
is equal to the amount of the tax imposed under Section 3121 of the Code on the
amount otherwise subject to deferral (determined without regard to this Section
9.1) pursuant to Section 3.1 for such calendar year.
9.2 Nonassignment of Benefits. It shall be a condition of the payment of
benefits under this Plan that neither such benefits nor any portion thereof
shall be assigned, alienated or transferred to any person voluntarily or by
operation of any law, including any assignment, division or awarding of property
under state domestic relations law (including community property law). If any
person shall endeavor or purport to make any such assignment, alienation or
transfer, amounts otherwise provided hereunder shall cease to be payable to any
person.
9.3 No Guarantee of Employment. Nothing contained in this Plan shall be
construed as a contract of employment between any Employer and any employee or
as conferring a right on any employee to be continued in the employment of any
Employer, or as a limitation of the right of an Employer to discharge any of its
employees, with or without cause.
9.4. Adoption By Employers. Any affiliate of the Company which is or
becomes an "Employer" under the LTIP may, with the consent of the Company,
become an Employer under this Plan by delivery to the Company of a resolution of
its board of directors or duly authorized committee to such effect, which
resolution shall specify the date for which this Plan shall be effective with
respect to the employees of such affiliate.
6
<PAGE>
9.5 Gender and Number. Except when the context indicates to the contrary,
when used herein, masculine terms shall be deemed to include the feminine and
singular the plural.
9.6 Headings. The headings of Articles and Sections are included solely
for convenience of reference, and if there is any conflict between such headings
and the text of the Plan, the text shall control.
9.7 Invalidity. If any provision of this Plan shall be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provisions hereof, and the Plan shall be enforced and construed as if such
provisions, to the extent invalid or unenforceable, had not been included.
9.8 Successors and Assigns. The provisions of the Plan shall bind and
inure to the benefit of the Company and each Employer and their successors and
assigns, as well as each Participant and his successors.
9.9 Law Governing. Except as provided by any federal law, the provisions
of the Plan shall be construed in accordance with and governed by the laws of
the state of Illinois.
EXECUTED this 30th day of September, 1998.
UNICOM CORPORATION
By: __________________________
S. Gary Snodgrass
Senior Vice President
7
<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 September 30, December 31,
No. 1998 1997
- ---- ----------- -------------
<S> <C> <C>
1 Net income (loss) before extraordinary item and cumulative effect of
2 change in accounting principle $ (65,071) $(160,138)
--------- ---------
3 Net provisions for income taxes and investment tax credits deferred
4 charged to-
5 Operations $ 327,975 $ 307,276
6 Other income (405,764) (405,819)
--------- ---------
7 $ (77,789) $ (98,543)
--------- ---------
8 Fixed charges-
9 Interest on debt $ 457,065 $ 487,749
10 Estimated interest component of nuclear fuel and
other lease payments, rentals and other interest 75,707 70,468
12 Amortization of debt discount, premium and expense 12,789 21,951
13 Company-obligated mandatorily redeemable preferred securities
14 dividend requirements of subsidiary trusts holding solely the
15 Company's subordinated debt securities 29,710 28,860
--------- ---------
16 $ 575,271 $ 609,028
--------- ---------
17 Preferred and preference stock dividend requirements-
18 Provisions for preferred and preference stock dividends $ 57,635 $ 60,486
19 Taxes on income required to meet provisions for
20 preferred and preference stock dividends 37,744 39,623
--------- ---------
21 $ 95,379 $ 100,109
--------- ---------
22 Fixed charges and preferred and preference stock
23 dividend requirements $ 670,650 $ 709,137
--------- ---------
24 Earned for fixed charges and preferred and preference stock
25 dividend requirements $ 432,411 $ 350,347
--------- ---------
26 Ratios of earnings to fixed charges (line 25 divided by line 16) 0.75 0.58
==== ====
27 Ratios of earnings to fixed charges and preferred and preference
28 stock dividend requirements (line 25 divided by line 25 divided by line 23) 0.64 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
September 30, 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
September 30, 1998 and December 31, 1997 appearing in this Form 10-Q.
Arthur Andersen LLP
Chicago, Illinois
November 10, 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
September 30, 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 Mandatorily 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 Mandatorily 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 September 30, 1998 and
December 31, 1997 appearing in this Form 10-Q.
Arthur Andersen LLP
Chicago, Illinois
November 10, 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 September 30, 1998 and the related Statements of Consolidated Operations,
Retained Earnings (Deficit) and Cash Flows for the nine months ended September
30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 13,535,698
<OTHER-PROPERTY-AND-INVEST> 2,315,417
<TOTAL-CURRENT-ASSETS> 2,153,309
<TOTAL-DEFERRED-CHARGES> 0<F1>
<OTHER-ASSETS> 4,684,066
<TOTAL-ASSETS> 22,688,490
<COMMON> 4,950,250
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 117,109
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,067,359<F2>
157,118<F3>
506,808<F3>
<LONG-TERM-DEBT-NET> 6,014,714<F4>
<SHORT-TERM-NOTES> 0<F1>
<LONG-TERM-NOTES-PAYABLE> 0<F4>
<COMMERCIAL-PAPER-OBLIGATIONS> 0<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 85,879
17,801<F3>
<CAPITAL-LEASE-OBLIGATIONS> 401,288
<LEASES-CURRENT> 177,504
<OTHER-ITEMS-CAPITAL-AND-LIAB> 10,260,019<F5>
<TOT-CAPITALIZATION-AND-LIAB> 22,688,490
<GROSS-OPERATING-REVENUE> 5,587,080
<INCOME-TAX-EXPENSE> 264,361<F6>
<OTHER-OPERATING-EXPENSES> 4,505,165
<TOTAL-OPERATING-EXPENSES> 4,781,082
<OPERATING-INCOME-LOSS> 805,998
<OTHER-INCOME-NET> (68,444)<F6><F7>
<INCOME-BEFORE-INTEREST-EXPEN> 749,110
<TOTAL-INTEREST-EXPENSE> 350,115
<NET-INCOME> 398,995
0<F7>
<EARNINGS-AVAILABLE-FOR-COMM> 398,995
<COMMON-STOCK-DIVIDENDS> 260,355
<TOTAL-INTEREST-ON-BONDS> 0<F8>
<CASH-FLOW-OPERATIONS> 950,303
<EPS-PRIMARY> 1.84
<EPS-DILUTED> 1.83
<FN>
<F1> This item is not disclosed as a separate line item on the Consolidated
Balance Sheet.
<F2> Includes a deduction of $3,217 thousand for preference stock expense of
ComEd.
<F3> Preferred and preference stocks of ComEd.
<F4> $1,281,368 thousand of notes, long-term note to bank and guaranteed senior
note are 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 $11,556 thousand related to nonoperating activities is
included in INCOME-TAX-EXPENSE.
<F7> A $43,062 thousand provision for preferred and preference stock dividends
of ComEd and a $22,283 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 September 30, 1998 and the related Statements of Consolidated Operations,
Retained Earnings (Deficit) and Cash Flows for the nine months ended September
30, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 13,535,698
<OTHER-PROPERTY-AND-INVEST> 2,115,166
<TOTAL-CURRENT-ASSETS> 2,107,280
<TOTAL-DEFERRED-CHARGES> 0<F1>
<OTHER-ASSETS> 4,670,506
<TOTAL-ASSETS> 22,428,650
<COMMON> 2,677,951
<CAPITAL-SURPLUS-PAID-IN> 2,208,027
<RETAINED-EARNINGS> 142,989
<TOTAL-COMMON-STOCKHOLDERS-EQ> 5,028,967
157,118
506,808
<LONG-TERM-DEBT-NET> 5,782,824<F2>
<SHORT-TERM-NOTES> 0<F1>
<LONG-TERM-NOTES-PAYABLE> 0<F2>
<COMMERCIAL-PAPER-OBLIGATIONS> 0<F1>
<LONG-TERM-DEBT-CURRENT-PORT> 83,304
17,801
<CAPITAL-LEASE-OBLIGATIONS> 401,288
<LEASES-CURRENT> 177,504
<OTHER-ITEMS-CAPITAL-AND-LIAB> 10,273,036<F3>
<TOT-CAPITALIZATION-AND-LIAB> 22,428,650
<GROSS-OPERATING-REVENUE> 5,576,132
<INCOME-TAX-EXPENSE> 280,392<F4>
<OTHER-OPERATING-EXPENSES> 4,477,355
<TOTAL-OPERATING-EXPENSES> 4,769,304
<OPERATING-INCOME-LOSS> 806,828
<OTHER-INCOME-NET> (16,149)<F4><F5>
<INCOME-BEFORE-INTEREST-EXPEN> 802,236
<TOTAL-INTEREST-EXPENSE> 339,879
<NET-INCOME> 462,357
43,062
<EARNINGS-AVAILABLE-FOR-COMM> 419,295
<COMMON-STOCK-DIVIDENDS> 257,082
<TOTAL-INTEREST-ON-BONDS> 0<F6>
<CASH-FLOW-OPERATIONS> 1,070,864
<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> $1,049,479 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 $11,557 thousand related to nonoperating activities is
included in INCOME-TAX-EXPENSE.
<F5> Includes $22,283 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>
