<PAGE>
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
UNICOM CORPORATION
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
UNICOM CORPORATION
One First National Plaza
P.O. Box A-3005
Chicago, Illinois 60690-3005
[UNICOM LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, MAY 29, 1997 AT 10:30 A.M. (LOCAL TIME)
The annual meeting of shareholders of Unicom Corporation ("Unicom" or the
"Company") will be held in the Wallingford Center of the Clock Tower Resort &
Conference Center, 7801 E. State Street, Rockford, Illinois. At the meeting,
shareholders will be asked to consider and act upon the following matters, and
to transact such other business as may properly be brought before the meeting:
Item A: The election of ten Directors.
Item B: The amendment and restatement of the Unicom Corporation Long-Term
Incentive Plan.
Item C: The material terms of performance-based incentives in Long-Term
Performance Unit Awards under Unicom's Long-Term Incentive Plan.
Item D: The appointment of Arthur Andersen LLP, independent public
accountants, as Auditors for 1997.
Item E: A shareholder proposal to limit to an annual maximum of $250,000 the
value of stock and/or cash paid to any one executive under the Long-
Term Incentive Plan or as a bonus.
Shareholders of record on the books of Unicom at 4:00 P.M., Chicago time, on
March 31, 1997, will be entitled to vote at the meeting.
PLEASE FILL IN, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY.
IN THE ABSENCE OF SPECIFIC DIRECTION, THE SHARES REPRESENTED BY THE PROXIES
WILL BE VOTED AT THE MEETING AND WILL BE VOTED NON-CUMULATIVELY FOR THE
ELECTION OF THE NOMINEES NAMED IN THIS PROXY STATEMENT AS DIRECTORS, FOR ITEMS
B, C AND D, AND AGAINST ITEM E (THE SHAREHOLDER PROPOSAL).
David A. Scholz
Secretary
April 9, 1997
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DIRECTIONS TO THE CLOCK TOWER
RESORT & CONFERENCE CENTER
FROM CHICAGO AREA:
I-90 (Kennedy Expressway--Northwest Tollway) West to Rockford, exit at
Business Route U.S. 20. Straight across Business Route U.S. 20 to Clock Tower
Resort & Conference Center.
[MAP TO LOCATION OF ANNUAL MEETING]
<PAGE>
[UNICOM LOGO]
PROXY STATEMENT
April 9, 1997
This Proxy Statement is being sent to you in connection with the
solicitation by the Unicom Board of Directors of proxies for use at Unicom's
annual meeting of shareholders to be held on May 29, 1997.
You may revoke your proxy at any time before it is voted. You may revoke it
by written notice to David A. Scholz, Secretary, Unicom Corporation, 10 South
Dearborn Street, Post Office Box A-3005, Chicago, IL 60690-3005, by signing
and delivering a more recent proxy or by attending the meeting and voting in
person. Attendance at the meeting will not automatically revoke your proxy.
All shares represented by properly executed and unrevoked proxies received in
the accompanying form in time for the annual meeting will be voted at the
meeting or at any adjournment thereof. A ticket is not required for attendance
at the annual meeting; however, confirmation of stock ownership will be made
prior to admission to the meeting.
The cost of soliciting proxies will be borne by Unicom. In addition to
solicitation by mail, officers and employees of Unicom may solicit proxies by
telephone or in person. Unicom has arranged for Morrow & Co. Inc. to assist in
the solicitation of proxies, at an estimated cost (excluding reimbursement of
out of pocket costs) of $12,000.
Unicom's 1996 Summary Annual Report was mailed to each shareholder on or
about February 19, 1997. The audited financial statements of Unicom, along
with certain other financial information, are included in Exhibit B to this
Proxy Statement. This Proxy Statement and form of Proxy were first mailed to
shareholders on or about April 9, 1997.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ALL DIRECTOR NOMINEES NAMED IN
ITEM A, FOR APPROVAL OF THE MATTERS DISCUSSED IN ITEMS B, C AND D, AND AGAINST
THE SHAREHOLDER PROPOSAL DISCUSSED IN ITEM E.
<PAGE>
ITEM A: ELECTION OF DIRECTORS
NOMINEES
Jean Allard, Edward A. Mason and Frank A. Olson, whose current terms as
Directors expire at the 1997 annual meeting of shareholders, are not standing
for re-election. Both Ms. Allard and Mr. Mason have reached the applicable
mandatory retirement age, and Mr. Olson has chosen not to stand for re-
election due to a substantial increase in his other business obligations.
Their contributions were many and are gratefully appreciated.
Ten Directors are to be elected at the annual meeting to serve terms of one
year and until their respective successors have been elected. The Board has
decided that it is not necessary to fill the vacancies caused by the
retirements of Ms. Allard, Mr. Mason and Mr. Olson at this time and,
therefore, the number of Board members is being reduced to ten. The nominees
for Director, all of whom are now serving as Directors of Unicom and
Commonwealth Edison Company ("ComEd"), are listed below together with certain
biographical information. Except as otherwise indicated, each nominee for
Director has been engaged in his or her present principal occupation for at
least the past five years. Unicom was formed in 1994.
[PHOTO] EDWARD A. BRENNAN, age 63. Director of Unicom and ComEd since
1995. Retired. Chairman and CEO of Sears, Roebuck and Co.
(retail merchandiser) for more than five years prior to August
1995. Member of Audit, Corporate Governance and Compensation,
and Nominating Committees. Other directorships: The Allstate
Corporation, AMR Corporation, Dean Foods Company, Dean Witter,
Discover & Co., Minnesota Mining and Manufacturing Company and
The SABRE Group Holdings, Inc.
[PHOTO] JAMES W. COMPTON, age 59. Director of Unicom since 1994 and
ComEd since 1989. President and Chief Executive Officer of the
Chicago Urban League (a non-profit agency). Chairman of
Finance Committee and member of Corporate Governance and
Compensation, Executive and Nominating Committees.
[PHOTO] BRUCE DeMARS, age 61. Director of Unicom and ComEd since
October 1996. Retired. Admiral, United States Navy and
Director, Naval Nuclear Propulsion Program for more than five
years prior to October 1996. Member of Corporate Governance
and Compensation Committee.
[PHOTO] SUE L. GIN, age 55. Director of Unicom since 1994 and ComEd
since 1993. Founder, Owner, Chairman and Chief Executive
Officer of Flying Food Fare, Inc. (in-flight catering
company). Member of Corporate Governance and Compensation,
Executive and Finance Committees.
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[PHOTO] DONALD P. JACOBS, age 69. Director of Unicom since 1994 and
ComEd since 1979. Dean of the J. L. Kellogg Graduate School of
Management, Northwestern University. Member of Corporate
Governance and Compensation, Finance and Nominating
Committees. Other directorships: The First National Bank of
Chicago, Hartmarx Corp., Security Capital Industrial Trust,
Unocal Corp. and Whitman Corp.
[PHOTO] EDGAR D. JANNOTTA, age 65. Director of Unicom and ComEd since
1994. Senior Director of William Blair & Company, L.L.C.
(investment banking and brokerage company) since January 1996.
For more than five years prior thereto, Managing Partner of
William Blair & Company and Senior Partner during 1995.
Chairman of Nominating Committee and member of Audit,
Corporate Governance and Compensation, and Finance Committees.
Other directorships: AAR Corp., AON Corporation, Bandag,
Incorporated, Molex Incorporated, Oil-Dri Corporation of
America and Safety-Kleen Corp.
[PHOTO] GEORGE E. JOHNSON, age 69. Director of Unicom since 1994 and
ComEd since 1971. Founder and retired Chairman, Johnson
Products Company, Inc. (personal care products company).
Chairman of Indecorp, Inc. for more than five years prior to
December 1995. Member of Audit, Corporate Governance and
Compensation, and Executive Committees. Other directorship:
Burrell Communications Group.
[PHOTO] LEO F. MULLIN, age 54. Director of Unicom and ComEd since
1995. Vice Chairman of Unicom and ComEd since December 1995.
President and Chief Operating Officer of First Chicago
Corporation from November 1993 to July 1995. Chairman,
President and Chief Executive Officer of American National
Bank and Trust Company of Chicago from April 1991 to November
1993. Member of Executive Committee. Other directorships:
Pittway Corporation and Inland Steel Industries, Inc.
[PHOTO] JAMES J. O'CONNOR, age 60. Director of Unicom since 1994 and
ComEd since 1978. Chairman of Unicom and ComEd. Chairman of
Executive Committee. Other directorships: Corning
Incorporated, First Chicago NBD Corporation, The First
National Bank of Chicago, Tribune Company and UAL Corporation.
[PHOTO] SAMUEL K. SKINNER, age 58. Director of Unicom since 1994 and
ComEd since 1993. President of Unicom and ComEd since February
1993. General Chairman of the Republican National Committee
from August 1992 to January 1993. Chief of Staff to the
President of the United States from December 1991 to August
1992. Member of Executive Committee. Other directorships:
ANTEC Corporation, The Broken Hill Proprietary Company
Limited, LTV Corporation and Union Pacific Resources Group
Inc.
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ADDITIONAL INFORMATION CONCERNING BOARD OF DIRECTORS
Compensation of Directors--Directors who are not employees of Unicom or any
of its subsidiaries receive an annual fee of $30,000 payable in shares of
Unicom Common Stock under the Unicom Corporation 1996 Directors' Fee Plan.
Such Directors also receive a fee of $1,000 for each Board and Committee
meeting they attend and an additional annual fee of $2,500 for each Committee
of the Board that they chair, which meeting and chair fees may, at the
election of the Director, be paid in shares of Unicom Common Stock under the
1996 Directors' Fee Plan. In the event that Directors also serve as directors
of ComEd, or as chairs of corresponding committees of ComEd, the aggregate
fees paid to such Directors in respect of such service to Unicom and ComEd do
not exceed the foregoing amounts. Directors who are full-time employees of
Unicom or any of its subsidiaries receive no fees for service on the Board of
Directors. Directors may defer the cash portion of their fees. Directors who
have never been an officer or an employee of Unicom or any of its
subsidiaries, and who have attained at least age 65 and completed the required
period of Board service (3 to 5 years as applicable, including service as a
director of ComEd), are eligible for retirement benefits upon retirement. Such
benefits are paid to the retired Director or a surviving spouse for a period
equal to such Director's years of service (including service as a director of
ComEd) in an amount per year equal to the annual retainer for Board members as
in effect at the time of payment. Effective January 1, 1997, the Board of
Directors terminated the further accrual of retirement benefits and offered
each Director the option to irrevocably elect, in lieu of amounts otherwise
payable, a lump sum amount payable upon retirement, either by delivery of
shares of Unicom Common Stock or in cash. In lieu of further accrual of
retirement benefits, non-employee Directors will receive a $6,200 increase in
their annual fee, effective June 1, 1997 and payable in shares of Unicom
Common Stock.
Audit Committee--The Audit Committee consists of five Directors who are not
employees of Unicom or any of its subsidiaries. Members serve three-year
staggered terms. It is the responsibility of the Audit Committee to review,
with Unicom's independent Auditors, Unicom's financial statements and the
scope and results of such Auditors' examinations, to monitor the internal
accounting controls and practices of Unicom, to review the Summary Annual
Report to shareholders and the financial statements set forth in Exhibit B,
and to recommend the appointment, subject to shareholder approval, of
independent Auditors. The Committee met three times during 1996. Members of
the Committee are Jean Allard (Chair), Edward A. Brennan, Edgar D. Jannotta,
George E. Johnson and Edward A. Mason.
Corporate Governance and Compensation Committee--The Corporate Governance
and Compensation Committee consists of all Directors who are not and have
never been employees of Unicom or any of its subsidiaries. Members serve one-
year terms. The Committee reviews management and executive compensation
programs and corporate governance matters and administers awards under
Unicom's Deferred Compensation Unit Plan, Long-Term Incentive Plan, and 1996
Directors' Fee Plan. The Committee met five times during 1996. Members of the
Committee are Frank A. Olson (Chairman), Jean Allard, Edward A. Brennan, James
W. Compton, Bruce DeMars, Sue L. Gin, Donald P. Jacobs, Edgar D. Jannotta,
George E. Johnson and Edward A. Mason.
Executive Committee--The Executive Committee consists of six Directors.
Members serve one-year terms. The remaining Directors constitute alternates to
serve temporarily, in rotation, in place of any member unable to serve. The
Committee has and may exercise all the authority of the Board of Directors
when the Board is not in session, subject to limitations set forth in the By-
Laws. The Committee did not meet during 1996. Members of the Committee are
James J. O'Connor (Chairman), James W. Compton, Sue L. Gin, George E. Johnson,
Leo F. Mullin and Samuel K. Skinner.
Finance Committee--The Finance Committee consists of five Directors. Members
serve one-year terms. The Committee reviews the scope and results of Unicom's
and its subsidiaries' financing program. The Committee met two times during
1996. Members of the Committee are James W. Compton (Chairman), Jean Allard,
Sue L. Gin, Donald P. Jacobs and Edgar D. Jannotta.
4
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Nominating Committee--The Nominating Committee consists of five Directors
who are not employees of Unicom or its subsidiaries. Members serve one-year
terms. The Committee reviews the qualifications of potential candidates and
proposes nominees for Director to the Board. The Committee will consider
nominees recommended by shareholders if such recommendations are submitted in
writing, accompanied by a description of the proposed nominee's qualifications
and other relevant biographical information and evidence of the consent of the
proposed nominee. The recommendations should be addressed to the Nominating
Committee, in care of the Secretary of Unicom. Nominations also may be
presented by shareholders at the annual meeting of shareholders. The Committee
met one time during 1996. Members of the Committee are Edgar D. Jannotta
(Chairman), Edward A. Brennan, James W. Compton, Donald P. Jacobs and Frank A.
Olson.
Attendance at Meetings--During 1996, there were seven meetings of Unicom's
Board of Directors. The average attendance of all incumbent Directors,
expressed as a percent of the aggregate total of Board and Board Committee
meetings in 1996, was 95%. Each incumbent Director attended at least 76% of
the meetings of Unicom's Board and Board Committees of which the Director was
a member.
During 1996, there were eight meetings of ComEd's Board of Directors. The
average attendance of all incumbent Directors, expressed as a percent of the
aggregate total of Board and Board Committee meetings in 1996, was 95%. Each
incumbent Director attended at least 79% of the meetings of ComEd's Board and
Board Committees of which the Director was a member.
5
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership, as of March 1, 1997, of
Unicom Common Stock held by persons known to Unicom to be the beneficial owner
of more than five percent of such stock and held by each of the Directors,
each of the executive officers named in the Summary Compensation Table on page
13 and Unicom's Directors and executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT OF
BENEFICIAL
OWNERSHIP PERCENT
OF COMMON OF
NAME STOCK CLASS
- ---- ---------- -------
<S> <C> <C>
Barrow, Hanley, Mewhinney & Strauss, Inc.............. 13,210,500(1) 6.11%
Jean Allard........................................... 1,963 *
Edward A. Brennan..................................... 1,781 *
James W. Compton...................................... 2,361 *
Bruce DeMars.......................................... 242 *
Sue L. Gin............................................ 5,167 *
Donald P. Jacobs...................................... 3,522 *
Edgar D. Jannotta..................................... 2,003 *
George E. Johnson..................................... 4,147 *
Edward A. Mason....................................... 2,489 *
Leo F. Mullin......................................... 20,091 *
James J. O'Connor..................................... 32,653(2)(3) *
Frank A. Olson........................................ 2,003 *
Samuel K. Skinner..................................... 34,782 *
Thomas J. Maiman...................................... 8,520(3) *
Michael J. Wallace.................................... 9,518(3)(4) *
Directors and executive officers as a group (35
persons)............................................. 213,580(3)(5) *
</TABLE>
- ---------------------
*Less than one percent
(1) Barrow, Hanley, Mewhinney & Strauss, Inc. is an investment advisor located
at One McKinney Plaza, 3232 McKinney Avenue--15th Floor, Dallas, Texas
75204-2429. According to their Schedule 13G dated February 13, 1997, they
share voting power with respect to 9,981,400 shares, have sole voting
power with respect to 3,229,100 shares and have sole dispositive power
with respect to all shares.
(2) Includes 1,670 shares owned by family members.
(3) Does not include shares of Unicom Common Stock that would have been
received by an officer under certain awards made pursuant to the Unicom
Corporation Long-Term Incentive Plan but for an election by such officer
to defer receipt of such shares. All such deferred shares were issued to a
trust held by an institutional investor. The Trustee has sole voting
rights with respect to such deferred shares. Dividends paid thereon are
either reinvested in Unicom Common Stock and held by such Trustee or are
paid to the officer making the deferral. As of March 1, 1997, the total
number of shares deferred by officers was 124,916. Deferrals by Messrs.
O'Connor, Maiman and Wallace totalled 41,340, 8,683 and 9,927 shares,
respectively.
(4) Includes 100 shares jointly owned with a family member, 189 shares owned
by a family member and 200 shares held in a custodial account for a family
member.
(5) Includes 1,979 shares owned by spouses, 200 shares held in a custodial
account for a family member, 1,399 shares jointly owned by spouse and in-
law, 1,859 shares owned by family members and 1,978 shares jointly owned
with family members. Such persons also beneficially own 70 shares of ComEd
Preference Stock, representing less than one percent of such class.
6
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires Unicom's
officers and directors and persons who own more than ten percent of a
registered class of Unicom equity securities ("Reporting Person") to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission. Reporting Persons are required by Securities and Exchange
Commission regulations to furnish Unicom with copies of all Section 16(a)
reports they file.
Based solely on its review of the copies of such forms received by it and
written representations from certain Reporting Persons, Unicom believes that
during fiscal 1996, its Reporting Persons complied with all filing
requirements applicable to them.
ITEM B: AMENDMENT AND RESTATEMENT OF
UNICOM CORPORATION LONG-TERM INCENTIVE PLAN
The second item to be considered by shareholders at the annual meeting will
be an amendment and restatement of the existing Unicom Corporation Long-Term
Incentive Plan. The Incentive Plan was originally approved by ComEd's
shareholders in May 1993. It was re-approved by ComEd in August 1994, as the
then sole shareholder of Unicom, in connection with its assumption by Unicom.
As explained below, it is being amended, and submitted to both Unicom and
ComEd shareholders for their consideration and approval, so that future grants
or awards under the Incentive Plan can qualify as "performance-based
compensation" under the Internal Revenue Code. Neither the number of shares
available for awards under the Incentive Plan, nor the types of awards allowed
under the Incentive Plan, is being changed. Subject to shareholder approval,
the amendments to the Incentive Plan establish the following new limits on
awards: first, the maximum aggregate number of shares of Common Stock
available for stock option and stock appreciation rights grants to any given
individual in any five consecutive years would be limited to 500,000; and
second, the maximum aggregate number of performance units that could be
granted to any given individual in any given year would be limited to 50,000.
The full text of the Incentive Plan, which will become effective upon Unicom
and ComEd shareholder approval, is attached as Exhibit A to this Proxy
Statement.
PURPOSES OF INCENTIVE PLAN AND AMENDMENTS
The purposes of the Incentive Plan are (i) to align the interests of the
Company's shareholders and recipients of awards by increasing the proprietary
interest of such recipients in the Company's growth and success and (ii) to
advance the interests of the Company by attracting and retaining well-
qualified persons by providing such persons with performance-related
incentives. Awards under the original plan have been, and awards under the
amended Incentive Plan are expected to be, structured to achieve these
purposes.
The Incentive Plan provides for a variety of awards that can be flexibly
administered in order to carry out its purposes. The Board believes this
authority will continue to permit the Company to keep pace with changing
developments in compensation programs and to make the Company competitive with
other companies that offer creative incentives to attract and keep employees.
The flexibility of the Incentive Plan will continue to allow the Company to
respond to changing circumstances such as changes in tax laws, accounting
rules, securities regulations and other rules regarding benefit plans. The
Incentive Plan grants the administrators flexibility in creating the terms and
restrictions deemed appropriate for particular awards as facts and
circumstances warrant.
As noted earlier, the purpose of the amendments, and the reason for
obtaining shareholder approval, is to assist awards under the Incentive Plan
in qualifying as performance-based compensation under the Internal Revenue
Code. Section 162(m) of the Internal Revenue Code, which became effective
after the adoption of the original plan in 1993, limits the deduction that may
be claimed for compensation paid to the Chairman and Chief Executive Officer
and the four other highest paid executive officers at the end of a given
calendar year to $1,000,000 per person, subject to
7
<PAGE>
certain exceptions. The rule applies to all types of compensation, including
amounts realized upon the exercise of stock options and the receipt of cash
and stock in payment of awards, unless the award and the plan under which they
are made qualify as "performance-based" under the Internal Revenue Code and
related regulations. The amendment and restatement of the original plan is
intended to allow future option, stock appreciation rights and performance
unit grants under the Incentive Plan to be eligible for treatment as
performance-based compensation under Section 162(m) of the Code.
PRINCIPAL TERMS OF INCENTIVE PLAN
Employees of the Company and its subsidiary companies (in which the Company
owns directly or indirectly a 51% or more voting equity interest) are eligible
to be selected to participate in the Incentive Plan. The selection of
participants from eligible persons is within the sole discretion of the
Corporate Governance and Compensation Committee of the Board of Directors.
Approximately 16,800 persons are eligible to participate in the Incentive
Plan.
The Incentive Plan authorizes the Corporate Governance and Compensation
Committee to make or grant the following types of awards singly, in
combination or in tandem:
Stock Options. Awards may consist of options to purchase shares of the
Company's Common Stock, which may be "incentive stock options" or non-
qualified stock options. Incentive stock options must meet the requirements
of Section 422 of the Internal Revenue Code and carry some potential tax
advantages for the recipient. Non-qualified stock options are not subject
to those requirements and do not carry such advantages. The Committee is
empowered to determine the number of shares subject to each option, the
manner and time of the option's exercise, and the exercise price per share
of stock subject to the option. The exercise price of an incentive stock
option may not be less than the fair market value of a share of Common
Stock on the date the option is granted. The Committee may establish any
exercise price for non-qualified stock options. The exercise price of an
option may, at the discretion of the Committee, be paid by a participant in
cash, shares of Common Stock owned by the participant, a combination
thereof, or such other consideration as the Committee may deem appropriate.
Stock Appreciation Rights. A stock appreciation right ("SAR") is a right
to receive a payment (either in cash, shares of Common Stock, or a
combination thereof) equal to the appreciation in market value of a stated
number of shares of Common Stock. The appreciation is measured by the
difference between a reference price stated in the SAR and the market value
of a share of Common Stock on the date of exercise of the SAR. A SAR may be
granted in tandem with a stock option ("Tandem SARs") or independent of a
stock option ("Non-tandem SARs"). A Tandem SAR may be granted either at the
time of the grant of the related stock option or, in the case of a non-
qualified stock option, at any time thereafter during the term of such
option. Upon the exercise of a stock option as to some or all of the shares
covered by the award, the related Tandem SAR is cancelled automatically to
the extent that the number of shares subject to the Tandem SAR exceeds the
number of remaining shares subject to the related stock option.
Stock Awards. Awards may also consist of grants of restricted or
unrestricted shares of Common Stock. Such awards will be subject to such
terms, conditions, restrictions and/or limitations, if any, as the
Committee deems appropriate, which may include restrictions on
transferability and continued employment.
Performance Shares. Performance shares are either shares of Common Stock
or units which are expressed in terms of Common Stock. Such awards are
contingent upon the attainment over a specified time period (as determined
by the Committee) of certain performance objectives. The performance
objectives to be achieved during a performance period and the measures of
whether and to what degree such objectives have been attained are also
determined by the Committee.
8
<PAGE>
Performance Units. Awards may also be granted in the form of "performance
units," which are units valued by reference to criteria chosen by the
Committee other than Common Stock. Performance units are similar to
performance shares in that they are contingently awarded based on the
attainment over a performance period of certain objectives. The length of
the performance period, the performance objectives to be achieved and the
measure of whether and to what degree such objectives have been achieved
are determined by the Committee. Amounts earned under performance units may
be paid in cash, shares of Common Stock or both.
Other Stock-Based Awards. The Committee is also authorized to grant to
participants awards of stock and other awards that are valued in whole or
in part by reference to, or are otherwise based on, Common Stock.
Awards may be paid in cash, shares of Common Stock, a combination of cash
and shares of Common Stock, or any other form of property, as the Committee
determines. If an award is granted in the form of a stock option, restricted
or unrestricted stock award, performance shares, or in the form of any other
stock-based award, the Committee may include as part of such award an
entitlement to receive dividends or dividend equivalents. At the discretion of
the Committee, the payment of performance shares or performance units may be
deferred by a participant. As noted in the first paragraph of this Item, the
amendments limit (i) the maximum aggregate number of shares of Common Stock
available for stock option and stock appreciation rights grants to 500,000 for
any given individual in any five consecutive years and (ii) the maximum
aggregate number of performance units that can be granted to 50,000 for any
given individual in any given year.
Awards are evidenced by written agreements containing the terms, conditions,
restrictions and/or limitations covering the grant of the award.
AVAILABLE SHARES; OUTSTANDING AWARDS
The Incentive Plan originally made available an aggregate of 4,000,000
shares of Common Stock for the grant of awards. Since then, 659,284 shares
have been issued in payment of awards under the Incentive Plan. There remain
3,340,716 shares available for satisfying currently outstanding awards
(including the stock options described in the next paragraph), and issuing
future awards. Shares covered by any stock option, stock appreciation right or
other stock award that expires or terminates unexercised or is cancelled or
forfeited become available again for awards under the Incentive Plan.
As of March 1, 1997, there were 1,190,000 shares covered by outstanding non-
qualified stock options. Each stock option entitles the holder to purchase
shares of the Company's Common Stock. The options become exercisable in equal
increments on the first three anniversaries of the grant date (subject to
acceleration in the event of a change in control of the Company), and expire
entirely on the tenth anniversary of the grant date to the extent not
previously exercised. Options to purchase an aggregate of 1,201,500 shares at
an exercise price of $25.50 per share were granted in July 1996 to employees,
including options to purchase 65,000, 50,000, 50,000, 22,500 and 15,000 shares
granted to Messrs. O'Connor, Mullin, Skinner, Maiman and Wallace,
respectively; and options to purchase 436,500 shares granted to all executive
officers as a group. Options to purchase an aggregate of 4,000 shares at an
exercise price of $25.50 per share were granted in December 1996 to two key
non-executive employees. Non-employee Directors are not eligible to
participate in the Incentive Plan. As of March 1, 1997, the market price of
the Common Stock was $22.50 per share, which was below the exercise price of
the outstanding options.
Benefits under the Incentive Plan with respect to 1997 and future years are
not determinable.
INCENTIVE PLAN ADMINISTRATION
The Incentive Plan is administered by the Corporate Governance and
Compensation Committee of the Board of Directors of the Company. No member of
the Committee is eligible to participate in the Incentive Plan. Among the
powers granted to the Committee are the authority to interpret the
9
<PAGE>
Incentive Plan, establish rules and regulations for its operation, select
employees of the Company and its subsidiaries to receive awards, and determine
the form, amount and other terms and conditions of awards. The Committee also
has the power to modify or waive restrictions on awards, to amend awards and
to grant extensions and accelerate awards.
AMENDMENT AND TERMINATION
The Board of Directors may amend the Incentive Plan at any time but may not,
without shareholder approval, adopt any amendment which would increase the
number of shares of Common Stock available for award under the Incentive Plan
or which would cause the Incentive Plan to lose its exemption under Securities
and Exchange Commission Regulation Section 240.16b-3.
The Incentive Plan has no fixed termination date but may be terminated by
the Board at any time. Termination of the Incentive Plan will not affect the
status of any awards outstanding at the date of termination.
FEDERAL TAX TREATMENT
Under current U.S. federal tax law, the following is a brief summary of the
U.S. federal income tax consequences generally arising with respect to awards
under the Incentive Plan.
A participant who is granted an incentive stock option will not recognize
any taxable income at the time of the grant of the option or at the time of
its exercise. If the participant does not dispose of the shares acquired
pursuant to an incentive stock option before the later of two years from the
date of grant and one year from the date of exercise, any gain or loss
realized on a subsequent disposition of the shares will be treated as a long-
term capital gain or loss, and the Company will not be entitled to any
deduction for federal income tax purposes.
A participant who is granted a non-qualified option will not recognize
taxable income at the time of grant, but will recognize taxable income at the
time of exercise equal to the difference between the exercise price of the
shares and the market value of the shares on the date of exercise. The Company
will be entitled to a tax deduction for the amount of income recognized by the
participant.
A participant who is granted a SAR will not recognize any taxable income at
the time of grant, but will recognize taxable income at the time of exercise
equal to the difference between the reference price of the shares and the
market price of the shares on the date of exercise, and the Company will be
entitled to a tax deduction for the amount of income recognized by the
participant.
A participant who has been granted either performance units or performance
shares will not recognize taxable income at the time of the grant. A
participant will recognize ordinary income at the time the award is paid equal
to the amount of cash paid or the value of shares delivered, and the Company
will be entitled to a tax deduction for the amount of income recognized by the
participant.
A participant who has been granted an award of restricted shares of Common
Stock will not recognize taxable income at the time of the grant, and the
Company will not be entitled to a tax deduction at the time of the grant,
unless the participant makes an election to be taxed at the time of the award.
When the restrictions lapse, the participant will recognize taxable income in
an amount equal to the excess of the fair market value of the shares at such
time over the amount, if any, paid for such shares. The Company will be
entitled to a corresponding tax deduction.
A participant who has been granted an unrestricted stock award will
recognize taxable income at the time of grant in an amount equal to the then
fair market value of the Common Stock awarded. The Company will receive a
corresponding tax deduction.
10
<PAGE>
ITEM C: MATERIAL TERMS OF PERFORMANCE-BASED
INCENTIVES IN THE LONG-TERM PERFORMANCE UNIT AWARDS
UNDER UNICOM'S LONG-TERM INCENTIVE PLAN
The third item to be considered by shareholders at the annual meeting will
be the approval of the material terms of certain performance unit awards to be
made under the Unicom Corporation Long-Term Incentive Plan. The Corporate
Governance and Compensation Committee has annually granted to certain
management-level employees a long-term performance unit award whose payment is
based upon a cumulative total shareholder return performance comparison of
Unicom Common Stock to the common stock of the other companies comprising the
Dow Jones Utility Stock Index over a three-year period. Such employees include
persons subject to the compensation deduction limitations of Section 162(m) of
the Internal Revenue Code. As noted previously, the deduction limitations do
not apply to certain categories of performance-based compensation grants which
meet the applicable statutory requirements. Such requirements include
obtaining shareholder approval of the "material terms" of the grants. Those
"material terms" are (i) the individuals eligible to receive compensation
under the award, (ii) the business criteria on which the performance
incentives under the award are based and (iii) the maximum amount of
compensation to be paid or the formula by which the amount of individual
awards will be determined under the award.
ELIGIBLE PARTICIPANTS
Recipients of the long-term performance unit awards would include the
Company's Chief Executive Officer and its four most highly paid officers
(other than the Chief Executive Officer). Previous and currently outstanding
long-term performance unit awards have included so-called "group level" and
"officer level" employees of ComEd and Commonwealth Edison Company of Indiana,
Inc., representing an aggregate of approximately 325 recipients. It is
expected that future awards would cover the aforementioned recipients and, if
the Corporate Governance and Compensation Committee so determines, other key
employees of the Company and its subsidiaries.
BUSINESS CRITERIA AND FORMULA FOR AWARDS
Under each long-term performance unit award, a participant would be entitled
to receive a payment based on the cumulative total shareholder return on the
Company's Common Stock relative to the common stock of the other companies
comprising the Dow Jones Utility Stock Index over a three-year performance
period. Cumulative total shareholder return is calculated by dividing (1) the
sum of the cumulative amount of dividends during the three-year period
(assuming that those dividends are reinvested) plus the difference in the
share price between the beginning and end of the three-year period, by (2) the
share price at the beginning of the three-year period. The Company's
performance relative to the other companies in the public utility index must
equal or exceed the 25th percentile for any award to be earned by a
participant, and must equal or exceed the 90th percentile to earn the maximum
payout.
Payout amounts under the awards are determined based upon a participant's
salary and the aforementioned relative performance. Specifically, a portion of
base salary is divided by the closing price of Unicom Common Stock as reported
in The Wall Street Journal as New York Stock Exchange Composite Transactions
on the last business day immediately preceding the commencement of the
performance period to determine the number of performance units that the
participant will initially receive. The total number of performance units
which may be granted to such participant in any given year under the Incentive
Plan may not exceed 50,000. The initial number is then adjusted based upon the
performance of Unicom Common Stock relative to the other companies comprising
the Dow Jones Utility Stock Index over a three-year performance period. At the
minimum performance level (i.e., the 25th percentile), that initial number is
multiplied by one-half; and at the maximum performance level (i.e., the 90th
percentile), it is multiplied by two. The dollar value of the payout is then
determined by multiplying the performance adjusted number of performance units
by the average closing price of
11
<PAGE>
Unicom Common Stock as reported in The Wall Street Journal as New York Stock
Exchange Composite Transactions during the calendar quarter ending on the last
day of the performance period.
Payments made to the named executive officers under prior long-term
performance unit awards are reflected in the "Payouts" column under the "Long-
Term Compensation" heading in the Summary Compensation Table.
ITEM D: APPROVAL OF AUDITORS
Subject to approval of the shareholders, the Board of Directors of Unicom
has appointed Arthur Andersen LLP, independent public accountants, as Auditors
to examine the annual and quarterly consolidated financial statements of
Unicom and its subsidiary companies for 1997. The shareholders will be asked
at the annual meeting to approve such appointment. The firm of Arthur Andersen
LLP has audited the accounts of Unicom since its inception in 1994, and ComEd
since 1932. A representative of Arthur Andersen LLP will be present at the
meeting to make a statement if such representative so desires, and to respond
to shareholders' questions.
ITEM E: SHAREHOLDER PROPOSAL
The last item to be considered by shareholders at the annual meeting will be
a shareholder proposal regarding incentive compensation. Mr. Dale L. Harshman,
who owns 500 shares of Unicom Common Stock, has notified the Company that he
intends to submit the following proposal at the annual meeting:
"The shareholders request that the Long Term Incentive Plan and bonuses
be modified so that under future executive compensation arrangements the
value of stock and or cash paid under such plans shall not exceed Two
Hundred Fifty Thousand Dollars ($250,000.00) per calendar (or fiscal) year
to any one executive."
The proponent has submitted the following statement in support of the
proposal:
"Current executive compensation has grown at a rate greatly exceeding the
growth rate of corporate profits, earnings per share, dividends, total
returns to shareholders or inflation. Top executives are handsomely
compensated with ample salaries, retirement plans, perks and other
compensation. Payments of up to $250,000.00 should adequately motivate
senior executives to perform the services expected of them. I recommend a
vote for this plan."
The address of Mr. Harshman will be supplied orally or in writing promptly
upon request directed to David A. Scholz, Secretary, Unicom Corporation, 10
South Dearborn Street, Post Office Box A-3005, Chicago, IL 60690-3005,
telephone (312) 394-2899.
Following is a statement of the Board of Directors in opposition to the
proposal:
"The Board of Directors opposes arbitrarily limiting the amounts of long-
term and other incentive compensation. In order to attract and retain
highly skilled managers, the Board believes that the Company must offer
compensation and benefits that are competitive with those offered by other
companies. The Board further believes that the Company would encounter
difficulty in competing for managerial talent if it were restricted in the
amounts or types of compensation that it could offer to prospective
management candidates.
"The Company's incentive compensation programs provide a mechanism for
the Company to offer competitive compensation while linking pay to
performance. A significant portion of each executive's compensation depends
on corporate results and business unit performance. This linkage enables
the Company to align the interests of executives with those of shareholders
while providing sufficient incentives to draw top executive leadership for
the Company. In addition, a large portion of the Company's incentive
compensation is currently paid in the form of shares of Unicom Common
Stock, further strengthening alignment of the interests of shareholders and
executives. The imposition of an arbitrary limit on incentive compensation
would deprive the Company of the full benefit of this powerful compensation
tool. Significantly, a limit on incentive
12
<PAGE>
pay might result in increased base compensation, since the Company could
not realistically hope to compete for top managerial talent by offering
less overall pay.
"The Board does not believe it would be in the best interests of the
Company or its shareholders to impose an arbitrary limit on incentive
compensation payouts. By its very nature, incentive compensation is
intended to reward executives for achieving goals considered to be
important to the Company. As the electric utility industry becomes more
open to competition, it will be all the more important for the Company to
retain maximum flexibility in its compensation programs so as to enable it
to attract and retain skilled executives and to provide incentives for the
achievement of corporate goals."
EXECUTIVE COMPENSATION
The following table sets forth certain information relating to the
compensation during the past three calendar years of those persons who were,
at December 31, 1996, the Chief Executive Officer and the other four most
highly compensated executive officers of Unicom or ComEd.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- --------------------
AWARDS PAYOUTS
OTHER ------------ -------
ANNUAL SECURITIES ALL OTHER
COMPEN- UNDERLYING LTIP COMPEN-
NAME AND PRINCIPAL SALARY BONUS SATION OPTIONS/SARS PAYOUTS SATION(1)
POSITION YEAR $ $ $ # $ $
------------------ ---- ------- ------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
James J. O'Connor 1996 844,926 528,079 0 65,000 324,956 101,174
Chairman (Chief 1995 826,926 826,926 0 -- 452,296 98,102
Executive Officer) 1994 773,536 485,106 0 -- 0 93,120
Unicom and ComEd
Samuel K. Skinner 1996 589,000 368,125 0 50,000 232,994 102,048
President 1995 580,000 580,000 0 -- 324,297 105,828
Unicom and ComEd 1994 543,748 602,338 0 -- 0 87,969
Leo F. Mullin(2) 1996 580,000 362,500 0 50,000 91,849 117,287
Vice Chairman 1995 35,508 275,000 0 -- 15,156 1,953
Unicom and ComEd
Thomas J. Maiman 1996 336,785 105,639 0 22,500 90,981 24,506
Executive Vice 1995 279,055 128,445 0 -- 126,633 20,265
President 1994 267,516 155,862 0 -- 0 19,609
ComEd
Michael J. Wallace 1996 308,440 94,104 0 15,000 87,847 16,488
Senior Vice President 1995 277,440 93,021 0 -- 122,271 13,469
ComEd 1994 269,689 123,803 0 -- 0 12,919
</TABLE>
- ---------------------
(1) Amounts shown include matching contributions made by ComEd pursuant to the
ComEd Employee Savings and Investment Plan ("ESIP"), matching
contributions made by ComEd pursuant to the ComEd Excess Benefit Savings
Plan and premiums and administrative service fees paid by ComEd on behalf
of the named individuals under various group life insurance plans. For the
year 1996, contributions made to the ESIP amounted to $6,648, $3,781,
$6,993, $6,308 and $5,497 on behalf of Messrs. O'Connor, Skinner, Mullin,
Maiman and Wallace, respectively. Contributions made to the ComEd Excess
Benefit Savings Plan during 1996 totaled $23,802, $20,796, $18,288, $7,127
and $6,900 on behalf of Messrs. O'Connor, Skinner, Mullin, Maiman and
Wallace, respectively. Premiums and administrative service fees paid
during 1996 for Split
13
<PAGE>
Dollar Life, Accidental Death and Travel Accident insurance policies for
Messrs. O'Connor, Skinner, Mullin, Maiman and Wallace, respectively, are as
follows: $70,323, $365 and $36; $77,191, $255 and $25; $91,727, $254 and
$25; $10,894, $161 and $16; and $3,944, $134 and $13. ComEd is entitled to
recover the premiums and administrative service fees from any amounts paid
by the insurer on such Split Dollar Life policies and has retained a
collateral interest in each policy to the extent of the premiums and
administrative service fees paid with respect to such policy.
(2) Mr. Mullin became an executive officer of Unicom and ComEd in December
1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE GRANT DATE
OPTIONS/SARS GRANTED TO OR BASE PRESENT
GRANTED EMPLOYEES IN PRICE EXPIRATION VALUE
NAME #(1) FISCAL YEAR $/SHARE DATE $(2)
---- ------------ ------------ -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
James J. O'Connor (CEO). 65,000 5.39 25.50 7/17/06 243,100
Samuel K. Skinner....... 50,000 4.15 25.50 7/17/06 187,000
Leo F. Mullin........... 50,000 4.15 25.50 7/17/06 187,000
Thomas J. Maiman........ 22,500 1.87 25.50 7/17/06 84,150
Michael J. Wallace...... 15,000 1.24 25.50 7/17/06 56,100
</TABLE>
- --------------------
(1) Each option becomes exercisable in equal annual increments on the first,
second and third anniversaries of the July 1996 grant date, subject to
acceleration in the event that a change in control of the Company occurs.
The options do not include any stock appreciation rights.
(2) The "grant date present value" is based upon the Black-Scholes option-
pricing model. The actual value, if any, an executive may realize upon
exercise of the option will depend on the excess of the stock price over
the exercise price on the date the option is exercised. Consequently,
there is no assurance the value realized by an executive will be at or
near the value estimated by the Black-Scholes model. The principal
assumptions incorporated into the valuation model by the Company are as
follows: (i) expected time to exercise of seven years, (ii) dividend yield
rate of 6.3%, (iii) risk-free interest rate of 6.64% and (iv) expected
volatility of 20.98%.
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE ESTIMATED FUTURE PAYOUTS
OR OTHER UNDER
NUMBER PERIOD NON-STOCK PRICE-BASED PLANS
OF SHARES, UNTIL -----------------------------
UNITS OR MATURATION THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS(1) OR PAYOUT NUMBER NUMBER NUMBER
---- --------------- ----------- --------- --------- ---------
(NUMBER OF PERFORMANCE UNITS)
<S> <C> <C> <C> <C> <C>
James J. O'Connor (CEO). 16,589.87 3 years(2) 8,294.94 16,589.87 33,179.74
Samuel K. Skinner....... 9,275.58 3 years(2) 4,637.79 9,275.58 18,551.16
Leo F. Mullin........... 9,275.58 3 years(2) 4,637.79 9,275.58 18,551.16
Thomas J. Maiman........ 5,502.45 3 years(2) 2,751.23 5,502.45 11,004.90
Michael J. Wallace...... 4,089.55 3 years(2) 2,044.78 4,089.55 8,179.10
</TABLE>
- --------------------
(1) Long-term performance unit awards were initiated during 1994 to executive
and group level employees under the Unicom Corporation Long-Term Incentive
Plan. Under the awards described in the table, the number of units
initially awarded to a participant is determined by dividing a portion of
base salary (including income from current compensation units under
14
<PAGE>
Unicom's and ComEd's Deferred Compensation Unit Plans) (such portion being
50% for Mr. O'Connor, 40% each for Messrs. Skinner, Mullin and Maiman and
35% for Mr. Wallace) by $27.125. Payouts are based on the cumulative total
shareholder return on Unicom Common Stock (assuming reinvestment of
dividends) relative to that of the other companies comprising the Dow Jones
Utility Stock Index over a three-year performance period ending December
31, 1999. The dollar value of a payout is determined by multiplying the
number of units applicable to the level of performance achieved by the
average closing price of Unicom Common Stock as reported in The Wall Street
Journal as New York Stock Exchange Composite Transactions during the
calendar quarter ending on December 31, 1999. Payments are to be made half
in cash and half in the form of unrestricted shares of Unicom Common Stock.
Effective with awards payable in 1996, a participant may elect to defer
receipt of up to 100% of the total award (net of applicable taxes) under
the Unicom Corporation Stock Bonus Deferral Plan and receive, after such
deferral, the deferred amount in the form of unrestricted shares of Unicom
Common Stock. Notwithstanding the foregoing, no payouts are earned or made
if the relative cumulative total shareholder return on Unicom Common Stock
is lower than the 25th percentile; and the highest level of payout is
reached when such relative return equals or exceeds the 90th percentile.
(2) Three-year period ending December 31, 1999.
SERVICE ANNUITY SYSTEM PLAN
The following table sets forth the annual retirement benefits payable under
ComEd's Service Annuity System Plan (including payments under a supplemental
management retirement plan) to employees who retire at age 65 at stated levels
of compensation and years of service at retirement (in 1997).
<TABLE>
<CAPTION>
PENSION PLAN TABLE
- --------------------------------------------------------------------------------------
HIGHEST ANNUAL NORMAL RETIREMENT BENEFITS AFTER SPECIFIED YEARS OF
4-YEAR SERVICE*
AVERAGE -------------------------------------------------------------
EARNINGS 15 20 25 30 35 40
-------- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ 100,000.............. $ 35,369 $ 45,905 $ 55,800 $ 65,217 $ 74,275 $ 83,066
200,000.............. 70,738 91,810 111,601 130,433 148,550 166,131
300,000.............. 106,107 137,715 167,401 195,650 222,825 249,197
400,000.............. 141,475 183,620 223,201 260,866 297,100 332,263
500,000.............. 176,844 229,526 279,002 326,083 371,374 415,328
600,000.............. 212,213 275,431 334,802 391,300 445,649 498,394
700,000.............. 247,582 321,336 390,603 456,516 519,924 581,460
800,000.............. 282,951 367,241 446,403 521,733 594,199 664,526
900,000.............. 318,320 413,146 502,203 586,949 668,474 747,591
1,000,000.............. 353,689 459,051 558,004 652,166 742,749 830,657
1,100,000.............. 389,058 504,956 613,804 717,382 817,024 913,723
1,200,000.............. 424,426 550,861 669,604 782,599 891,299 996,788
1,300,000.............. 459,795 596,767 725,405 847,816 965,573 1,079,854
1,400,000.............. 495,164 642,672 781,205 913,032 1,039,848 1,162,920
1,500,000.............. 530,533 688,577 837,005 978,249 1,114,123 1,245,985
1,600,000.............. 565,902 734,482 892,806 1,043,465 1,188,398 1,329,051
1,700,000.............. 601,271 780,387 948,606 1,108,682 1,262,673 1,412,117
1,800,000.............. 636,640 826,292 1,004,406 1,173,899 1,336,948 1,495,183
1,900,000.............. 672,009 872,197 1,060,207 1,239,115 1,411,223 1,578,248
2,000,000.............. 707,377 918,102 1,116,007 1,304,332 1,485,498 1,661,314
</TABLE>
- --------------------
* An employee may elect a marital annuity for a surviving spouse which would
reduce the employee's normal retirement benefits. The amounts shown reflect
certain assumptions as to total earnings, but do not reflect any reduction
for Social Security benefits.
15
<PAGE>
Service Annuity System Plan--ComEd maintains a non-contributory Service
Annuity System Plan for all regular employees of ComEd. The Plan provides
benefits upon retirement at age 65 which are based upon years of credited
service and percentages of the employee's highest consecutive four-year
average annual base pay, which includes basic compensation and certain
incentive pay. An employee with at least 10 years of service may retire prior
to attaining age 65 (but not prior to age 50) and will receive reduced
benefits if retirement is prior to age 60. A non-executive employee may work
beyond age 65 with additional benefits accruing for earnings and service after
age 65. Contributions to the Plan by ComEd are based upon actuarial
determinations 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. Compensation used in the computation
of annual retirement benefits under the Plan is substantially equivalent to
the amounts shown in the "Salary" and "Bonus" columns under the "Annual
Compensation" heading of the Summary Compensation Table. The compensation used
in the computation of annual retirement benefits under the Plan is limited by
the Internal Revenue Code as of January 1, 1997 to $160,000 (which number is
subject to adjustment for increases in the cost of living) for any one
employee. Any reduction in the annual retirement benefits payable to
management employees under the Plan as a result of any limitations imposed by
the Internal Revenue Code is restored under a supplemental management
retirement plan maintained by ComEd. Thus, annual retirement benefits, as set
forth in the Pension Plan Table above, are based on the amounts shown in the
"Salary" and "Bonus" columns under the "Annual Compensation" heading of the
Summary Compensation Table, without limitation as a result of the application
of the provisions of the Internal Revenue Code. Credited years of service
under the Plan for the persons named in the Summary Compensation Table are as
follows: James J. O'Connor, 33 years; Leo F. Mullin, 1 year; Samuel K.
Skinner, 4 years; Thomas J. Maiman, 31 years; and Michael J. Wallace, 22
years.
EMPLOYMENT AGREEMENTS
ComEd has an agreement with Samuel K. Skinner providing for an initial 1993
base salary of $490,000 per annum, an unfunded supplemental retirement benefit
and credit for ten years of service for purposes of determining eligibility
for certain post-retirement health care benefits. The supplemental retirement
benefit does not vest until the completion of five years of employment, unless
ComEd terminates Mr. Skinner's employment for reasons other than fraud or
willful misconduct; however, payment of a surviving spouse benefit will be
made if Mr. Skinner dies within such five years. The formula underlying the
supplemental retirement benefit provides a benefit, together with any benefits
payable under the Service Annuity System Plan and a social security
supplement, equal to one-third of Mr. Skinner's highest annual earnings during
the preceding five years, after five years of service, and increasing ratably
annually to one-half of such annual earnings after ten years. The agreement
also provides for a severance payment equal to two years of base salary,
payable over three years, and a three-year continuation of health and life
insurance benefits in the event that Mr. Skinner's employment is terminated by
ComEd for reasons other than death, fraud or willful misconduct. The severance
payment is subject to reduction to the extent that Mr. Skinner receives
compensation from another full-time employer during the payment period.
ComEd entered into an employment agreement with Leo F. Mullin, pursuant to
which he became Vice-Chairman of Unicom and ComEd on December 1, 1995. The
agreement provides that ComEd will pay Mr. Mullin an initial base salary of
$577,000 per annum. In addition, Mr. Mullin received a bonus upon commencement
of his duties of $275,000. The agreement provides that he will receive bonuses
on the same basis as any annual bonus paid to Unicom's and ComEd's Chairman or
President, or both, as determined by the Board of Directors. For calendar year
1996, Mr. Mullin was guaranteed a bonus of at least 50% of his base salary. He
was also awarded performance units making him eligible for payments under the
Unicom Corporation Long-Term Incentive Plan. Mr. Mullin's agreement also
provides for an unfunded supplemental retirement benefit pursuant to which he
will receive the annual retirement benefit that would have been payable under
the Service Annuity
16
<PAGE>
System Plan if he were to retire at age 60 with 20 years of service plus one
additional year for each year of actual employment. No such benefit is payable
until Mr. Mullin has completed five years of service, unless ComEd terminates
his employment for reasons other than death, fraud or willful misconduct or
Mr. Mullin terminates his employment as a result of certain adverse actions
taken by ComEd; however, payment of a surviving spouse benefit will be made if
Mr. Mullin dies within such five-year period. The agreement further provides
for a severance payment equal to two years of his then-current base salary and
most recent annual bonus, payable over three years, and a three-year
continuation of health and life insurance benefits in the event that his
employment is terminated by ComEd for reasons other than death, fraud or
willful misconduct or in the event that he terminates his employment because
ComEd has reduced or failed to pay his salary or takes certain other actions.
The severance payment is subject to reduction in the event that Mr. Mullin
accepts other full-time employment during the payment period.
CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION
The Corporate Governance and Compensation Committee of the Board of
Directors of Unicom Corporation ("Unicom") and Commonwealth Edison Company
("ComEd") have furnished the following report on executive compensation:
Introduction. It is the policy of the Committee to compensate executive
officers based on their responsibilities, their achievement of annual goals
and the Company's annual and long-term performance. The Committee believes
that compensation paid should be appropriate in relation to the financial
performance of the Company and should be sufficient to enable the Company to
attract and retain individuals possessing the talents required for the
Company's long-term successful performance. The Committee also believes that
the incentive compensation performance goals for executive management should
be based on factors over which management has significant control and which
are important to the Company's long-term success.
In 1996, the major components of executive officer compensation were base
salary, consisting of cash salary and current compensation unit income, and
incentive compensation related to awards under the Unicom Corporation Long-
Term Incentive Plan (the "Incentive Plan").
Base Salary. The process of determining the officers' base salary begins
with a review of the salary levels for various comparable executive positions
at twenty-three of the largest companies in the electric utility industry as
published in the 1995 Edison Electric Institute Executive Compensation Survey.
The Committee also considers the median levels of base salary for various
comparable positions among companies in the utility industry and in industry
generally. This information is used as a reference point due to the similarity
of the basic duties and responsibilities between such positions and positions
within the Company. Judgment is then applied to recognize differences in the
organization structure and responsibilities of executive officers of the
Company, in the size and complexity of the Company's operations, and in the
regulatory environment and competitive challenges faced by the Company. After
considering these various factors, the Committee approved, in December 1995,
base salary ranges for 1996 which were generally about 3% above 1995 levels.
The base salary of each officer is set within the applicable range based on
a largely subjective assessment of the particular responsibilities and
performance of such officer following, in the case of officers other than the
Chairman, discussions with the Chairman regarding his recommendations. The
length of service and level of experience of each officer in his or her area
of responsibility are also considered. For 1996, the Committee approved
increases in cash salary for the executive officers averaging 3.2% of base
salary. Percentage increases for individual executive officers varied and were
structured, in part, to recognize changes in industry levels and to reflect
the performance and contributions of the individual officers.
In 1996, most executive officers held current compensation units. Each such
unit entitles the holder to receive current income equal to the dividends paid
on one share of Unicom common stock.
17
<PAGE>
During 1996, the Committee awarded compensation units to three recently hired
executive officers in an effort to provide a salary enhancement for these
individuals in relation to competitive positions elsewhere.
With respect to compensation comparisons with other companies, it should be
noted that because of the differences, discussed above, between the Company
and others in the group of twenty-three large utilities that participated in
the 1995 Edison Electric Institute Executive Compensation Survey, that group
is not used in the performance comparisons shown on page 20. The Dow Jones
Utility Stock Index, a well-known and widely-followed utility index comprising
a broader array of utility companies (including Unicom and nine of the other
large utilities in the Edison Electric Institute Survey), is used for those
comparisons. A comparison to the companies composing this Index is also used
for measuring performance for purposes of one of the incentive compensation
awards discussed below.
Incentive Compensation Awards. The other component of executive compensation
is incentive compensation earned under awards made by the Committee under the
Incentive Plan. Such awards included an annual incentive award, a longer-term
award covering a three-year performance period and stock options.
Annual incentive awards were established to encourage the achievement of
certain corporate and business unit goals during 1996. Award payouts were also
contingent on maintaining quarterly cash dividends of at least 40c per share,
limiting operation and maintenance expenses and capital expenditures to
specified levels, and achieving a minimum level of earnings per share. The
potential payouts were tied to base salary and varied depending on management
level and level of goal achievement. The varying payouts were established
based on subjective judgment with respect to the appropriate level of
incentive and award, considering degree of difficulty of the goals and degree
of responsibility of the different levels of management for achievement of the
goals.
With respect to management employees other than Messrs. O'Connor, Mullin and
Skinner, corporate goals were established for the annual incentive award with
respect to Unicom's earnings per share and the amount by which ComEd's
operation and maintenance expenses were below budget. For purposes of
measuring achievement of such goals, the Committee provided for the exclusion
of certain items on grounds that it would not be appropriate to allow the
effects of such items to affect the measure of performance. As a result of
these adjustments, the earnings per share goals ranged from $3.24, to achieve
the minimum award level, to $3.39, to achieve the maximum award level, and the
operation and maintenance expense goals ranged from $1,998 million to $1,912
million, respectively. As so adjusted for purposes of the award, earnings per
share were $3.33 and operation and maintenance expenses were $2,019 million.
With respect to Messrs. O'Connor, Mullin and Skinner, the annual incentive
award was based entirely upon the achievement of earnings per share goals for
Unicom. The earnings per share goals were set at $3.24, to achieve the minimum
award level, and $3.39, to achieve the maximum award level, and earnings were
adjusted in the same manner as described in the preceding paragraph. The level
of Unicom earnings as determined under this award was $3.33 per share.
Longer-term incentive awards were initiated in 1994 to encourage an interest
in longer-term performance by keying incentive payouts to the total return
performance of Unicom common stock in relation to that of the other companies
constituting the Dow Jones Utility Stock Index over three-year performance
periods. Payments on such awards, as a percentage of base salary, increase
with the executive's management level. For the three-year performance period
that ended with 1996, Unicom stock performance was slightly above the 43rd
percentile among the stocks constituting the Dow Jones Utility Stock Index.
Resulting payments are included in the "Payouts" column under the "Long-Term
Compensation" heading in the Summary Compensation Table.
18
<PAGE>
Stock option awards were initiated in 1996 to reward and motivate the
Company's management to increase long-term shareholder value. The options
grant the holders the opportunity to purchase shares of the Company's Common
Stock at an exercise price equal to the market value on the date of grant, and
become exercisable in equal increments over a three-year period (subject to
acceleration in the event of a change in control of the Company). The options
have a maximum term of ten years. Committee decisions with respect to the size
of option grants were based on an evaluation of competitive compensation data
drawn from eleven other utilities and ten non-utility companies similar to the
Company as well as the option recipient's base salary, management level and
performance. Option grants are made generally to key employees who are
expected to contribute materially to the Company's success.
Compensation of the Chief Executive Officer. The Committee's assessment of
the Chairman and Chief Executive Officer's personal performance at the outset
of 1996, based upon a non-quantifiable evaluation of his leadership,
achievements and contributions to the Company during 1995, was very favorable.
Under Mr. O'Connor's leadership, the Company's financial performance in 1995
improved significantly over 1994 as evidenced by an increase in earnings per
share to $2.98 in 1995 from $1.66 in 1994. Notwithstanding this assessment,
and based on an assessment of competitive pay and in view of the Committee's
focus on incentive compensation, Mr. O'Connor's cash salary for 1996 remained
unchanged from its level in 1995. The Chairman's total base salary in 1996 was
$844,926 ($700,000 cash salary plus $144,926 in current compensation unit
income). The Committee's objective in structuring the Chairman's incentive
compensation was to encourage both short-term and longer-term actions to
benefit earnings per share and the cumulative return on Unicom's common stock.
The elements of these awards are described above.
The Chairman's total compensation (cash salary, compensation unit income,
and incentive compensation) was $1,697,961 for 1996. The Committee believes,
based on available information, that both the absolute and relative levels of
compensation for 1996 were fully appropriate considering the size and
complexity of the Company's operations (the Company is one of the largest in
the comparison group of twenty-three electric utility companies), and also
considering the Committee's very favorable assessment of the Chairman's
performance in providing leadership to the Company, which achieved improved
financial performance in 1996. Earnings per share rose to $3.09 in 1996 from
$2.98 in 1995, and the improved performance resulted in an increase of $335
million in shareholders' equity.
Internal Revenue Code Section 162(m) Considerations. Section 162(m) of the
Internal Revenue Code provides that executive compensation in excess of $1
million will not be deductible for purposes of corporate income taxes unless
it is performance-based compensation and is paid pursuant to a plan meeting
certain requirements of the Code. As noted in previous reports, the Committee
intends to continue reliance on performance-based compensation programs. Such
programs will be designed to fulfill, in the best possible manner, future
corporate business objectives. To the extent consistent with this goal, the
Committee currently anticipates that such programs will also be designed to
satisfy the requirements of Section 162(m) with respect to the deductibility
of compensation paid. The Committee believes that executive compensation
actually paid in respect of 1996 was deductible.
Corporate Governance and Compensation Committee
Jean Allard Donald P. Jacobs
Edward A. Brennan Edgar D. Jannotta
James W. Compton George E. Johnson
Bruce DeMars Edward A. Mason
Sue L. Gin Frank A. Olson
19
<PAGE>
SHAREHOLDER RETURN PERFORMANCE
Set forth below is a line graph comparing the quarterly percentage change in
the cumulative total shareholder return on Unicom Common Stock ("UCM") against
the cumulative total return of the S&P 500 Composite Stock Index and the Dow
Jones Utility Stock Index for the five-year period ending December 31, 1996.
CUMULATIVE PERFORMANCE SINCE JANUARY 1, 1992
ASSUMING REINVESTMENT OF DIVIDENDS
(JANUARY 1, 1992 = $100)
<TABLE>
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG UNICOM COMMON STOCK, S&P 500 INDEX AND DOW JONES UTILITY INDEX
<CAPTION>
Measurement Period UNICOM S&P DOW JONES
(Fiscal Year Covered) COMMON STK* 500 INDEX UTILITY INDEX
- --------------------- ----------- --------- -------------
<S> <C> <C> <C>
Measurement Pt-
1/1/92 $100 $100 $100
FYE 12/31/92 $ 63 $108 $104
FYE 12/31/93 $ 81 $118 $114
FYE 12/31/94 $ 74 $120 $ 97
FYE 12/31/95 $107 $165 $128
FYE 12/31/96 $ 94 $203 $140
</TABLE>
- ---------------------
* Performance shown for Unicom Common Stock on and after September
1, 1994 and for ComEd common stock prior to that date.
20
<PAGE>
VOTING
Shareholders of record on the books of Unicom at 4:00 P.M., Chicago time, on
March 31, 1997, will be entitled to vote at the annual meeting. Unicom had
outstanding on March 31, 1997, 216,201,387 shares of Common Stock. Each share
entitles the holder to one vote on each matter submitted to a vote at the
meeting, except that in the election of Directors each shareholder has the
right to vote the number of shares owned by such shareholder for as many
persons as there are Directors to be elected, or to cumulate such votes and
give one candidate as many votes as shall equal the number of Directors to be
elected multiplied by the number of such shares or to distribute such
cumulative votes in any proportion among any number of candidates. The holders
of a majority of the outstanding shares entitled to vote on a particular
matter and represented in person or by proxy will constitute a quorum for the
consideration of such matter at the meeting.
The shares represented by the proxy of each shareholder include shares owned
by such shareholder and shares credited to such shareholder's account under
the Dividend Reinvestment and Stock Purchase Plan and the Employee Stock
Purchase Plan.
The shares represented by properly executed and unrevoked proxies received
in the accompanying form in time for the meeting will be voted at the meeting
and will be voted as directed in the proxies. With respect to the election of
Directors, a shareholder may mark the accompanying form of proxy to (i) vote
for the election of all ten nominees named in this Proxy Statement as
Directors, (ii) withhold authority to vote for all such Director nominees or
(iii) vote for the election of all such Director nominees other than any
nominee or nominees with respect to whom the shareholder withholds authority
to vote. Assuming that a quorum is present at the meeting, the ten persons
receiving the greatest number of votes shall be elected as Directors. The
proxy holders will cumulate votes for shares represented by proxies only if a
shareholder gives them specific written instructions to do so.
With respect to Item B (the amendment and restatement of the Unicom
Corporation Long-Term Incentive Plan), Item C (the material terms of long-term
performance unit awards), Item D (the appointment of Auditors) and Item E (the
shareholder proposal), a shareholder may mark the accompanying form of proxy
to (i) vote for the matter, (ii) vote against the matter or (iii) abstain from
voting on the matter. Assuming that a quorum is present at the meeting, the
affirmative vote of a majority of the shares of Common Stock represented at
the meeting and entitled to vote on the matter is required for approval of
these items. Proxies marked to abstain from voting with respect to any of
these matters will have the legal effect of voting against such matter.
Proxies submitted by brokers for shares beneficially owned by other persons
may indicate that all or a portion of the shares represented by such proxies
are not being voted with respect to approval of these items. This is because
the rules of the New York Stock Exchange may not permit a broker to vote
Common Stock held in street name with respect to these matters in the absence
of instructions from the beneficial owner of the Common Stock. The shares
represented by broker proxies which are not voted with respect to such items
will not be counted in determining whether a quorum is present for the
consideration of these matters and will not be considered represented at the
meeting and entitled to vote on them.
The shares represented by properly executed and unrevoked proxies received
in the accompanying form in time for the meeting will be voted as directed in
the proxies. IN THE ABSENCE OF SPECIFIC DIRECTION, THE SHARES REPRESENTED BY
THE PROXIES WILL BE VOTED AT THE MEETING AND WILL BE VOTED NON-CUMULATIVELY
FOR THE ELECTION OF THE NOMINEES NAMED IN THIS PROXY STATEMENT AS DIRECTORS,
FOR APPROVAL OF THE MATTERS DISCUSSED IN ITEMS B, C AND D, AND AGAINST ITEM E
(THE SHAREHOLDER PROPOSAL). In the event any nominee for Director shall be
unable to serve, which is not now contemplated, the proxies may or may not be
voted for a substitute nominee.
21
<PAGE>
SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Any shareholder proposal intended to be presented at the 1998 annual meeting
of Unicom's shareholders must be received at the principal executive offices
of Unicom by December 10, 1997, in order to be considered for inclusion in
Unicom's proxy materials relating to that meeting. Any such proposal should be
directed to the Secretary of Unicom located on the 37th Floor, First National
Bank Building, 10 South Dearborn Street, Chicago, Illinois. If mailed, it
should be sent to Secretary, Unicom Corporation, 10 South Dearborn Street,
Post Office Box A-3005, Chicago, Illinois 60690-3005.
OTHER MATTERS
As of the date of this Proxy Statement, management knows of no matters to be
brought before the annual meeting other than the matters referred to in this
Proxy Statement. If, however, further business is presented, the proxy holders
will act in accordance with their best judgment.
By order of the Board of Directors.
David A. Scholz
Secretary
April 9, 1997
A COPY OF UNICOM'S ANNUAL REPORT ON FORM 10-K TO THE SECURITIES AND EXCHANGE
COMMISSION MAY BE OBTAINED WITHOUT CHARGE BY WRITING TO DAVID A. SCHOLZ,
SECRETARY, UNICOM CORPORATION, 10 SOUTH DEARBORN STREET, POST OFFICE BOX A-
3005, CHICAGO, ILLINOIS 60690-3005.
22
<PAGE>
EXHIBIT A
UNICOM CORPORATION
AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN
ARTICLE I: PURPOSE
The purposes of the Long-Term Incentive Plan (the "Plan") of Unicom
Corporation (the "Company") and its subsidiaries are (i) to align the
interests of the Company's stockholders and recipients of awards under the
Plan by increasing the proprietary interest of such recipients in the
Company's growth and success and (ii) to advance the interests of the Company
by attracting and retaining well-qualified persons by providing such persons
with performance-related incentives.
ARTICLE II: DEFINITIONS
For purposes of the Plan, the following terms shall have the following
meanings:
"Award" shall mean any form of stock option, stock appreciation right,
stock award, performance shares, performance units or other stock-based
award granted under this Plan.
"Board" shall mean the Board of Directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended, or any
successor legislation.
"Committee" shall mean the Corporate Governance and Compensation
Committee or such other committee of the Board as may be appointed from
time to time by the Board consisting of two or more Directors, all of whom
must qualify as disinterested persons within the meaning of Securities and
Exchange Commission Regulation (S) 240.16b-3 or any successor regulation.
"Common Stock" shall mean the Common Stock, without par value, of the
Company.
"Participant" shall mean an employee to whom an Award has been made
pursuant to this Plan.
"Subsidiary" shall mean any corporation of which the Company owns
directly or indirectly 51% or more of the outstanding shares of stock
entitled to vote for the election of directors and any partnership, joint
venture or other enterprise with respect to which the Company owns a 51% or
more interest and has the power to direct or cause the direction of the
management and policies.
ARTICLE III: ELIGIBILITY
Participants in the Plan shall consist of such employees of the Company and
its Subsidiaries as the Committee in its sole discretion may select from time
to time. The Committee's selection of a person to participate in the Plan in
any year shall not require the Committee to select such person to participate
in the Plan in any other year. No employee shall have the right to be selected
to participate in the Plan.
ARTICLE IV: SHARES AVAILABLE
4.1 Shares. Subject to adjustment as provided in Section 4.2 of the Plan, an
aggregate of 4,000,000 shares of Common Stock shall be available for Awards
under the Plan, reduced by the sum of the aggregate number of shares of Common
Stock then subject to (i) outstanding stock options
A-1
<PAGE>
and outstanding stock appreciation rights that are not related to a stock
option, (ii) outstanding Awards which may be exercised or selected solely in
shares of Common Stock and (iii) outstanding Awards which may be exercised or
settled either in shares of Common Stock or cash. To the extent (i) that an
outstanding stock option expires or terminates unexercised or is cancelled or
forfeited (other than in connection with the exercise of a related stock
appreciation right) or (ii) that an outstanding stock appreciation right that
is not related to a stock option or other outstanding Award, either of which
may be exercised or settled (A) solely in shares of Common Stock or (B) in
shares of Common Stock or cash, expires or terminates unexercised or is
cancelled or forfeited, then the shares of Common Stock subject to such
expired, unexercised, cancelled or forfeited portion of such Award shall again
be available for Awards under the Plan. In the event that all or a portion of
a stock appreciation right is exercised, the number of shares of Common Stock
subject to such right (or portion thereof) shall again be available for
issuance under the Plan, except to the extent that shares of Common Stock were
issued (or would have been issued but were withheld to satisfy tax withholding
obligations) upon exercise of the right. Stock appreciation rights and other
Awards which may be exercised or settled only in cash shall not affect the
number of shares of Common Stock available for Awards under the Plan.
Shares of Common Stock to be delivered under the Plan shall be made
available from authorized and unissued shares of Common Stock, or authorized
and issued shares of Common Stock reacquired and held as treasury shares or
otherwise, or a combination thereof.
4.2 Adjustment Provisions. In the event of any stock split, stock dividend,
recapitalization, reorganization, merger, consolidation, combination, exchange
of shares, liquidation, spin-off or other similar change in capitalization, or
any distribution to holders of Common Stock other than a cash dividend, the
number and class of shares available under the Plan, the number and class of
shares subject to each outstanding option and the purchase price per share,
the terms of each outstanding stock appreciation right, and the number and
class of shares subject to each other outstanding Award shall be appropriately
adjusted by the Committee, such adjustments to be made in the case of
outstanding stock options and stock appreciation rights without a change in
the aggregate purchase price or reference price.
ARTICLE V: ADMINISTRATION
5.1 Administration and Interpretation. The Plan shall be administered and
interpreted by the Committee. The Committee shall have the authority to adopt,
alter and repeal such administrative rules, guidelines and practices governing
the Plan and perform all acts, including the delegation of its administrative
responsibilities, as it shall, from time to time, deem advisable; to construe
and interpret the terms and provisions of the Plan and any Award issued under
the Plan (and any notices or agreements relating thereto); and to otherwise
supervise the administration of the Plan. The Committee may correct any
defect, supply any omission or reconcile any inconsistency in the Plan or in
any notice of an Award or any agreement relating thereto in the manner and to
the extent it shall deem necessary to carry the Plan into effect. Any
decision, interpretation or other action made or taken in good faith by or at
the direction of the Committee (or any of its members) arising out of or in
connection with the Plan shall be within its absolute discretion and shall be
final, binding and conclusive on the Company and all employees and
Participants and their respective beneficiaries, heirs, executors,
administrators, successors and assigns.
Neither the Committee nor any member thereof shall be liable for any act,
omission, interpretation, construction or determination made in connection
with the Plan in good faith, and the members of the Committee shall be
entitled to indemnification and reimbursement by the Company in respect of any
claim, loss, damage or expense (including attorney's fees) arising therefrom
to the full extent permitted by law and under any directors' and officers'
liability insurance that may be in
A-2
<PAGE>
effect from time to time. In addition, no member of the Board and no employee
of the Company shall be liable for any act or failure to act hereunder, by any
other member or employee or by any agent to whom duties in connection with the
administration of this Plan have been delegated or, except in circumstances
involving a member's or employee's bad faith, gross negligence or fraud, for
any act or failure to act by the member or employee.
A majority of the Committee shall constitute a quorum, and the acts of a
majority of the members present at any meeting at which a quorum is present,
or acts approved in writing by a majority of the Committee without a meeting,
shall be the acts of the Committee.
5.2 Awards. The Committee shall have full authority to grant, pursuant to
the terms of the Plan, to employees: (i) stock options, (ii) stock
appreciation rights, (iii) stock awards, (iv) performance shares, (v)
performance units, and (vi) other stock-based awards. In particular, and
without limitation, the Committee shall have the authority:
(a) to select the employees to whom Awards may from time to time be
granted hereunder;
(b) to determine the types of Awards, and combinations thereof, to be
granted hereunder to employees and whether such Awards are to operate on a
tandem basis and/or in conjunction with or apart from other awards made by
the Company outside of this Plan;
(c) to determine the number of shares of Common Stock or monetary units
to be covered by each Award granted hereunder;
(d) to determine the terms and conditions, not inconsistent with the
terms of this Plan, of any Award granted hereunder (including, but not
limited to, any restriction or limitation on exercise or transfer, any
vesting schedule or acceleration thereof, or any forfeiture provisions or
waiver thereof, regarding any Award and the shares of Common Stock relating
thereto, based on such factors as the Committee shall determine, in its
sole discretion);
(e) to determine whether Common Stock and other amounts payable with
respect to an Award under the Plan shall be deferred either automatically
or at the election of the Participant; and
(f) to modify or waive any restrictions or limitations contained in, and
grant extensions to or accelerate the vesting of, any outstanding Awards as
long as such modifications, waivers, extensions or accelerations are
consistent with the terms of this Plan; but no such changes shall impair
the rights of any Participant without his or her consent.
An Award under the Plan shall be made in such manner and evidenced by such
means as the Committee shall determine, which may include, but shall not be
limited to, written agreements between the Company and the employee to whom
the Award is granted.
ARTICLE VI: STOCK OPTIONS
6.1 Grants. Stock options may be granted alone or in addition to other
Awards granted under this Plan. Each stock option granted under this Plan
shall be of one of two types: (i) an "incentive stock option" within the
meaning of Section 422 of the Code (or any successor provision) or (ii) a non-
qualified stock option. The Committee shall have the authority to grant to any
employee one or more incentive stock options, non-qualified stock options, or
both types of stock options (in each case with or without stock appreciation
rights). No incentive stock options may be awarded after the tenth anniversary
of the date this Plan is adopted by the Board.
6.2 Terms of Options. Stock options granted under this Plan shall be subject
to the following terms and conditions and shall be in such form and contain
such additional terms and conditions, not inconsistent with the terms of this
Plan, as the Committee shall deem desirable:
A-3
<PAGE>
(a) Exercise Price. The exercise price per share of Common Stock
purchasable under a stock option shall be determined by the Committee at
the time of grant but no incentive stock option shall have an exercise
price less than 100% of the fair market value of the Common Stock at the
option grant date.
(b) Option Term. The term of each stock option shall be fixed by the
Committee, but no incentive stock option shall be exercisable more than ten
years after the date the option is granted.
(c) Exercisability. Stock options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by
the Committee.
(d) Method of Exercise. An option may be exercised (i) by giving written
notice to the Company specifying the number of whole shares of Common Stock
to be purchased with the purchase price therefor to be payable in full
either (A) in cash, (B) in previously owned whole shares of Common Stock
(for which the holder of the option has good title free and clear of all
liens and encumbrances) with their fair market value determined as of the
date of exercise, (C) by authorizing the Company to retain whole shares of
Common Stock which would otherwise be issuable upon exercise of the option
with their fair market value determined as of the date of exercise, (D) in
cash by a broker-dealer acceptable to the Company to whom the optionee has
submitted an irrevocable notice of exercise, or (E) a combination of (A),
(B) and (C), in each case to the extent determined by the Committee at the
time of grant of the option, (ii) if applicable, by surrendering to the
Company any stock appreciation rights or other Awards which are cancelled
by reason of the exercise of the option and (iii) by executing such
documents as the Company may reasonably request. No shares of Common Stock
shall be issued until the full purchase price has been paid.
(e) Termination of Employment by Death, Disability or Retirement. If a
Participant's employment by the Company or a Subsidiary terminates by
reason of the Participant's death, disability (as determined by the
Committee) or retirement (as determined by the Committee), any outstanding
stock option then held by such Participant shall remain exercisable, but
only to the extent such option was exercisable on the date of such
Participant's termination of employment, until the expiration of the term
of such option. If on the date of such termination of employment, any such
stock option shall not be fully exercisable, the Committee shall have the
discretion to cause such stock option to continue to become exercisable on
the date or dates specified therein as if such termination of employment
had not occurred. The Committee may exercise the discretion granted to it
by the preceding sentence at the time a stock option is granted or at any
time thereafter while such stock option remains outstanding.
(f) Other Termination of Employment. Unless otherwise determined by the
Committee at or after grant, if a Participant's employment by the Company
or a Subsidiary terminates for any reason other than the Participant's
death, disability or retirement, the stock option shall terminate at such
time as provided in the Award.
(g) Buyout and Settlement Provisions. The Committee may at any time offer
to buy out an option previously granted, based on such terms and conditions
as the Committee shall establish and communicate to the Participant at the
time that such offer is made.
(h) Maximum Share Grant. The maximum number of shares that may be granted
to a Participant in any particular five-year period shall not exceed
500,000.
ARTICLE VII: STOCK APPRECIATION RIGHTS
The Committee may grant stock appreciation rights to employees either alone
or in addition to stock options granted under Article VI. A stock appreciation
right shall entitle the holder thereof to receive upon exercise shares of
Common Stock, cash or a combination thereof with an aggregate value equal to
the excess of the fair market value of one share of Common Stock over the
reference
A-4
<PAGE>
price of such stock appreciation right multiplied by the number of shares of
Common Stock subject to such stock appreciation right or portion thereof which
is exercised. Any stock appreciation right related to a non-qualified stock
option may be granted at the same time such option is granted or at any time
thereafter before exercise or expiration of such option. Any stock
appreciation right related to an incentive stock option shall be granted at
the same time such option is granted. In the case of any stock appreciation
right related to any option, the stock appreciation right or applicable
portion thereof shall terminate and no longer be exercisable upon the
termination or exercise of the related option, except that a stock
appreciation right granted with respect to less than the full number of shares
covered by a related option shall not be reduced until the exercise or
termination of the related option exceeds the number of shares not covered by
the stock appreciation right at the time of grant. Any option related to any
stock appreciation right shall no longer be exercisable to the extent the
related stock appreciation right has been exercised. The Committee may impose
such conditions or restrictions on the exercise of any stock appreciation
right as it shall deem appropriate. The maximum number of shares that may be
subject to stock appreciation rights granted to a Participant in any
particular five-year period shall not exceed 500,000.
ARTICLE VIII: STOCK AWARDS
Restricted or unrestricted shares of Common Stock may be granted either
alone or in addition to other Awards granted under this Plan. The Committee
may grant Awards of Common Stock subject to the attainment of specified
performance goals, continued employment and such other limitations or
restrictions as the Committee may determine.
ARTICLE IX: PERFORMANCE SHARES
Performance shares may be awarded either alone or in addition to other
Awards granted under this Plan and shall consist of the right to receive
Common Stock or cash of an equivalent value at the end of a specified
performance period. The Committee shall determine the employees to whom and
the time or times at which performance shares shall be awarded, the number of
performance shares to be awarded to any person, the duration of the period
during which, and the conditions under which, a Participant's rights to
performance shares will be vested and the receipt of the shares will be
deferred.
The Committee may condition the grant of performance shares upon the
attainment of specified performance goals or such other factors or criteria as
the Committee shall determine.
ARTICLE X: PERFORMANCE UNITS
Performance units may be awarded either alone or in addition to other Awards
granted under this Plan and shall consist of the right to receive a fixed
dollar amount, payable in cash or Common Stock or a combination of both. The
Committee shall determine the employees to whom and the time or times at which
performance units shall be awarded, the number of performance units to be
awarded to any person, the duration of the period during which, and the
conditions under which, a Participant's right to performance units will be
vested and the ability of Participants to defer the receipt of payment of such
performance units. The maximum number of performance units that may be granted
to a Participant in any one-year period shall not exceed 50,000.
The Committee may condition the vesting of performance units upon the
attainment of specified performance goals or such other factors or criteria as
the Committee shall determine.
A-5
<PAGE>
ARTICLE XI: OTHER STOCK-BASED AWARDS
Other awards of Common Stock and cash awards that are valued in whole or in
part by reference to, or are payable in or otherwise based on, Common Stock
("other stock-based awards") including, without limitation, Awards valued by
reference to performance concepts, may be granted either alone or in addition
to or in tandem with stock options, stock appreciation rights, stock awards,
performance shares or performance units.
Subject to the provisions of this Plan, the Committee shall have authority
to determine the persons to whom and the time or times at which such Awards
shall be made, the number of shares of Common Stock to be awarded pursuant to
such Awards, and all other conditions of such Awards.
ARTICLE XII: TERMINATION OR AMENDMENT
Notwithstanding any other provision of this Plan, the Board may at any time,
and from time to time, amend, in whole or in part, any or all of the
provisions of this Plan, or suspend or terminate it entirely; provided,
however, that, unless otherwise required by law, the rights of a Participant
with respect to any Awards granted prior to such amendment, suspension or
termination, may not be impaired without the consent of such Participant; and,
provided further, no amendment may be made which would cause this Plan to lose
its exemption under Securities and Exchange Commission Regulation 240.16b-3 or
which would increase the number of shares of Common Stock available for Awards
under Section 4.1 of the Plan without shareholder approval.
ARTICLE XIII: GENERAL PROVISIONS
13.1 Unfunded Status of Plan. This Plan is intended to be unfunded. With
respect to any payments as to which a Participant has a fixed and vested
interest but which are not yet made to a Participant by the Company, nothing
contained herein shall give any such Participant any rights that are greater
than those of a general creditor of the Company.
13.2 No Right to Employment. Neither this Plan nor the grant of any Award
hereunder shall give any Participant or other employee any right with respect
to continuance of employment by the Company or any Subsidiary, nor shall they
be a limitation in any way on the right of the Company or any Subsidiary by
which an employee is employed to terminate his or her employment at any time.
13.3 Other Plans. In no event shall the value of, or income arising from,
any Awards under this Plan be treated as compensation for purposes of any
pension, profit sharing, life insurance, disability or any other retirement or
welfare benefit plan now maintained or hereafter adopted by the Company or any
Subsidiary, unless such plan specifically provides to the contrary.
13.4 Withholding of Taxes. The Company shall have the right to require,
prior to the issuance or delivery of any shares of Common Stock hereunder,
payment by the Participant of any federal, state, local or other taxes which
may be required to be withheld or paid in connection with an Award hereunder.
An Award agreement may provide that (i) the number of shares of Common Stock
issuable with respect to such Award shall be reduced by the amount necessary
to satisfy any such obligation or (ii) the Participant may satisfy any such
obligation by any of the following means: (A) a cash payment to the Company,
(B) delivery to the Company of previously owned whole shares of Common Stock
(for which the Participant has good title, free and clear of all liens and
encumbrances) having a fair market value determined as of the date the
obligation to withhold or pay taxes first arises in connection with an Award
(the "Tax Date"), (C) authorizing the Company to withhold from the shares of
Common Stock otherwise issuable to the Participant pursuant to an Award, a
number of
A-6
<PAGE>
whole shares of Common Stock having a fair market value determined as of the
Tax Date or (D) any combination of the foregoing methods; provided, however,
that in the case of a Participant who is subject to Section 16 of the
Securities Exchange Act of 1934, as amended, the Company may require that the
method of satisfying such an obligation shall be in compliance with Section 16
and the rules and regulations thereunder. An Award agreement may not provide
for shares of Common Stock to be delivered or withheld having a fair market
value in excess of the amount determined by applying the Participant's maximum
marginal tax rate. Any fraction of a share of Common Stock which would be
required to satisfy such an obligation shall be disregarded and the remaining
amount due shall be paid in cash by the Participant. The Company may require
that any or all obligations to satisfy or pay taxes with respect to any Award
shall be satisfied or paid by the Participant prior to satisfaction of such
Award by the Company.
13.5 No Assignment of Benefits. No Award or other benefit payable under this
Plan shall, except as otherwise specifically provided by this Plan or by law,
be transferable in any manner other than by will or the laws of descent and
distribution, and any attempt to transfer any such benefit shall be void. All
stock options, stock appreciation rights and performance shares may be
exercised or settled during the Participant's lifetime, only by the
Participant or his or her guardian, conservator or other legal representative.
Awards or other benefits payable under this Plan shall not in any manner be
subject to the debts, contracts, liabilities, engagements or torts of any
person who shall be entitled to such benefit, nor shall it be subject to
attachment or legal process for or against such person.
13.6 Governing Law. This Plan and actions taken in connection herewith shall
be governed and construed in accordance with the laws of the State of Illinois
(without regard to applicable Illinois principles of conflict of laws).
13.7 Construction. Wherever any words are used in this Plan in the masculine
gender, they shall be construed as though they were also used in the feminine
gender in all cases where they would so apply, and wherever any words are used
herein in the singular form, they shall be construed as though they were also
used in the plural form in all cases where they would so apply.
ARTICLE XIV: EFFECTIVE DATE
This Plan, formerly the Commonwealth Edison Company 1993 Long-Term Incentive
Plan, which was assumed, adopted and amended by the Board on August 30, 1994
and approved by the shareholder of the Company on August 30, 1994, is
effective September 1, 1994.
A-7
<PAGE>
EXHIBIT B
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
Certain portions of this document contain forward looking statements with
respect to the consequences of future events, including estimates of costs
associated with certain actions and outcomes. Unforeseen events or conditions
may require changes in the factors affecting such estimates and the projected
results thereof. Consequently, actual results could differ materially from the
estimates presented. See the last paragraph under the subheading "Liquidity
and Capital Resources--Construction Program" in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
information regarding certain caveats affecting forward looking statements.
Forward looking information is contained in various sections of this report,
including, without limitation, (i) Note 1 of Notes to Financial Statements in
the third and fifth paragraphs under the subheading "Depreciation and
Decommissioning Costs" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the last paragraph under the
subheading "Regulation--Nuclear Matters," with respect to the estimated costs
of decommissioning nuclear generating stations, (ii) "Management's Discussion
and Analysis of Financial Condition and Results of Operations" under the
subheading "Liquidity and Capital Resources--Construction Program," regarding
ComEd's construction program budget, (iii) the fourth paragraph under the
subheading "Results of Operations--Operation and Maintenance Expenses" under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and (iv) the last paragraph in Note 21 of Notes to Financial
Statements, regarding cleanup costs associated with MGP and other remediation
sites.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... B-2
Summary of Selected Consolidated Financial Data........................... B-3
Price Range and Cash Dividends Paid Per Share of Common Stock............. B-3
1996 Consolidated Revenues and Sales...................................... B-3
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... B-4
Report of Independent Public Accountants.................................. B-17
Consolidated Financial Statements--
Statements of Consolidated Income for the years 1996, 1995 and 1994..... B-18
Consolidated Balance Sheets--December 31, 1996 and 1995................. B-19
Statements of Consolidated Capitalization--December 31, 1996 and 1995... B-21
Statements of Consolidated Retained Earnings for the years 1996, 1995
and 1994............................................................... B-22
Statements of Consolidated Cash Flows for the years 1996, 1995 and 1994. B-23
Notes to Financial Statements........................................... B-24
Subsequent Events......................................................... B-46
</TABLE>
REFERENCE IS MADE TO "SUBSEQUENT EVENTS" FOR CERTAIN RECENT INFORMATION THAT
SHOULD BE READ AND CONSIDERED IN CONNECTION WITH THE OTHER INFORMATION
CONTAINED IN THIS EXHIBIT B.
B-1
<PAGE>
DEFINITIONS
The following terms are used in this document with the following meanings:
<TABLE>
<CAPTION>
TERM MEANING
- ----------------------- ------------------------------------------------------------------
<S> <C>
AFUDC Allowance for funds used during construction
AMT Alternative minimum tax
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, which is a wholly-owned subsidiary of ComEd.
DOE U.S. Department of Energy
ESPP Employee stock purchase plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FERC Order FERC Open Access Order issued in April 1996
Fuel Matters Settlement A settlement effected in November 1993 relating to various ICC
fuel reconciliation proceedings involving ComEd.
ICC Illinois Commerce Commission
Indiana Company Commonwealth Edison Company of Indiana, Inc., which is a wholly-
owned subsidiary of ComEd.
ISO Independent System Operator
MGP Manufactured gas plant
NEIL Nuclear Electric Insurance Limited
NML Nuclear Mutual Limited
NRC Nuclear Regulatory Commission
Rate Matters Settlement A settlement effected in November 1993 relating to various rate
proceedings involving ComEd.
Rate Order ICC rate order issued in January 1995, as subsequently modified
Remand Order ICC rate order issued in January 1993, as subsequently modified
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
Trust ComEd Financing I, which is a wholly-owned subsidiary trust of
ComEd.
Unicom Unicom Corporation
Unicom Enterprises Unicom Enterprises Inc., which is a wholly-owned subsidiary of
Unicom.
Unicom Thermal Unicom Thermal Technologies Inc., which is a wholly-owned
subsidiary of Unicom Enterprises.
Units ComEd's nuclear generating units known as Byron Unit 2 and
Braidwood Units 1 and 2
U.S. EPA U.S. Environmental Protection Agency
</TABLE>
B-2
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(MILLIONS OF DOLLARS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Operating revenues............... $ 6,937 $ 6,910 $ 6,278 $ 5,260 $ 6,026
Net income....................... $ 666 $ 640(1) $ 355 $ 46(2) $ 443
Earnings per common share........ $ 3.09 $ 2.98(1) $ 1.66 $ 0.22(2) $ 2.08
Cash dividends declared per
common share.................... $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 2.30
Total assets (at end of year).... $23,388 $23,250 $23,121 $24,383 $20,993
Long-term obligations at end of
year excluding current portion:
Long-term debt, preference stock
and preferred securities
subject to mandatory redemption
requirements................... $ 6,487 $ 7,011 $ 7,745 $ 7,861 $ 7,913
Accrued spent nuclear fuel
disposal fee and related
interest....................... $ 657 $ 624 $ 590 $ 567 $ 549
Capital lease obligations....... $ 477 $ 376 $ 433 $ 323 $ 347
Other long-term obligations..... $ 1,989 $ 1,826 $ 1,754 $ 1,718 $ 666
</TABLE>
- ---------------------
(1) Includes an extraordinary loss related to the early redemption of long-
term debt of $20 million or $0.09 per common share.
(2) Includes the cumulative effect of change in accounting for income taxes of
$10 million or $0.05 per common share.
PRICE RANGE* AND CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK
<TABLE>
<CAPTION>
1996 (BY QUARTERS) 1995 (BY QUARTERS)
--------------------------- ---------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price range:
High.................. 28 1/2 28 1/8 29 35 3/8 33 7/8 30 1/2 27 3/4 26 1/8
Low................... 24 7/8 22 5/8 26 27 30 1/4 26 1/4 23 5/8 23 1/4
Cash dividends paid.... 40c 40c 40c 40c 40c 40c 40c 40c
</TABLE>
* As reported as NYSE Composite Transactions.
- ---------------------
Unicom's common stock is traded on the New York, Chicago and Pacific stock
exchanges, with the ticker symbol UCM. At December 31, 1996, there were
approximately 161,000 holders of record of Unicom's common stock.
1996 CONSOLIDATED REVENUES AND SALES
<TABLE>
<CAPTION>
OPERATING INCREASE/ KILOWATTHOUR INCREASE/
REVENUES (DECREASE) SALES (DECREASE) INCREASE
(THOUSANDS) OVER 1995 (MILLIONS) OVER 1995 CUSTOMERS OVER 1995
----------- ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Residential............. $2,541,873 (3.0)% 22,310 (4.3)% 3,102,101 0.7%
Small commercial and
industrial............. 2,113,716 1.9 % 25,131 (0.7)% 289,803 0.3%
Large commercial and
industrial............. 1,445,708 1.4 % 23,896 0.5 % 1,550 0.7%
Public authorities...... 503,004 3.3 % 7,336 2.5 % 12,142 0.9%
Electric railroads...... 29,651 10.3 % 424 8.7 % 2 --
---------- ------ ---------
Ultimate consumers...... $6,633,952 -- 79,097 (1.1)% 3,405,598 0.7%
Sales for resale........ 235,041 12,178 44
Other revenues.......... 68,031 -- --
---------- ------ ---------
Total.................. $6,937,024 0.4 % 91,275 (0.1)% 3,405,642 0.7%
========== ====== =========
</TABLE>
B-3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN THE ELECTRIC UTILITY INDUSTRY
Unicom and its predominant business, electric energy generation,
transmission and distribution, are in a period of fundamental change in the
manner in which customers obtain, and energy suppliers provide, energy
services. These changes are attributable to changes in technology, the
relaxation of regulatory barriers to utilities' respective service territories
as well as to efforts to change the manner in which electric utilities are
regulated. Federal law and regulations have been amended to provide for open
transmission system access, and various states 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.
ComEd and other energy suppliers, energy customers and other interested
parties have been active participants in the discussions related to the
economic and technical issues associated with reform. As a result of these
efforts, legislation was introduced in Illinois during January 1997 which is
intended to provide both electric service providers and their customers with
an orderly transition to a less regulated market for electric service. Under
the legislative proposal, utilities would be granted a period in which to
offer direct access experiments that would allow them and customers to gain
experience with the effects of such access, with a requirement to provide such
access starting in 2000. Such a requirement would be phased-in to customers
over several years, starting with larger load customers. The legislation would
provide utilities with an opportunity to recover costs, which might not
otherwise be recoverable, in charges for electric service in a less regulated
market through, among other things, cost savings and a transition charge for
customers who use alternate suppliers of electric power and energy. The
legislation would provide for a leveling of certain regulatory oversight and
tax provisions among electric service providers in Illinois and would also
allow certain restructurings of utility operations in order to facilitate
their response to a competitive environment. The legislation would also
provide for annual base rate decreases of 1.5 percent, starting in 2000 and
continuing through 2004. ComEd supports the proposed legislation and believes
there is support among a number of constituencies for its provisions. Other
legislative proposals have also been introduced for consideration, which
contain different provisions with respect to timing and cost recovery. The
Governor of Illinois has formed a three-person advisory committee to advise
with respect to electric utility deregulation issues. No assurance can be
given as to when any such legislation may be adopted or in what form it may be
adopted.
In response to changes in the industry, ComEd has implemented certain
customer initiatives designed to improve and strengthen customer relationships
and is undertaking an evaluation of its operations and assets, particularly
generating assets, with a view toward positioning itself for market and
industry changes. As discussed below, ComEd's actions to date have included a
five-year base rate cap, efforts to control expenditure growth through
personnel reductions, operational efficiencies and sales of generating plants.
Although ComEd's operating results and financial condition have historically
been affected by various rate proceedings, ComEd expects that these industry
changes, and ComEd's activities anticipating or responding to them, will
directly impact its operating results and financial condition over the next
several years.
Electric Utility Industry. The electric utility industry has historically
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serving customers within relatively
defined service territories; and operating under extensive regulation with
respect to rates, operations and other matters. Utilities 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 those current and projected needs
of its 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, has provided the basis for recording
certain costs as regulatory assets. These assets represent
B-4
<PAGE>
costs which are allocated over future periods reflecting related regulatory
treatment, rather than expensed in the current period.
As noted previously, the United States electric utility industry is in a
process of fundamental change as state legislators and regulators re-examine
their approach to regulation and its objectives and consider a transition to a
competitive or market-based system of pricing for electric energy. Although
the process and approach have varied from state to state in terms of the
elements and timing of implementation, it is evident that the question is no
longer if, but rather how and when there will be a more competitive
electricity market. 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. In April 1996, the FERC Order was issued
requiring utilities to file open access tariffs with regard to their
transmission systems. These tariffs set forth the terms, including prices,
under which other parties and the utility's wholesale marketing function may
use the utility's transmission system. ComEd has filed an open access tariff
with the FERC. The FERC Order requires the separation of the transmission
operations and wholesale marketing functions so as to ensure that unaffiliated
third parties have access to the same information as to system availability
and other requirements. 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.
An important element of reform proposals under consideration is the ability
of other suppliers to provide energy in competition with a utility within its
service territory. This element generally has included consideration of some
future form of "retail wheeling," whereby a utility's transmission and
distribution system is made available to other energy suppliers for delivery
of their services to retail customers. 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. While
municipalization is possible under the present regulatory system, ComEd is not
required to grant alternative electric suppliers access to its distribution
system through any type of "retail wheeling."
Presumably, under such a modified regulatory structure, customers will base
energy purchase decisions on a combination of factors, including price,
reliability and service. In addition to the potential effects on revenues and
marketing and sales efforts, such changes can raise the question as to whether
an affected utility's rates are based on cost-based regulation, allowing
recovery of incurred costs, or are based on something else, i.e., the
marketplace. Under generally accepted accounting principles, the latter
determination would require the write off of regulatory assets and liabilities
and would require an examination as to the recoverability in revenues of other
incurred costs, with any portion determined to be unrecoverable being subject
to write off. Various approaches have been proposed to deal with such
strandable costs, from full recovery, as provided in the FERC Order, to no
recovery, as proposed by at least some of the participants in virtually all
legislative debates on regulatory reform proposals. For additional
information, see "Regulatory Assets and Liabilities" in Note 1 of Notes to
Financial Statements.
Retail wheeling and municipalization are significant issues for electric
utility companies, including ComEd, because of their potential to strand a
utility's costs. Without the development of a more fully competitive
marketplace, it is not possible to develop an estimate of strandable costs
with any degree of accuracy. Any calculation of potentially strandable costs
requires that a set of assumptions be made, including the timing of open
access (customer choice), the extent of open access allowed, potential market
prices over time, sales and load growth forecasts, operating performance over
time, allowed rates over time, cost structure over time, mitigation
opportunities and strandable cost
B-5
<PAGE>
recoveries. The calculation of strandable costs is extremely sensitive to the
assumptions made, and the resulting estimates are potentially misleading if
removed from the context in which they were calculated. At this point in time,
ComEd does not subscribe to a certain set of assumptions or a particular
estimate. The proposed legislation described above, which ComEd supports,
would provide utilities the opportunity to recover their stranded costs, if
any. However, ComEd believes the amount of its strandable costs could be
material without allowance for recovery of costs and investments it incurred
under its regulatory compact, including its duty to serve. Most reform
proposals anticipating increased competition include some form of stranded
cost recovery. ComEd is taking steps, such as cost-control measures, improving
generating station reliability and additional depreciation, to minimize its
potential stranded investment. See Note 2 of Notes to Financial Statements for
additional information.
ComEd. ComEd is responding, and is undertaking a significant planning effort
with respect to further responses, to the developments within the utility
industry. During the past several years, such efforts have focused on cost
reductions, including personnel reductions, efficiencies in purchasing and
inventory management, and an incentive compensation system keyed to cost
reduction and control. Notwithstanding these efforts, ComEd's costs remain
high in comparison to its neighboring utilities.
ComEd is examining its assets, particularly generating assets, with a view
toward rationalizing their investment and operating costs against their
ability to contribute to the revenues of ComEd under various market scenarios.
Such an assessment involves the consideration of numerous factors, including
revenue contribution, operating costs, impacts on ComEd's service obligations,
purchase commitments and remaining assets, and the impact of various options.
Such options include continued operation, indefinite suspension from
operation, sale to a third party and retirement. If ComEd retired a generating
plant, particularly a nuclear plant, without regulatory or legislative
provision for continued recovery of its investment, such retirement could have
a material impact on ComEd's and Unicom's financial position and results of
operations.
On April 17, 1996, ComEd announced that it had finalized agreements to sell
two of its coal-fired generating stations, representing approximately 1,600
megawatts of generating capacity. Under the agreements, State Line and Kincaid
stations would be sold for a total of $250 million, which approximates the
book value of the stations. The net proceeds, after income tax effects, would
be approximately $200 million, which would be used to retire or redeem
existing debt. Under the terms of the sales, ComEd would enter into exclusive
15-year purchased power agreements for the output of the plants. The
agreements are subject to regulatory approval, and proceedings have been
initiated to obtain those approvals. Numerous parties have intervened in the
proceedings, including various governmental and consumer groups and ComEd's
principal union. The union has also filed a lawsuit in state court alleging
that the labor provisions of the Kincaid agreement are violative of state law
and seeking to enjoin the ICC proceedings. ComEd had previously filed an
action in federal court seeking confirmation that the state law is preempted
by federal labor law, and ComEd believes that the union's allegations are
without merit. These actions have now been consolidated and are pending in
federal court. The State Line and Kincaid agreements give the purchasers the
right to terminate the agreements if a closing has not occurred prior to
December 31, 1996 for State Line and June 30, 1997 for Kincaid. Such closing
has not occurred as of January 31, 1997.
With respect to its transmission assets, ComEd is participating with
approximately 20 other electric utility companies in an effort to form an ISO
for the midwest United States. Under the structure currently contemplated, the
ISO would set standard transmission rates and facilitate compliance with the
FERC Order. In addition, while individual utility companies would continue to
own their transmission lines, the ISO would oversee regional planning to avoid
transmission constraints. Creation of the ISO will be subject to further
negotiations among the parties as well as federal and state regulatory
approval.
ComEd is also taking actions to strengthen its relationship with its
customers. On December 11, 1995, ComEd instituted a five-year base rate cap
for all of its customers. The base rate cap does not
B-6
<PAGE>
affect ComEd's fuel cost or nuclear decommissioning cost recovery provisions.
See Note 2 of Notes to Financial Statements for additional information about
ComEd's base rate cap and other initiatives intended to give customers more
choice and control over the services they seek and the price they pay.
LIQUIDITY AND CAPITAL RESOURCES
UTILITY OPERATIONS
Construction Program. ComEd and the Indiana Company have a construction
program for the year 1997, which consists principally of improvements to their
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, calls for
electric plant and equipment expenditures of approximately $982 million
(excluding nuclear fuel expenditures of approximately $322 million). It is
estimated that such construction expenditures, with cost escalation computed
at 3.5% annually, will be as follows:
<TABLE>
<CAPTION>
1997
-----------
(MILLIONS
OF DOLLARS)
<S> <C>
Production....................................................... $420
Transmission and Distribution.................................... 421
General.......................................................... 141
----
Total......................................................... $982
====
</TABLE>
Such construction program includes the replacement of the steam generators
at ComEd's Braidwood Unit 1 and Byron Unit 1 nuclear generating units expected
to be placed in service prior to year-end 1998. The estimated replacement cost
is approximately $460 million, including approximately $80 million for the
cost of removal of the existing steam generators. Approximately $130 million
of this estimated cost is included in the construction expenditures shown
above. Approximately $140 million has been incurred through December 31, 1996.
In addition, ComEd has continued to monitor the degradation of the steam
generators at its Zion nuclear generating station. Recent studies indicate
that the degradation is continuing and that replacement may be required sooner
than 2005. No amount has been included in ComEd's construction budget for
replacement of these steam generators, since ComEd has not decided whether or
when to effect a replacement. Based upon its experience with the replacement
activities at Braidwood and Byron, and depending on the timing of any
replacement at Zion, ComEd believes such cost could be approximately $435
million if a decision to replace is made.
ComEd's forecasts of peak load indicate a need for additional resources to
meet demand, either through generating capacity, through equivalent purchased
power or through the development of additional demand-side management
resources, in 1998 and each year thereafter. However, it believes that
adequate resources, including cost-effective demand-side management resources,
non-utility generation resources and other utility power purchases, could be
obtained in sufficient quantities to meet such forecasted needs. If ComEd
instead were to build additional capacity to meet its needs, it would need to
make additional capital expenditures during 1997.
Purchase commitments for ComEd and the Indiana Company, principally related
to construction and nuclear fuel, approximated $1,018 million at December 31,
1996. In addition, ComEd's estimated commitments for the purchase of coal are
indicated in the following table.
<TABLE>
<CAPTION>
CONTRACT PERIOD COMMITMENT (1)
-------------- --------- --------------
<S> <C> <C>
Black Butte Coal Co................................ 1997-2000 $807
Decker Coal Co..................................... 1997-2014 $582
Big Horn Coal Co................................... 1998 $ 22
</TABLE>
--------
(1) In millions of dollars, excluding transportation costs. No estimate of
future cost escalation has been made.
B-7
<PAGE>
For additional information concerning these coal contracts and ComEd's fuel
supply, see "Results of Operations" below and Notes 1 and 21 of Notes to
Financial Statements.
The foregoing paragraphs in this "Construction Program" section include
forward-looking statements with respect to the future levels of capital
expenditures which are necessarily based upon assumptions regarding estimated
costs and availability of materials and services as well as contingencies.
Unforeseen events or conditions may require changes in the scope of work with
consequent changes in the timing and level of the projected expenditures. In
addition, changes in laws and regulations, or their interpretation and
enforcement, can affect the scope of certain projects, the manner in which
they are undertaken and the costs associated therewith. While ComEd gives
consideration to such factors in developing its budgets, such consideration
cannot predict the course of future events or anticipate the interaction of
multiple factors beyond management's control upon project timing and cost.
Consequently, actual results could differ materially from those described.
Capital Resources. ComEd forecasts that internal sources will provide more
than three-fourths of the funds required for ComEd's construction program and
other capital requirements, including nuclear fuel expenditures, contributions
to nuclear decommissioning funds, sinking fund obligations and refinancing of
scheduled debt maturities. See Notes 7 and 9 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 assumes the rate levels reflected in the Rate Order remain in effect.
See "Regulation," subcaption "Rate Matters" below for additional information.
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of ComEd at the time of such
financing. A portion of ComEd's financing is expected to be provided through
the continued sale and leaseback of nuclear fuel through ComEd's existing
nuclear fuel lease facility. See Note 18 of Notes to Financial Statements for
more information concerning ComEd's nuclear fuel lease facility. ComEd has
approximately $906 million of unused bank lines of credit at December 31, 1996
which may be borrowed at various interest rates and which may be secured or
unsecured. The interest rate is set at the time of a borrowing and is based on
several floating rate bank indices plus a spread which is dependent upon the
credit ratings of ComEd's outstanding first mortgage bonds or on a prime
interest rate. Collateral, if required for the borrowings, would consist of
first mortgage bonds issued under and in accordance with the provisions of
ComEd's mortgage. See Note 10 of Notes to Financial Statements for information
concerning lines of credit. See the Statements of Consolidated Cash Flows for
the construction expenditures and cash flow from operating activities for the
years 1996, 1995 and 1994.
During 1996, ComEd sold and leased back approximately $317 million of
nuclear fuel through its existing nuclear fuel lease facility. In addition,
ComEd issued $199 million of pollution control obligations, the proceeds of
which were used to redeem an equivalent amount of other pollution control
obligations. In January 1997, ComEd issued $150 million principal amount of
7.375% Notes due January 15, 2004, $150 million principal amount of 7.625%
Notes due January 15, 2007 and $150 million principal amount of Company-
obligated preferred securities of subsidiary trust, the proceeds of which will
be used to discharge current maturities of long-term debt and to redeem on
March 11, 1997 $200 million principal amount of First Mortgage 9 1/2% Bonds,
Series 57, due May 1, 2016. See the Statements of Consolidated Cash Flows and
Note 4 of Notes to Financial Statements for information regarding common stock
activity.
As of January 31, 1997, ComEd has an effective "shelf" registration
statement with the SEC for the future sale of up to an additional $505 million
of debt securities and cumulative preference stock for general corporate
purposes of ComEd, including the discharge or refund of other outstanding
securities.
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<PAGE>
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-
ComEd-obligated mandatorily redeemable preferred
securities of the Trust.......................... baa3 BBB- BBB-
Commercial paper.................................. P-2 A-2 D-2
</TABLE>
In January 1997, Moody's changed the rating outlook on ComEd's securities
from "stable" to "negative" and Duff & Phelps added ComEd's securities to
"Rating Watch-Down." As of January 1997, Standard & Poor's rating outlook on
ComEd remained "stable."
Capital Structure. ComEd's ratio of long-term debt to total capitalization
has decreased to 46.1% at December 31, 1996 from 49.3% at December 31, 1995.
This decrease is related primarily to the retirement of long-term debt, the
increase in current maturities of long-term debt reclassified to current
liabilities and the increase in retained earnings.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through its subsidiaries, in energy service
activities which are not subject to utility regulation by state or federal
agencies. Its principal subsidiary, Unicom Thermal, currently provides
district cooling services to office and other buildings in the city of Chicago
under a non-exclusive use agreement. District cooling involves, in essence,
the production of chilled water at a central location(s) 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 in lieu of self-generated cooling. As a
result of the Clean Air Amendments, the manufacture of CFCs has been
curtailed, commencing in January 1996, thereby creating an excellent marketing
opportunity for non-CFC based systems, such as Unicom Thermal's district
cooling. Unicom Thermal is involved in or considering district cooling
projects in other cities, including a project in Boston with Boston Edison
Technologies Group, Inc., a project in Windsor, Ontario, Canada with Ontario
Hydro and a project in Houston, Texas with Houston Light and Power Energy
Services Company.
Construction Program. Unicom has approved capital expenditures for 1997 of
approximately $56 million for Unicom Thermal, primarily representing the
construction costs of its district cooling facilities in Chicago and its share
of construction costs in Boston and Windsor. Unicom Thermal's first two
district cooling facilities in Chicago began serving customers in May 1995 and
July 1996, respectively. Its third district cooling facility in Chicago is
scheduled to be completed in 1997. As of December 31, 1996, Unicom Thermal's
purchase commitments, principally related to construction, were approximately
$42 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 bank borrowings. The availability of ComEd's dividends
to Unicom is dependent on ComEd's financial performance and cash position.
Other forms of financing by ComEd to Unicom or the unregulated subsidiaries of
Unicom, such as loans or additional equity investments, none of which is
expected, would be subject to prior approval by the ICC.
Unicom Enterprises has a $200 million credit facility which will expire in
1999, of which $105 million was unused as of December 31, 1996. The credit
facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including Unicom Thermal, and for
B-9
<PAGE>
general corporate purposes. The credit facility is guaranteed by Unicom and
includes certain covenants with respect to Unicom's 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 10 of Notes to Financial
Statements for additional information regarding certain covenants with respect
to Unicom's and Unicom Enterprises' operations.
REGULATION
ComEd and the Indiana Company are subject to state and federal regulation in
the conduct of their respective businesses, including the operations of
Cotter. Such regulation includes rates, securities issuance, nuclear
operations, environmental and other matters. Particularly in the cases of
nuclear operations and environmental matters, such regulation can and does
affect operational and capital expenditures.
Rate Matters. On January 9, 1995, the ICC issued its Rate Order in the
proceedings relating to ComEd's February 1994 rate increase request. The Rate
Order provided, among other things, for (i) an increase in ComEd's total
revenues of approximately $301.8 million (excluding add-on revenue taxes) or
5.2%, on an annual basis, including a $303.2 million increase in base rates,
(ii) the collection of municipal franchise costs on an individual municipality
basis through a rider, and (iii) the use of a rider, with annual review
proceedings, to pass on to ratepayers increases or decreases in estimated
costs associated with the decommissioning of ComEd's nuclear generating units.
See "Depreciation and Decommissioning" in Note 1 of Notes to Financial
Statements for additional information related to the level of decommissioning
cost collections. The ICC also determined that the Units were 100% "used and
useful" and that the previously determined reasonable costs of such Units, as
depreciated, should be included in full in ComEd's rate base. The rates
provided in the Rate Order became effective on January 14, 1995; however, they
are being collected subject to refund as a result of subsequent judicial
action. As of December 31, 1996, electric operating revenues of approximately
$651 million (excluding revenue taxes) are subject to refund. Intervenors and
ComEd have filed appeals of the Rate Order with the Illinois Appellate Court,
and oral argument was heard on January 28, 1997. See Note 2 of Notes to
Financial Statements for additional information.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd--given the impact of such operations on overall operating and
maintenance expenditures and the ability of nuclear power plants to produce
electric energy at a relatively low marginal cost. ComEd operates a large
number of nuclear plants, ranging from the older Zion, Dresden and Quad Cities
stations to the more recently completed LaSalle, Byron and Braidwood stations,
and is intent upon safe, reliable and efficient operation. These plants were
constructed over a period of time in which technology, construction procedures
and regulatory initiatives and oversight have evolved, with the result that
older plants generally require greater attention and resources to meet
regulatory requirements and expectations as well as to maintain operational
reliability.
On January 29, 1997, the NRC determined that ComEd's Dresden nuclear
generating station should remain on the NRC's list of plants to be monitored
closely, where it has been since being placed on that list in 1992. The NRC
also determined that ComEd's LaSalle and Zion nuclear generating stations
should be added to that list. Although in each case the NRC recognized that
ComEd had undertaken significant management changes and had accomplished a
number of performance improvements, it expressed concern with specific issues
at each station and expressed a general concern with the sustainability of
improvements as the basis for its determination. The determination 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.
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<PAGE>
The NRC also took the unusual additional 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 six nuclear generating
stations while sustaining performance improvement at each site. The request
also requires ComEd to submit information regarding the criteria that it has
established, or plans to establish, to measure performance and to explain
ComEd's proposed actions if the criteria are not met. The request states the
NRC staff's concerns with the "cyclical safety performance of ComEd nuclear
stations," noting the presence on the list of plants to be monitored closely
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
request does acknowledge the management and organizational changes implemented
by ComEd, including the "additional focus placed on management and leadership,
accountability, the problem identification and corrective action processes,
material condition improvement, work control, and radiation protection." It
also acknowledges improvements seen at Dresden and Quad Cities stations; but
indicated at the same time performance declines were observed at both LaSalle
and Zion stations. The operational problems identified by the NRC are
consistent with weaknesses identified in recent station self-assessments
initiated by ComEd; and management has undertaken to develop and implement
programs designed to address these issues. Consequently, ComEd's management
believes that it can provide sufficient information to the NRC demonstrating
ComEd's ability to operate its nuclear generating stations while sustaining
performance improvements.
ComEd has devoted, and intends to continue to devote, significant resources
to the management and operations of its nuclear generating stations. Over the
past several years, it has increased and reinforced station management with
managers drawn from other utilities having experience with similar operational
and performance issues. It has also sought to identify, anticipate and address
operating and performance issues in a safe, cost-effective manner while
seeking to improve the availability and capacity factors of its nuclear
generating units. Such activities have included improvements in operating and
personnel procedures and repair and replacement of equipment and can result in
longer unit outages. In this regard, ComEd's management decided to continue
the present unit outages at its LaSalle station until the identified
performance issues have been appropriately addressed. ComEd presently expects
such outages to extend into the summer of 1997.
Generating station availability and performance during a year may be issues
in fuel reconciliation proceedings in assessing the prudence of fuel and power
purchases during such year. Final ICC orders have been issued in fuel
reconciliation proceedings for years prior to 1994. In 1996, an intervenor
filed testimony in the fuel reconciliation proceeding for 1994 seeking a
refund of approximately $90 million relating to nuclear station performance.
ComEd estimates that it will expend approximately $15.5 billion, excluding
any contingency allowance, for decommissioning costs primarily during the
period from 2007 through 2032. Such costs, which are estimated to aggregate
$3.9 billion in current-year (1997) dollars, 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 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 21 of Notes to Financial Statements for additional information regarding
certain effects of CERCLA on ComEd.
B-11
<PAGE>
RESULTS OF OPERATIONS
Unicom's earnings per common share were $3.09 in 1996, $2.98 in 1995 and
$1.66 in 1994. Substantially all of the results of operations for Unicom are
the results of operations for ComEd. The results of Unicom's unregulated
subsidiaries are not material to the results of Unicom and subsidiary
companies as a whole. As such, the following section discusses the results of
operations for ComEd alone.
Net Income. The 1996 results reflect, among other factors, a 1% decrease in
overall operation and maintenance expenses as compared to 1995 and the
positive effects of an income tax refund related to prior years (net income
effect of $26 million or $0.12 per common share) and a reduction in real
estate taxes (net income effect of $28 million or $0.13 per common share).
Approximately half of the reduction in real estate taxes is related to the
year 1995. The real estate tax reduction results primarily from ongoing
challenges by ComEd of the methodology used by local taxing authorities to
assess the value of ComEd's nuclear generating stations. The 1996 results also
reflect a 9% reduction in the total of interest expense on debt and dividend
requirements on preferred and preference stocks compared to 1995, largely due
to the early retirement of debt at the end of 1995. In September 1996, the ICC
approved ComEd's request to increase depreciation charges on its nuclear
generating units by $30 million for the year 1996, reducing net income by $20
million or $0.09 per common share.
The 1995 results reflect higher revenues, primarily as a result of higher
kilowatthour sales, and the higher rate levels, which became effective in
January 1995 under the Rate Order. The higher kilowatthour sales reflect the
unusually hot summer weather in 1995. The 1995 results were also affected by
higher operation and maintenance expenses, which reflect an after-tax charge
of $59 million or $0.27 per common share for a voluntary employee separation
offer to certain ComEd employees. ComEd also recorded an after-tax charge of
$20 million or $0.09 per common share related to the early redemption of $645
million of long-term debt.
The 1994 results reflect higher revenues as a result of the favorable
comparison to 1993 in which the effects of the Rate Matters Settlement and the
Fuel Matters Settlement were recorded. The 1994 results also reflect ComEd's
increased kilowatthour sales to ultimate consumers as the result of an
improving economy and warmer weather. The effects of these items were
partially offset by higher operation and maintenance expenses, which include
an after-tax charge of $20 million or $0.09 per common share for additional
pension costs related to an early retirement offer made to certain employees
during 1994. ComEd also recorded a reduction in the carrying value of its
investments in uranium-related properties in 1994, which reduced net income by
$34 million or $0.16 per common share.
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 fuel adjustment clause
(which is intended to recover 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, rates and fuel adjustment clause recoveries. 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 opportunities are affected by a number of factors, including
nuclear generating availability and performance.
During 1996, electric operating revenues increased $25 million principally
reflecting increased sales for resale and increased energy cost recoveries
under ComEd's fuel adjustment clause, although kilowatthour sales to ultimate
consumers were down 1.1% from the prior year due to the cooler summer weather
compared to the exceptionally hot summer in 1995. Operating revenues
B-12
<PAGE>
increased $632 million in 1995, as compared to 1994, primarily due to an
increase of 4.6% in kilowatthour sales to ultimate consumers attributable to
the hot summer weather as well as a rate increase that became effective in
January 1995. Operating revenues increased $1,017 million in 1994, as compared
to 1993, principally reflecting the favorable comparison to the prior year in
which the refunds associated with the Rate Matters Settlement and the Fuel
Matters Settlement were deducted from revenues, but also reflecting a 2.8%
increase in kilowatthour sales to ultimate consumers as a result of warmer
summer weather, colder winter weather and improved economic activity within
ComEd's service territory. The 1994 revenues were also affected by a decline
in the amount of energy costs recovered under the fuel adjustment clause.
Kilowatthour sales including sales for resale decreased 0.1% in 1996,
increased 7.3% in 1995 and decreased 3.0% in 1994.
Fuel Costs. Changes in fuel expense for 1996, 1995 and 1994 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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cost of fuel consumed (per million Btu):
Nuclear........................................... $0.53 $0.52 $0.53
Coal.............................................. $2.41 $2.43 $2.31
Oil............................................... $3.41 $3.06 $2.89
Natural gas....................................... $2.75 $1.85 $2.27
Average all fuels................................. $1.17 $1.05 $1.08
Net generation of electric energy (millions of kilo-
watthours)......................................... 93,048 96,608 90,243
Fuel sources of kilowatthour generation:
Nuclear........................................... 67% 73% 71%
Coal.............................................. 30 24 25
Oil............................................... 1 -- 1
Natural gas....................................... 2 3 3
------ ------ ------
100% 100% 100%
====== ====== ======
</TABLE>
The decrease in nuclear generation as a percentage of total generation for
1996 compared to the prior years is primarily due to scheduled and non-
scheduled outages at certain of ComEd's nuclear generating stations.
Under the Energy Policy Act of 1992, investor-owned electric utilities that
have purchased enrichment services from the DOE are being assessed amounts to
fund a portion of the cost for the decontamination and decommissioning of
uranium enrichment facilities owned and previously operated by the DOE.
ComEd's portion of such assessments is estimated to be approximately $15
million per year (to be adjusted annually for inflation) to 2007. The Act
provides that such assessments are to be treated as a cost of fuel. See Note 1
of Notes to Financial Statements under "Deferred Unrecovered Energy Costs" for
information related to the accounting for such costs.
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
December 31, 1996, ComEd had unrecovered fuel costs in the form of coal
reserves of approximately $364 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, fuel reconciliation proceedings and coal reserves, see
"Liquidity and Capital Resources" above and Notes 1 and 21 of Notes to
Financial Statements.
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<PAGE>
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of ComEd and the Indiana Company's generating units and
the availability and cost of power from other utilities.
The number and average cost of kilowatthours purchased were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Kilowatthours (millions)................................ 6,129 2,475 2,071
Cost per kilowatthour................................... 2.37c 2.60c 2.86c
</TABLE>
Deferred Under or Overrecovered Energy Costs--Net. Operating expenses for
the years 1996, 1995 and 1994 include the net change in under or overrecovered
allowable energy costs under ComEd's fuel adjustment clause. See "Fuel Costs"
and "Fuel Supply" above and Note 1 of Notes to Financial Statements under
"Deferred Unrecovered Energy Costs."
Operation and Maintenance Expenses. Operation and maintenance 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 year. Two major components of such expenses, however, are the costs
associated with operating and maintaining ComEd's fossil and nuclear
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 years presented in the financial statements, the aggregate
level of operation and maintenance expenses decreased 1% in 1996 and increased
4% during 1995 and 2% during 1994. All three years include increases in the
level of generating station expenses, as discussed below. The year to year
variations reflect, in substantial part, the impact in 1995 of an early
separation program offered to ComEd's employees, which resulted in a $97
million charge related to the offered incentives. Additional factors in each
year also affected the level of operation and maintenance expenses.
Operation and maintenance expenses associated with generating stations have
increased during the three year period as a result of activities associated
with the repair, replacement and improvement of generating facility equipment.
During 1996, 1995 and 1994, operation and maintenance expenses associated with
fossil generating stations increased $4 million, $3 million and $4 million,
respectively. In the same years, operation and maintenance expenses associated
with nuclear generating stations increased $88 million, $32 million and $9
million, respectively. During 1994, the increases were attributable to
scheduled maintenance and unplanned equipment repairs. In 1995, ComEd
increased the number and scope of maintenance activities associated with
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 improve station availability. The
efforts begun in 1995 continued into 1996 and are expected to continue through
1998.
The increase in operation and maintenance expenses associated with nuclear
generating stations has been driven by ComEd's objective to improve station
availability as well as to meet regulatory requirements and expectations.
ComEd is actively embarked upon 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 the wholesale market for revenue generation.
During the three years presented in the financial statements, ComEd has
increased and reinforced station management with managers drawn from other
utilities having experience with similar operating issues. It has also sought
to identify, anticipate
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<PAGE>
and address nuclear station operation and performance issues in a safe, cost-
effective manner while seeking to improve the availability and capacity
factors of its nuclear generating units. Such activities have included
improvements in operating and personnel procedures and repair and replacement
of equipment, and can result in longer unit outages. Such activities have
involved increased maintenance and repair expenses in recent years. ComEd
expects 1997 overall operation and maintenance expenses to increase by
approximately $150 million over 1996 expenses. Approximately $100 million of
this increase is related to nuclear operations and is intended to address
previously identified operational issues (including issues identified by the
NRC in connection with its determination regarding the plants to be monitored
closely) and to achieve a longer term benefit of improved capacity factors.
ComEd expects this increased level of expenses to continue through 1998.
Operation and maintenance expenses associated with transmission and
distribution facilities increased $11 million in 1996 and decreased $3 million
and $18 million in 1995 and 1994, respectively. The 1996 increase reflects
higher maintenance expenses. The decreases in 1995 and 1994 reflect cost
control efforts. Costs of customer-related activities, including customer
assistance, energy sales services and uncollectible accounts, increased $17
million and $10 million in 1996 and 1995, respectively.
Operation and maintenance expenses also include compensation and benefits
expenses. During the period from 1995 to 1996, ComEd undertook to reduce the
size of its workforce by offering incentives for employees to leave
voluntarily. Such incentives included both current payments and earlier
eligibility for post-retirement health care benefits, and resulted in 1995
provisions of $72 million for the payments and $25 million for the benefits
incentives and 1996 provisions of $8 million for payments and $4 million for
benefits incentives. ComEd also offered an early retirement program during
1994, which increased pension expense by approximately $34 million in that
year. During 1995 and 1996, charges related to post-retirement health care
benefits (after excluding the effects of the separation program) decreased $40
million and $12 million, respectively, primarily as a result of a plan
amendment effected in mid-1995 which required retired employee contributions
to the plan for the first time. Favorable experience also allowed the use of
lower health care cost trend rates, producing a lower charge for 1995 and
1996. During 1996, ComEd also recorded a reduction of $12 million in the
provision for pension costs in 1996 as compared to 1995. Finally, operation
and maintenance expenses reflect $38 million, $65 million and $50 million for
employee incentive compensation plan costs in 1996, 1995 and 1994,
respectively. The payments, which were made partly in cash and partly in
shares of Unicom common stock, were made under Unicom's Long-Term Incentive
Plan as the result of the achievement during the indicated years of specified
financial performance, cost containment and operating performance goals.
Operation and maintenance expenses in 1996, 1995 and 1994 include
approximately $19 million, $16 million and $20 million, respectively, for wage
increases. The effects of inflation have also increased operation and
maintenance expenses during the years and are also reflected in the increases
and decreases discussed herein.
Operation and maintenance expenses associated with certain administrative
and general costs decreased $11 million in 1995 and increased $12 million in
1994. The decrease in 1995 was due to a variety of reasons including a
decrease in expenses related to insurance, injuries and damages and the
provision for vacation pay liability. The increase in 1994 is primarily due to
increased provisions for injuries and damages and obsolete materials.
Depreciation. Depreciation expense increased in 1996, 1995 and 1994 as a
result of additions to plant in service and an increase in the nuclear
depreciation rate for 1996. In September 1996, the ICC approved ComEd's
additional depreciation initiative for 1996, which increased depreciation
expense by $30 million in 1996. ComEd also continues to consider the
possibility of additional
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depreciation options. See "Depreciation and Decommissioning" in Note 1 of
Notes to Financial Statements and Note 2 of Notes to Financial Statements for
additional information.
Interest on Debt. Changes in interest on long-term debt and notes payable
for the years 1996, 1995 and 1994 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>
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Long-term debt outstanding:
Average amount (millions).......................... $6,644 $7,528 $7,934
Average interest rate.............................. 7.67% 7.78% 7.83%
Notes payable outstanding:
Average amount (millions).......................... $ 230 $ 51 $ 9
Average interest rate.............................. 5.79% 6.40% 6.48%
</TABLE>
Decommissioning. The staff of the SEC has questioned certain of the current
accounting practices of the electric utility industry, including ComEd,
regarding the recognition, measurement and classification of decommissioning
costs for nuclear generating stations in financial statements of electric
utilities. In response to these questions, the FASB is reviewing the
accounting for nuclear decommissioning costs and issued an exposure draft in
February 1996 requesting written comment. 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. Unicom does 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.
Investments in Uranium-Related Properties. In 1994, ComEd recorded a
reduction in the carrying value of its investments in uranium-related
properties after completing a review of various alternatives and reassessing
the long-term recoverability of those investments. The effects of the
reduction reduced 1994 net income by $34 million or $0.16 per common share.
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. AFUDC does not
contribute to the current cash flow of Unicom or ComEd.
ComEd's ratios of earnings to fixed charges for the years 1996, 1995 and
1994 were 2.90, 2.79 and 1.99, respectively. ComEd's ratios of earnings to
fixed charges and preferred and preference stock dividend requirements for the
years 1996, 1995 and 1994 were 2.48, 2.39 and 1.73, respectively.
Business corporations, in general, have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate
to replace, at increased costs, the productive assets consumed. Electric
utilities in particular have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental requirements. Because the
regulatory process limits the amount of depreciation expense included in
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.
B-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of 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 December 31, 1996 and 1995, and the related
statements of consolidated income, retained earnings and cash flows for each
of the three years in the period ended December 31, 1996. 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 December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 31, 1997
B-17
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED INCOME
The following Statements of Consolidated Income for the years 1996, 1995 and
1994 reflect the results of past operations and are not intended as any
representation as to results of operations for any future period. Future
operations will necessarily be affected by various and diverse factors and
developments, including changes in electric rates, population, business
activity, competition, taxes, environmental control, energy use, fuel supply,
cost of labor, fuel, purchased power and other matters, the nature and effect
of which cannot now be determined.
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Operating Revenues........................ $6,937,024 $6,910,045 $6,277,521
---------- ---------- ----------
Operating Expenses and Taxes:
Fuel.................................... $1,157,855 $1,087,109 $1,051,793
Purchased power......................... 145,299 64,378 59,123
Operation and maintenance............... 2,161,847 2,175,651 2,094,655
Depreciation............................ 953,701 898,034 887,466
Recovery of regulatory assets........... 15,272 15,272 15,453
Taxes (except income)................... 783,575 833,297 787,796
Income taxes............................ 489,545 526,518 326,744
Investment tax credits deferred--net.... (33,378) (28,710) (28,757)
---------- ---------- ----------
$5,673,716 $5,571,549 $5,194,273
---------- ---------- ----------
Operating Income.......................... $1,263,308 $1,338,496 $1,083,248
---------- ---------- ----------
Other Income and (Deductions):
Interest on long-term debt.............. $ (515,370) $ (587,583) $ (621,225)
Interest on notes payable............... (13,308) (3,280) (557)
Allowance for funds used during
construction--
Borrowed funds........................ 19,426 11,137 18,912
Equity funds.......................... 20,776 13,129 22,628
Income taxes applicable to nonoperating
activities............................. 7,812 5,085 27,074
Interest and other costs for 1993
Settlements............................ -- (61) (21,464)
Provision for dividends--
Preferred and preference stocks of
ComEd................................ (64,424) (69,961) (64,927)
ComEd-obligated mandatorily redeemable
preferred securities of subsidiary
trust................................ (16,960) (4,428) --
Miscellaneous--net...................... (35,160) (43,001) (88,755)
---------- ---------- ----------
$ (597,208) $ (678,963) $ (728,314)
---------- ---------- ----------
Net Income Before Extraordinary Item...... $ 666,100 $ 659,533 $ 354,934
Extraordinary Loss Related to Early
Redemption of Long-Term Debt, Less
Applicable Income Taxes.................. -- (20,022) --
---------- ---------- ----------
Net Income................................ $ 666,100 $ 639,511 $ 354,934
========== ========== ==========
Average Number of Common Shares
Outstanding.............................. 215,500 214,692 214,031
Earnings Per Common Share Before
Extraordinary Item....................... $ 3.09 $ 3.07 $ 1.66
Extraordinary Loss Related to Early
Redemption of Long-Term Debt, Less
Applicable Income Taxes.................. -- (0.09) --
---------- ---------- ----------
Earnings Per Common Share................. $ 3.09 $ 2.98 $ 1.66
========== ========== ==========
Cash Dividends Declared Per Common Share.. $ 1.60 $ 1.60 $ 1.60
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-18
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
ASSETS 1996 1995
------ ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $1,034 million
and $1,105 million, respectively)................. $27,900,632 $27,052,778
Less--Accumulated provision for depreciation....... 11,479,991 10,565,093
----------- -----------
$16,420,641 $16,487,685
Nuclear fuel, at amortized cost.................... 805,623 734,667
----------- -----------
$17,226,264 $17,222,352
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 1,456,360 $ 1,237,527
Subsidiary companies............................... 113,888 113,657
Other, at cost..................................... 146,302 99,149
----------- -----------
$ 1,716,550 $ 1,450,333
----------- -----------
Current Assets:
Cash............................................... $ 8,727 $ 3,575
Temporary cash investments......................... 51,821 47,801
Special deposits................................... 1,610 3,546
Receivables--
Customers........................................ 568,155 579,848
Taxes............................................ -- 82,988
Other............................................ 109,835 83,795
Provisions for uncollectible accounts............ (12,893) (11,828)
Coal and fuel oil, at average cost................. 140,362 129,176
Materials and supplies, at average cost............ 324,485 333,539
Deferred unrecovered energy costs.................. 104,651 46,028
Deferred income taxes related to current assets and
liabilities....................................... 120,185 107,991
Prepayments and other.............................. 35,872 45,178
----------- -----------
$ 1,452,810 $ 1,451,637
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 2,434,807 $ 2,467,386
Unrecovered energy costs........................... 444,009 588,152
Other.............................................. 113,530 70,308
----------- -----------
$ 2,992,346 $ 3,125,846
----------- -----------
$23,387,970 $23,250,168
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-19
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
CAPITALIZATION AND LIABILITIES 1996 1995
------------------------------ ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity.................................. $ 6,104,380 $ 5,769,637
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements.......... 507,342 508,034
Subject to mandatory redemption requirements....... 217,901 261,475
ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trust*..................... 200,000 200,000
Long-term debt....................................... 6,069,534 6,549,335
----------- -----------
$13,099,157 $13,288,481
----------- -----------
Current Liabilities:
Notes payable--
Commercial paper................................... $ 121,000 $ 261,000
Bank loans......................................... 7,750 7,150
Current portion of long-term debt, redeemable
preference stock and capitalized lease obligations
of subsidiary companies............................. 745,665 434,563
Accounts payable..................................... 469,815 609,224
Accrued interest..................................... 168,750 171,523
Accrued taxes........................................ 171,104 215,388
Dividends payable.................................... 101,850 102,497
Customer deposits.................................... 51,585 44,520
Other................................................ 98,567 93,841
----------- -----------
$ 1,936,086 $ 1,939,706
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes................................ $ 4,574,342 $ 4,507,349
Accumulated deferred investment tax credits.......... 655,662 689,041
Accrued spent nuclear fuel disposal fee and related
interest............................................ 657,449 624,191
Obligations under capital leases of subsidiary
companies........................................... 476,668 375,524
Regulatory liabilities............................... 668,301 601,002
Other................................................ 1,320,305 1,224,874
----------- -----------
$ 8,352,727 $ 8,021,981
----------- -----------
Commitments and Contingent Liabilities (Note 21)
$23,387,970 $23,250,168
=========== ===========
</TABLE>
*As described in Note 8 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 accompanying Notes to Financial Statements are an integral part of the
above statements.
B-20
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995
----------- ------------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Common Stock Equity:
Common stock, without par value--
Outstanding--215,954,625 shares and 215,255,998
shares, respectively (excludes $4 million as of
December 31, 1996 held by trustee for Unicom
Stock Bonus Deferral Plan)...................... $ 4,929,909 $ 4,916,438
Preference stock expense of ComEd................. (3,526) (3,694)
Retained earnings................................. 1,177,997 856,893
----------- ------------
$ 6,104,380 $ 5,769,637
----------- ------------
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--75,003 shares and 96,753 shares,
respectively.................................. 2,385 3,077
Prior preferred stock, cumulative, $100 par
value per share-- No shares outstanding........ -- --
----------- ------------
$ 507,342 $ 508,034
----------- ------------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par
value--
Outstanding--2,496,775 shares and 2,934,990
shares, respectively.......................... $ 248,589 $ 292,163
Current redemption requirements for preference
stock included in current liabilities.......... (30,688) (30,688)
----------- ------------
$ 217,901 $ 261,475
----------- ------------
ComEd-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust:
Outstanding--8,000,000............................ $ 200,000 $ 200,000
----------- ------------
Long-Term Debt:
First mortgage bonds:
Maturing 1996 through 2001--5 1/4% to 9 3/8%.... $ 1,120,000 $ 1,270,000
Maturing 2002 through 2011--4.20% to 8 3/8%..... 1,640,400 1,465,400
Maturing 2012 through 2021--5.85% to 9 7/8%..... 1,391,000 1,391,000
Maturing 2022 through 2023--7 3/4% to 8 5/8%.... 1,160,000 1,160,000
----------- ------------
$ 5,311,400 $ 5,286,400
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%................................. 105,164 110,505
Pollution control obligations, due 2004 through
2014--4.10% to 6 7/8%............................ 142,200 317,200
Other long-term debt.............................. 1,100,833 1,126,318
Current maturities of long-term debt included in
current liabilities.............................. (540,505) (235,992)
Unamortized net debt discount and premium......... (49,558) (55,096)
----------- ------------
$ 6,069,534 $ 6,549,335
----------- ------------
$13,099,157 $ 13,288,481
=========== ============
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-21
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Balance at Beginning of Year.................... $ 856,893 $ 560,971 $549,152
Add--Net income................................. 666,100 639,511 354,934
---------- ---------- --------
$1,522,993 $1,200,482 $904,086
---------- ---------- --------
Deduct--
Cash dividends declared on common stock..... $ 344,892 $ 343,619 $342,561
Other capital stock transactions--net....... 104 (30) 554
---------- ---------- --------
$ 344,996 $ 343,589 $343,115
---------- ---------- --------
Balance at End of Year.......................... $1,177,997 $ 856,893 $560,971
========== ========== ========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-22
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash Flow From Operating Activities:
Net income............................. $ 666,100 $ 639,511 $ 354,934
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization........ 990,779 949,413 929,365
Deferred income taxes and investment
tax credits--net.................... 129,770 156,817 126,281
Extraordinary loss related to early
redemption of long-term debt........ -- 33,158 --
Equity component of allowance for
funds used during construction...... (20,776) (13,129) (22,628)
Provisions for revenue refunds and
related interest.................... -- -- 37,548
Revenue refunds and related interest. -- 15,135 (1,221,650)
Recovery of regulatory assets........ 15,272 15,272 15,453
Provisions/(payments) for liability
for early retirement and separation
costs--net.......................... (29,888) 60,713 33,580
Net effect on cash flows of changes
in:
Receivables........................ 69,706 (178,665) 114,215
Coal and fuel oil.................. (11,186) (20,304) 2,880
Materials and supplies............. 9,053 51,073 18,102
Accounts payable excluding nuclear
fuel lease principal payments and
early retirement and separation
costs--net........................ 106,435 460,705 116,688
Accrued interest and taxes......... (47,057) (2,684) 70,408
Other changes in certain current
assets and liabilities............ 13,850 26,637 (55,843)
Other--net........................... 67,796 138,781 134,188
----------- ----------- -----------
$ 1,959,854 $ 2,332,433 $ 653,521
----------- ----------- -----------
Cash Flow From Investing Activities:
Construction expenditures.............. $ (982,274) $ (927,327) $ (739,679)
Nuclear fuel expenditures.............. (281,833) (289,118) (257,264)
Equity component of allowance for
funds used during construction........ 20,776 13,129 22,628
Contributions to nuclear
decommissioning funds................. (119,281) (132,653) (132,550)
Other investments and special
deposits.............................. (1,052) (1,601) 622,264
----------- ----------- -----------
$(1,363,664) $(1,337,570) $ (484,601)
----------- ----------- -----------
Cash Flow From Financing Activities:
Issuance of securities--
Long-term debt....................... $ 251,902 $ 62,000 $ 546,289
Preferred securities of subsidiary
trust............................... -- 200,000 --
Capital stock........................ 17,754 25,507 86,972
Retirement and redemption of
securities--
Long-term debt....................... (433,084) (1,137,272) (703,930)
Capital stock........................ (44,513) (17,935) (23,643)
Deposits and securities held for
retirement and redemption of
securities............................ -- 106 3,191
Premium paid on early redemption of
long-term debt........................ -- (25,823) (4,564)
Cash dividends paid on common stock.... (344,553) (343,375) (342,322)
Proceeds from sale/leaseback of
nuclear fuel.......................... 316,617 193,215 306,649
Nuclear fuel lease principal payments.. (211,741) (237,845) (209,689)
Increase (Decrease) in short-term
borrowings............................ (139,400) 261,000 1,200
----------- ----------- -----------
$ (587,018) $(1,020,422) $ (339,847)
----------- ----------- -----------
Increase (Decrease) in Cash and Tempo-
rary Cash Investments.................. $ 9,172 $ (25,559) $ (170,927)
Cash and Temporary Cash Investments at
Beginning of Year...................... 51,376 76,935 247,862
----------- ----------- -----------
Cash and Temporary Cash Investments at
End of Year............................ $ 60,548 $ 51,376 $ 76,935
=========== =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-23
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure and Basis of Presentation. Unicom was incorporated in
January 1994 and became the parent holding company of ComEd and Unicom
Enterprises in a corporate restructuring that became effective on September 1,
1994. ComEd, an electric utility, is the principal subsidiary of Unicom.
Unicom Enterprises is an unregulated subsidiary of Unicom and is engaged,
through subsidiaries, in energy service activities. Unicom also has one other
subsidiary that was formed to engage in unregulated activities.
The consolidated financial statements include the accounts of Unicom, ComEd,
the Indiana Company, ComEd Financing I 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
generally accepted accounting principles 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 generally
accepted accounting principles applicable to rate-regulated enterprises and
reflect the effects of the ratemaking process in accordance with SFAS No. 71,
Accounting for the Effects of Certain Types of Regulation. Such effects
concern mainly the time at which various items enter into the determination of
net income in order to follow the principle of matching costs and revenues.
B-24
<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 December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
---------- ----------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Regulatory assets:
Deferred income taxes (1)............................... $1,649,037 $1,689,832
Deferred carrying charges (2)........................... 396,879 409,923
Nuclear decommissioning costs--Dresden Unit 1 (3)....... 174,621 138,058
Unamortized loss on reacquired debt (4)................. 148,380 160,440
Other................................................... 65,890 69,133
---------- ----------
$2,434,807 $2,467,386
========== ==========
Regulatory liabilities:
Deferred income taxes (1)............................... $ 668,301 $ 601,002
========== ==========
</TABLE>
- --------
(1) Recorded in compliance with SFAS No. 109.
(2) Recorded as authorized in the Remand Order. The amortization period is
over the remaining lives of the Units.
(3) Amortized over the remaining life of Dresden station. See "Depreciation
and Decommissioning" below for additional information.
(4) Amortized over the remaining lives of the long-term debt issued to finance
the reacquisition. See "Loss on Reacquired Debt" below for additional
information.
See "Deferred Unrecovered Energy Costs" below regarding the fuel adjustment
clause, the DOE assessment and coal reserves.
If a portion of ComEd's operations was no longer subject to the provisions
of SFAS No. 71 as a result of a change in regulation or the effects of
competition, ComEd would be required to write off the related regulatory
assets and liabilities. In addition, ComEd would be required to determine any
impairment to other assets and purchase contracts and write down such assets
or contracts to their fair value.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which was adopted on January 1, 1996,
established accounting standards for the impairment of long-lived assets. The
SFAS also requires that regulatory assets which are no longer probable of
recovery through future revenue be charged to earnings. SFAS No. 121 did not
have an impact on ComEd's financial position or results of operations upon
adoption.
Deferred Unrecovered Energy Costs. The fuel adjustment clause adopted by the
ICC provides for the recovery of changes in fossil and nuclear fuel costs and
the energy portion of purchased power costs as compared to the fuel and
purchased energy costs included in ComEd's base rates. As authorized by the
ICC, ComEd has recorded under or overrecoveries of allowable fuel and energy
costs which, under the clause, are recoverable or refundable in subsequent
months. Deferred unrecovered energy costs also include amounts to be recovered
through the fuel adjustment clause 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 December
31, 1996 and 1995, an asset related to the assessments of approximately $168
million and $179 million, respectively, was recorded, of which the current
portion of approximately $16 million and $15 million, respectively, was
included in current assets on the Consolidated Balance Sheets. As of December
31, 1996 and 1995, a corresponding liability of approximately $157 million and
$167 million, respectively, was recorded, of which approximately $16 million
and $15 million, respectively, was recorded in other current liabilities.
B-25
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
At December 31, 1996 and 1995, ComEd had unrecovered fuel costs in the form
of coal reserves of approximately $364 million and $448 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 has
been allowed to recover from its customers the costs of the coal reserves
through its fuel adjustment clause as coal is used for the generation of
electricity; however, ComEd is not earning a return on the expenditures for
coal reserves. Such fuel costs expected to be recovered within one year
amounting to approximately $73 million and $24 million at December 31, 1996
and 1995, respectively, have been included on the Consolidated Balance Sheets
in current assets as deferred unrecovered energy costs. ComEd expects to fully
recover the costs of the coal reserves by the year 2000. See Note 21 for
additional information concerning ComEd's coal commitments.
Customer Receivables and Revenues. ComEd is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of residential, commercial, industrial and wholesale customers.
ComEd's electric service territory has an area of approximately 11,300 square
miles and an estimated population of approximately eight million as of
December 31, 1996 and 1995. 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 1996. ComEd had approximately 3.4 million electric customers at
December 31, 1996.
Depreciation and Decommissioning. ComEd's depreciation is provided on the
straight-line basis by amortizing the cost of depreciable plant and equipment
over estimated composite service lives. Non-nuclear plant and equipment is
depreciated at annual rates developed for each class of plant based on their
composite service lives. Provisions for depreciation were at average annual
rates of 3.25%, 3.14% and 3.13% of average depreciable utility plant and
equipment for the years 1996, 1995 and 1994, respectively. The annual rate for
nuclear plant and equipment is 3.09% for 1996, which includes increased
depreciation charges on ComEd's nuclear generating units, approved by the ICC
in September 1996, and excludes separately collected decommissioning costs,
and 2.88% for 1995 and 1994, which excludes separately collected
decommissioning costs. See Note 2 for additional information concerning the
ICC's approval of ComEd's request to increase depreciation charges on nuclear
generating units in 1996.
Nuclear plant decommissioning costs are accrued over the expected service
lives of the related nuclear generating units. The accrual is based on an
annual levelized cost of the unrecovered portion of estimated decommissioning
costs which are escalated for expected inflation to the expected time of
decommissioning and are net of expected earnings on the trust funds. See
"Decommissioning" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Results of Operations," for
a discussion of questions raised by the staff of the SEC and a FASB review
regarding the electric utility industry method of accounting for
decommissioning costs. Dismantling is expected to occur relatively soon after
the end of the useful life of each related generating station. The accrual for
decommissioning is based on the prompt removal method authorized by NRC
guidelines. ComEd's twelve operating units have estimated remaining service
lives ranging from 9 to 31 years. ComEd's first nuclear unit, Dresden Unit 1,
is retired and is expected to be dismantled upon the retirement of the last
unit at that station, which is consistent with the regulatory treatment for
the related decommissioning costs.
Based on ComEd's most recent study, decommissioning costs, including the
cost of decontamination and dismantling, are estimated to aggregate $3.9
billion in current-year (1997) dollars excluding a contingency allowance.
ComEd estimates that it will expend approximately $15.5
B-26
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
billion, excluding any contingency allowance, for decommissioning costs
primarily during the period from 2007 through 2032. 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.
Pursuant to the Rate Order, beginning in 1995, ComEd collects
decommissioning costs from its ratepayers under a rider which allows annual
adjustments to decommissioning cost collections outside the context of a
traditional rate proceeding. The current estimated decommissioning costs
allowed under the rider exclude a contingency allowance. 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. Under its
most recent annual rider, filed with the ICC on February 28, 1996, ComEd has
decreased its estimated annual decommissioning cost accrual from $113.5
million to $108.8 million, primarily reflecting stronger than expected after-
tax returns on the external trust funds in 1995. The ICC issued an order
approving the rider filing on April 24, 1996.
As a result of the ICC approval of the rider filing, beginning April 30,
1996, the effective date of the order, ComEd began accruing and collecting
$108.8 million annually for decommissioning costs. The assumptions used to
calculate the $108.8 million decommissioning cost accrual include: the
decommissioning cost estimate of $3.9 billion in current-year (1997) dollars,
after-tax earnings on the tax-qualified and nontax-qualified decommissioning
funds of 7.30% and 6.26%, respectively, as well as an escalation rate for
future decommissioning costs of 5.5%. The annual accrual of $108.8 million
provided over the lives of the nuclear plants, coupled with the expected fund
earnings and amounts previously recovered in rates, is expected to aggregate
approximately $15.5 billion. The annual accrual and collection amounts will be
reviewed again during the first quarter of 1997.
For the twelve operating nuclear units, decommissioning costs are recorded
as portions of depreciation expense and accumulated provision for depreciation
on the Statements of Consolidated Income and the Consolidated Balance Sheets,
respectively. As of December 31, 1996, the total decommissioning costs
included in the accumulated provision for depreciation were $1,522 million.
For ComEd's retired nuclear unit, Dresden Unit 1, the total estimated
liability at December 31, 1996 in current-year (1997) dollars of $276 million
was recorded on the Consolidated Balance Sheets as a noncurrent liability and
the unrecovered portion of the liability of approximately $175 million was
recorded as a regulatory asset.
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts; and, consequently, such collections do not add
to the cash flows available for general corporate purposes. The ICC has
approved ComEd's funding plan which provides for annual contributions of
current accruals and ratable contributions of past accruals over the remaining
service lives of the nuclear plants. At December 31, 1996, the past accruals
that are required to be contributed to the external trusts aggregate $169
million. The fair value of funds accumulated in the external trusts at
December 31, 1996 was approximately $1,456 million which includes pre-tax
unrealized appreciation of $230 million. The earnings on the external trusts
accumulate in the fund balance and in the accumulated provision for
depreciation.
Amortization of Nuclear Fuel. The cost of nuclear fuel is amortized to fuel
expense based on the quantity of heat produced using the unit of production
method. As authorized by the ICC, provisions for spent nuclear fuel disposal
costs have been recorded at a level required to recover the fee payable on
current nuclear-generated and sold electricity and the current interest
accrual on the one-
B-27
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
time fee payable to the DOE for nuclear generation prior to April 7, 1983. The
one-time fee and interest thereon have been recovered and the current fee and
current interest on the one-time fee are currently being recovered through the
fuel adjustment clause. See Note 11 for further information concerning the
disposal of spent nuclear fuel, the one-time fee and the interest accrual on
the one-time fee. Nuclear fuel expenses, including leased fuel costs and
provisions for spent nuclear fuel disposal costs, for the years 1996, 1995 and
1994 were $354 million, $391 million and $358 million, respectively.
Income Taxes. Deferred income taxes are provided for income and expense
items recognized for financial accounting purposes in periods that differ from
those for income tax purposes. Income taxes deferred in prior years are
charged or credited to income as the book/tax timing differences reverse.
Prior years' deferred investment tax credits are amortized through credits to
income generally over the lives of the related property. Income tax credits
resulting from interest charges applicable to nonoperating activities,
principally construction, are classified as other income.
AFUDC. 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. The equity component of AFUDC is recorded on an after-tax basis and
the borrowed funds component of AFUDC is recorded on a pre-tax basis. The
average annual capitalization rates for the years 1996, 1995 and 1994 were
9.02%, 9.52% and 9.85%, respectively. AFUDC does not contribute to the current
cash flow of Unicom or ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations for the years 1996, 1995 and 1994 were $626 million, $696 million
and $730 million, 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 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.
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 its employee
stock purchase plan under APB Opinion No. 25, "Accounting for Stock Issued to
Employees". See Note 5 for additional information.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on net income.
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 years 1996, 1995
and 1994 was as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)........... $538,351 $604,932 $645,658
Income taxes (net of refunds).................. $234,743 $367,708 $ (4,923)
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital lease obligations incurred by subsidiary
companies....................................... $320,975 $198,577 $309,716
</TABLE>
B-28
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(2) RATE MATTERS
On January 9, 1995, the ICC issued its Rate Order in the proceedings
relating to ComEd's February 1994 rate increase request. The Rate Order
provided, among other things, for (i) an increase in ComEd's total revenues of
approximately $301.8 million (excluding add-on revenue taxes) or 5.2%, on an
annual basis, including a $303.2 million increase in base rates, (ii) the
collection of municipal franchise costs on an individual municipality basis
through a rider, and (iii) the use of a rider, with annual review proceedings,
to pass on to ratepayers increases or decreases in estimated costs associated
with the decommissioning of ComEd's nuclear generating units. See Note 1 under
"Depreciation and Decommissioning" for additional information related to the
level of decommissioning cost collections. The ICC also determined that the
Units were 100% "used and useful" and that the previously determined
reasonable costs of such Units, as depreciated, should be included in full in
ComEd's rate base. The rates provided in the Rate Order became effective on
January 14, 1995; however, they are being collected subject to refund as a
result of subsequent judicial action. As of December 31, 1996, electric
operating revenues of approximately $651 million (excluding revenue taxes) are
subject to refund. Intervenors and ComEd have filed appeals of the Rate Order
with the Illinois Appellate Court, and oral argument was heard on January 28,
1997.
On December 11, 1995, ComEd announced a series of customer initiatives as
part of its larger ongoing effort to address the need to give all customer
classes the opportunity to benefit from increased competition in the electric
utility business, while retaining the benefits (such as reliability) of
current regulation and ensuring utilities' cost recovery for commitments made
under the obligation to serve customers. The initiatives include a five-year
cap on base electric rates at current levels and various customer service and
incentive pricing programs designed to allow customers more choice and control
over the services they seek and the prices they pay. These initiatives are in
addition to previously implemented special discount contract rate programs for
new or existing industrial customers. ComEd anticipates the initiatives will
be fully implemented in 1997 and will reduce its revenues by approximately $40
million annually (including the effects of previously implemented initiatives
and before income tax effects) primarily through changes in energy
utilization. Additionally in September 1996, the ICC approved ComEd's
additional depreciation initiative for 1996. ComEd's costs increased by $30
million in 1996 (before income tax effects), through the increase in
depreciation charges on its nuclear generating units. ComEd also continues to
consider the possibility of additional depreciation options.
Under ComEd's initiatives, the five-year base rate cap at current levels
became effective in December 1995 and will extend until January 1, 2001. The
rate cap does not affect ComEd's fuel cost or nuclear decommissioning cost
recovery provisions. ComEd's fuel cost variances will continue to be collected
through its fuel adjustment clause, and such collections will continue to be
subject to annual reconciliation proceedings before the ICC. Likewise, nuclear
decommissioning costs will continue to be collected as described in Note 1
under "Depreciation and Decommissioning."
See "Changes in the Electric Utility Industry" under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" for
information regarding the legislative proposal supported by ComEd.
(3) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK
At December 31, 1996, Unicom's authorized shares consisted of 400,000,000
shares of common stock. The authorized shares of ComEd preferred and
preference stocks at December 31, 1996 were: preference stock--22,806,775
shares; $1.425 convertible preferred stock--75,003 shares; and prior
B-29
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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.
(4) COMMON STOCK
At December 31, 1996, shares of Unicom common stock were reserved for the
following purposes:
<TABLE>
<S> <C>
Long-Term Incentive Plan........................................ 3,544,609
Employee Stock Purchase Plan.................................... 703,570
Employee Savings and Investment Plan............................ 274,203
Exchange for ComEd common stock not held by Unicom.............. 110,323
1996 Directors' Fee Plan........................................ 194,888
---------
4,827,593
=========
</TABLE>
Common stock increased during the years 1996, 1995 and 1994 as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Shares of Common Stock Issued:
Long-Term Incentive Plan.......................... 132,579 481,751 --
Employee Stock Purchase Plan...................... 196,513 217,080 305,205
Employee Savings and Investment Plan.............. 339,100 217,100 85,400
Conversion of $1.425 convertible preferred stock.. -- -- 185,041
Conversion of warrants............................ -- -- 13,274
Exchange for ComEd common stock not held by
Unicom........................................... 25,323 -- --
1996 Directors' Fee Plan.......................... 5,112 -- --
------- ------- -------
698,627 915,931 588,920
======= ======= =======
<CAPTION>
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Amount of Common Stock Issued:
Total issued...................................... $17,733 $25,412 $14,782
Held by trustee for Unicom Stock Bonus Deferral
Plan............................................. (4,300) -- --
Other............................................. 38 95 (386)
------- ------- -------
$13,471 $25,507 $14,396
======= ======= =======
</TABLE>
At December 31, 1996 and 1995, 78,045 and 82,742 ComEd common stock purchase
warrants, respectively, were outstanding. The warrants entitle the holders to
convert such warrants into common stock of ComEd at a conversion rate of one
share of common stock for three warrants.
(5) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN
Unicom has a nonqualified stock option awards program under its Long-Term
Incentive Plan and an ESPP. The stock option awards program was adopted by
Unicom in July 1996 to reward valued employees responsible for, or
contributing to, the management, growth and profitability of Unicom and its
subsidiaries. As of December 31, 1996, 1,205,500 options have been granted
primarily to employees of ComEd and its subsidiaries. Of this amount, 15,500
options have been canceled and 1,190,000 are outstanding. The weighted average
exercise price for the outstanding stock options is $25.50. The stock options
granted in 1996 will expire ten years from their grant date. One-third of the
shares subject to the options vest on each of the next three anniversaries of
the option grant date. In addition, the stock options will become fully vested
immediately if the holder dies, retires, is terminated other than for cause or
qualifies for long-term disability, and will also vest in full upon a
B-30
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
change in control of Unicom. As of December 31, 1996, 2,000 of the granted
stock options are exercisable and none of the stock options have been
exercised.
The estimated fair market value for each of the stock options granted in
1996 was $3.74. The fair value of each stock option granted was estimated as
of the date of grant using the Black-Scholes option-pricing model. Assumptions
used to determine the estimated fair market value of the stock options include
(i) dividend yield of 6.30%, (ii) expected volatility of 20.98%, (iii) risk-
free interest rate of 6.64% and (iv) expected life of 7 years.
The ESPP allows employees to purchase Unicom common stock at a 10% discount
from market value. The stock is purchased in six month intervals, April and
October of each year. Substantially all of the employees of Unicom, ComEd and
certain subsidiaries are eligible to participate in the ESPP. Unicom issued
196,512, 217,080 and 150,495 shares of common stock in 1996, 1995 and 1994,
respectively, under the ESPP at an average annual purchase price of $23.51,
$25.34 and $19.80, respectively. ComEd issued 154,710 shares of common stock
at a purchase price of $21.72 in 1994 under the ESPP.
Unicom has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". For financial reporting purposes,
Unicom has adopted APB No. 25, "Accounting for Stock Issued to Employees", 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 resulting effect on net income and earnings per share would have been de
minimis.
(6) 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 1996 or 1995. During
1994, 3,000,000 shares of ComEd preference stock without mandatory redemption
requirements were issued and no shares of ComEd preferred or preference stocks
without mandatory redemption requirements were redeemed. The series of ComEd
preference stock without mandatory redemption requirements outstanding at
December 31, 1996 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
B-31
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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.
(7) COMED PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS
During 1996, 1995 and 1994, 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 December 31,
1996 are summarized as follows:
<TABLE>
<CAPTION>
SHARES AGGREGATE
SERIES OUTSTANDING STATED VALUE OPTIONAL REDEMPTION PRICE(1)
- -------------- ----------- ------------ --------------------------------------------------
(THOUSANDS
OF DOLLARS)
<S> <C> <C> <C>
$8.20 214,275 $ 21,428 $103 through October 31, 1997; and $101 thereafter
$8.40 Series B 330,000 32,778 $101
$8.85 262,500 26,250 $103 through July 31, 1998; and $101 thereafter
$9.25 600,000 60,000 $103 through July 31, 1999; and $101 thereafter
$9.00 390,000 38,659 Non-callable
$6.875 700,000 69,474 Non-callable
--------- --------
2,496,775 $248,589
========= ========
</TABLE>
- ---------------------
(1) Per share plus accrued and unpaid dividends, if any.
The annual sinking fund requirements and sinking fund and involuntary
liquidation prices per share of the outstanding series of ComEd preference
stock subject to mandatory redemption requirements are summarized as follows:
<TABLE>
<CAPTION>
SINKING
ANNUAL SINKING FUND FUND INVOLUNTARY
SERIES REQUIREMENT PRICE(1) LIQUIDATION PRICE(1)
-------------- ------------------- ------- -------------------
<S> <C> <C> <C>
$8.20 35,715 shares $100 $100.00
$8.40 Series B 30,000 shares(2) $100 $ 99.326
$8.85 37,500 shares $100 $100.00
$9.25 75,000 shares $100 $100.00
$9.00 130,000 shares(2) $100 $ 99.125
$6.875 (3) $100 $ 99.25
</TABLE>
--------
(1) Per share plus accrued and unpaid dividends, if any.
(2) ComEd has a non-cumulative option to increase the annual
sinking fund payment on each sinking fund redemption date
to retire an additional number of shares, not in excess of
the sinking fund requirement, at the applicable redemption
price.
(3) All shares are required to be redeemed on May 1, 2000.
Annual remaining sinking fund requirements through 2001 on ComEd preference
stock outstanding at December 31, 1996 will aggregate $31 million in each of
1997-99, $88 million in 2000 and $18 million in 2001. During 1996, 1995 and
1994, 438,215 shares, 178,215 shares and 177,085 shares, respectively, of
ComEd preference stock subject to mandatory redemption requirements were
reacquired to meet sinking fund requirements.
Sinking fund requirements due within one year are included in current
liabilities.
(8) COMED-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF COMED
FINANCING I
In September 1995, ComEd Financing I (Trust), a wholly-owned subsidiary
trust of ComEd, issued 8,000,000 of its 8.48% ComEd-obligated mandatorily
redeemable preferred securities. The
B-32
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
sole asset of the Trust is $206.2 million principal amount of ComEd's 8.48%
subordinated deferrable interest notes due September 30, 2035. There is a full
and unconditional guarantee by ComEd of the Trust's obligations under the
securities issued by the Trust. 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. If interest payments on the subordinated
deferrable interest notes 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, or at any time
in the event of certain income tax circumstances. If the subordinated
deferrable interest notes are redeemed, the Trust must redeem preferred
securities having an aggregate liquidation amount equal to the aggregate
principal amount of the subordinated deferrable interest notes so redeemed. In
the event of the dissolution, winding up or termination of the Trust, the
holders of the preferred securities will be entitled to receive, for each
preferred security, a liquidation amount of $25 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 are distributed to the holders of the preferred securities.
(9) LONG-TERM DEBT
Sinking fund requirements and scheduled maturities remaining through 2001
for ComEd's first mortgage bonds, sinking fund debentures and other long-term
debt outstanding at December 31, 1996, after deducting sinking fund debentures
reacquired for satisfaction of future sinking fund requirements, are
summarized as follows: 1997--$539 million; 1998--$497 million; 1999--$150
million; 2000--$462 million; and 2001--$108 million. Unicom Enterprises' note
payable to bank of $95 million will mature in 1998.
B-33
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
At December 31, 1996, ComEd's outstanding first mortgage bonds maturing
through 2001 were as follows:
<TABLE>
<CAPTION>
SERIES PRINCIPAL AMOUNT
--------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
<S> <C>
7% due February 1, 1997............................ $ 150,000
5 3/8% due April 1, 1997........................... 50,000
6 1/4% due October 1, 1997......................... 60,000
6 1/4% due February 1, 1998........................ 50,000
6% due March 15, 1998.............................. 130,000
6 3/4% due July 1, 1998............................ 50,000
6 3/8% due October 1, 1998......................... 75,000
9 3/8% due February 15, 2000....................... 125,000
6 1/2% due April 15, 2000.......................... 230,000
6 3/8% due July 15, 2000........................... 100,000
7 1/2% due January 1, 2001......................... 100,000
----------
$1,120,000
==========
</TABLE>
Other long-term debt outstanding at December 31, 1996 is summarized as
follows:
<TABLE>
<CAPTION>
DEBT PRINCIPAL
SECURITY AMOUNT INTEREST RATE
- ------------ ---------- ---------------------------------------------
(THOUSANDS
OF
DOLLARS)
<S> <C> <C>
Unicom--
Loans Payable:
Loan due
January 1, 2003 $ 9,152 Interest rate of 8.31%
Loan due
January 1, 2004 9,749 Interest rate of 8.44%
----------
$ 18,901
----------
ComEd--
Notes:
Medium Term Notes,
Series 1N due
various dates
through
April 1, 1998 $ 35,500 Interest rates ranging from 9.52% to 9.65%
Medium Term Notes,
Series 3N due
various dates
through
October 15, 2004 296,000 Interest rates ranging from 9.00% to 9.20%
Medium Term Notes,
Series 4N due
May 15, 1997 20,000 Interest rate of 8.875%
Notes due
February 15, 1997 150,000 Interest rate of 7.00%
Notes due
July 15, 1997 100,000 Interest rate of 6.50%
Notes due
October 15, 2005 235,000 Interest rate of 6.40%
----------
$ 836,500
----------
Long-Term Note
Payable to Bank:
Note due
June 1, 1998 $ 150,000 Prevailing interest rate of 6.08% at December 31, 1996
----------
Purchase Contract
Obligation due
April 30, 2005 $ 432 Interest rate of 3.00%
----------
Total ComEd $ 986,932
----------
Unicom Enterprises--
Note Payable to
Bank:
Note due
November 22, 1998 $ 95,000 Prevailing interest rate of 6.51% at December 31, 1996
----------
Total Unicom $1,100,833
==========
</TABLE>
Long-term debt maturing within one year has been included in current
liabilities.
B-34
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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.
ComEd recorded an extraordinary loss of $33 million in the fourth quarter of
1995 related to the early redemption of $645 million of long-term debt which
reduced net income by $20 million (after reflecting income tax effects of $13
million) or $0.09 per common share.
(10) LINES OF CREDIT
ComEd had total bank lines of credit of $914 million and unused bank lines
of credit of $906 million at December 31, 1996. Of that amount, $906 million
(of which $175 million expires on September 29, 1997, $63 million expires in
equal quarterly installments commencing on March 31, 1997 and ending on
September 30, 1998 and $668 million expires in equal quarterly installments
commencing on December 31, 1997 and ending on September 30, 1999) may be
borrowed on secured or unsecured notes of ComEd at various interest rates. The
interest rate is set at the time of a borrowing and is based on several
floating rate bank indices plus a spread which is dependent upon the credit
rating of ComEd's outstanding first mortgage bonds or on a prime interest
rate. Amounts under the remaining lines of credit may be borrowed at
prevailing prime interest rates on unsecured notes of ComEd. Collateral, if
required for the borrowings, would consist of first mortgage bonds issued
under and in accordance with the provisions of ComEd's mortgage. ComEd is
obligated to pay commitment fees with respect to $906 million of such lines of
credit.
Unicom Enterprises has a $200 million credit facility which will expire in
1999, of which $105 million was unused as of December 31, 1996. The credit
facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including Unicom Thermal, and for general
corporate purposes. The credit facility is guaranteed by Unicom and includes
certain covenants with respect to Unicom's 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.
(11) 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 beginning not later than January 1998. The DOE advised ComEd in
December 1996 that it anticipates it will be unable to begin acceptance of
spent nuclear fuel by January 1998. It is expected this delivery schedule will
be delayed significantly. The contract with the DOE requires ComEd to pay the
DOE a one-time fee applicable to nuclear generation through April 6, 1983 of
approximately $277 million, with interest to date of payment, and a fee
payable quarterly equal to one mill per kilowatthour of nuclear-generated and
sold electricity after April 6, 1983. As provided for under the contract,
B-35
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
ComEd has elected to pay the one-time fee, with interest, just prior to the
first delivery of spent nuclear fuel to the DOE. The liability for the one-
time fee and the related interest is reflected in the Consolidated Balance
Sheets.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments either held or issued and outstanding. The disclosure
of such information does not purport to be a market valuation of Unicom and
subsidiary companies as a whole. The impact of any realized or unrealized
gains or losses related to such financial instruments on the financial
position or results of operations of Unicom and subsidiary companies is
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 December 31, 1996 and
1995 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
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.. $ 32,778 $ 38 $ 32,816 $ 40,575 $ 283 $ 40,858
U.S. Government and
Agency issues.......... 251,994 6,885 258,879 156,745 17,636 174,381
Municipal bonds......... 331,936 17,985 349,921 496,707 34,970 531,677
Common stock............ 539,392 201,304 740,696 348,866 107,280 456,146
Other................... 69,867 4,181 74,048 29,757 4,708 34,465
---------- -------- ---------- ---------- -------- ----------
$1,225,967 $230,393 $1,456,360 $1,072,650 $164,877 $1,237,527
========== ======== ========== ========== ======== ==========
</TABLE>
At December 31, 1996 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....................................... $ 32,778 $ 32,816
1 through 5 years................................... 161,625 164,907
5 through 10 years.................................. 221,264 229,382
Over 10 years....................................... 258,284 271,971
</TABLE>
The net earnings of the nuclear decommissioning funds, which are recorded as
increases to the accumulated provision for depreciation, for the years 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Gross proceeds from sales of securities.... $2,335,974 $ 2,598,889 $ 811,368
Less cost based on specific identification. (2,300,038) (2,581,714) (811,997)
---------- ----------- ---------
Realized gains (losses) on sales of
securities................................ $ 35,936 $ 17,175 $ (629)
Other realized fund earnings net of
expenses.................................. 33,008 46,294 38,148
---------- ----------- ---------
Total realized net earnings of the funds... $ 68,944 $ 63,469 $ 37,519
Unrealized gains (losses).................. 65,516 160,843 (57,948)
---------- ----------- ---------
Total net earnings (losses) of the funds.. $ 134,460 $ 224,312 $ (20,429)
========== =========== =========
</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
B-36
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
primarily includes cash deposited for the redemption, refund or discharge of
debt securities, are stated at cost, which approximates their fair value
because of the short maturity of these instruments. The securities included in
these categories have been classified as "available for sale" securities.
Capitalization. The estimated fair values of ComEd preferred and preference
stocks, ComEd-obligated mandatorily redeemable preferred securities of the
Trust 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 December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------- --------------------------------
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.... $ 755,931 $ 3,948 $ 759,879 $ 800,197 $ 14,769 $ 814,966
ComEd-obligated
mandatorily
redeemable preferred
securities of the
Trust................ $ 200,000 $ 1,000 $ 201,000 $ 200,000 $ 6,000 $ 206,000
Long-term debt........ $6,345,533 $159,818 $6,505,351 $6,572,853 $470,175 $7,043,028
</TABLE>
Long-term notes payable, which are not included in the above table, amounted
to $264 million and $212 million at December 31, 1996 and 1995, 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
portion of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of accrued spent nuclear
fuel disposal fee and related interest represents the settlement value as of
December 31, 1996 and 1995; therefore, the carrying value is equal to the fair
value.
(13) PENSION BENEFITS
ComEd and the Indiana Company have non-contributory defined benefit pension
plans which cover all regular employees. Benefits under these plans reflect
each employee's compensation, years of service and age at retirement. During
1995, these plans were amended to more closely base retirement benefits on
final pay. 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. Actuarial valuations were determined as of January 1,
1996 and 1995.
During 1994, the companies implemented an early retirement program for
employees eligible to retire or who would become eligible to retire after
December 31, 1993 and before April 1, 1995. A total of 679 employees accepted
the program, resulting in the recognition of approximately $34 million of
additional pension cost and an additional increase to the projected benefit
obligation of that $34 million and $41 million of unrecognized net loss. The
charge to income was approximately $20.5 million, after reflecting income tax
effects, as a result of the program.
B-37
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The funded status of these plans at December 31, 1996 and 1995 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
----------- -----------
(THOUSANDS OF DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated pension plan
benefits:
Vested benefit obligation.......................... $(3,025,000) $(2,904,000)
Nonvested benefit obligation....................... (127,000) (122,000)
----------- -----------
Accumulated benefit obligation..................... $(3,152,000) $(3,026,000)
Effect of projected future compensation levels..... (366,000) (352,000)
----------- -----------
Projected benefit obligation....................... $(3,518,000) $(3,378,000)
Fair value of plan assets, invested primarily in U.S.
Government, government-sponsored corporation and
agency securities, fixed income funds,
registered investment companies, equity index funds
and other equity and fixed income funds ........... 3,282,000 3,059,000
----------- -----------
Plan assets less than projected benefit obligation... $ (236,000) $ (319,000)
Unrecognized prior service cost...................... (69,000) (73,000)
Unrecognized transition asset........................ (130,000) (142,000)
Unrecognized net loss................................ 58,000 189,000
----------- -----------
Accrued pension liability.......................... $ (377,000) $ (345,000)
=========== ===========
</TABLE>
The assumed discount rate was 7.5% at December 31, 1996 and 1995, and the
assumed annual rate of increase in future compensation levels was 4.0%. These
rates were used in determining the projected benefit obligations, the
accumulated benefit obligations and the vested benefit obligations.
Pension costs were determined under the rules prescribed by SFAS No. 87,
including the use of the projected unit credit actuarial cost method and the
following actuarial assumptions for the years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Annual discount rate.......................................... 7.50% 8.00% 7.50%
Annual rate of increase in future compensation levels......... 4.00% 4.00% 4.00%
Annual long-term rate of return on plan assets................ 9.75% 9.75% 9.50%
</TABLE>
The components of pension costs, portions of which were recorded as
components of construction costs, for the years 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost............................................. $ 92,000 $ 87,000 $ 97,000
Interest cost on projected benefit obligation............ 246,000 225,000 213,000
Actual return on plan assets............................. (421,000) (681,000) 37,000
Early retirement program cost............................ -- -- 34,000
Net amortization and deferral............................ 115,000 418,000 (302,000)
--------- --------- ---------
$ 32,000 $ 49,000 $ 79,000
========= ========= =========
</TABLE>
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
During the fourth quarter of 1995 (the first quarter of 1996 for bargaining
unit employees of the Indiana Company), the employee savings and investment
plan was amended. Under the plan, as amended, each participating employee may
contribute up to 20% of such employee's base pay and 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 last 1% of contributed base salary. During 1996, 1995 and 1994,
the participating companies' contributions were $30 million, $25 million and
$23 million, respectively.
B-38
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(14) POSTRETIREMENT BENEFITS
ComEd and the Indiana Company provide certain postretirement health care,
dental care, vision care and life insurance for retirees and their dependents
and for the surviving dependents of eligible employees and retirees. The
employees become eligible for postretirement benefits when they reach age 55
with 10 years of service. The liability for postretirement benefits is funded
through trust funds based upon actuarially determined contributions that take
into account the amount deductible for income tax purposes. The postretirement
health care plan for ComEd and the Indiana Company was amended, effective
April 1, 1995. Prior to that date, the postretirement health care plan was
fully funded by the companies. With respect to employees who retire on or
after April 1, 1995, the plan is contributory, funded jointly by the companies
and the participating employees. Actuarial valuations were determined as of
January 1, 1996 and 1995.
Postretirement health care costs in 1996 and 1995 included $4 million and
$25 million, respectively, related to a voluntary separation offer for union
employees who accepted and left ComEd's employ combined with separation offers
to selected groups of non-union employees.
The funded status of the plan at December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
----------- ---------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees.............................................. $ (615,000) $(551,000)
Active fully eligible participants.................... (23,000) (21,000)
Other participants.................................... (439,000) (418,000)
----------- ---------
Accumulated benefit obligation........................ $(1,077,000) $(990,000)
Fair value of plan assets, invested primarily in S&P
500 common stocks, registered investment companies and
U.S. Government, government agency, municipal and
listed corporate obligations.......................... 666,000 602,000
----------- ---------
Plan assets less than accumulated postretirement
benefit obligation.................................... $ (411,000) $(388,000)
Unrecognized transition obligation..................... 370,000 392,000
Unrecognized prior service cost........................ 45,000 48,000
Unrecognized net gain.................................. (271,000) (267,000)
----------- ---------
Accrued liability for postretirement benefits.......... $ (267,000) $(215,000)
=========== =========
</TABLE>
Different health care cost trends are used for pre-Medicare and post-
Medicare expenses. Pre-Medicare trend rates were 9.0% and 9.5%, respectively,
at December 31, 1996 and 1995, grading down in 0.5% annual increments and
leveling off at 5.0%. Post-Medicare trend rates were 7.0% and 7.5%,
respectively, at December 31, 1996 and 1995, grading down in 0.5% annual
increments to 5.0%. The assumed discount rate was 7.5% at December 31, 1996
and 1995. That rate was used to determine the accumulated benefit obligations.
The effect of a 1% increase in the health care cost trend rate for each future
year would increase the accumulated postretirement health care obligations by
approximately $158 million.
B-39
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of postretirement health care costs, portions of which were
recorded as components of construction costs, for the years 1996, 1995 and
1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Service cost................................ $32,000 $ 31,000 $ 47,000
Interest cost on accumulated benefit
obligation................................. 73,000 69,000 81,000
Actual loss (return) on plan assets......... (90,000) (137,000) 9,000
Amortization of transition obligation....... 22,000 23,000 29,000
Severance plan cost......................... 4,000 25,000 --
Other....................................... 29,000 83,000 (49,000)
------- -------- --------
$70,000 $ 94,000 $117,000
======= ======== ========
</TABLE>
Postretirement benefit costs were determined under the rules prescribed by
SFAS No. 106, including the use of the projected unit credit actuarial cost
method. The discount rates used were 7.5%, 8.0% and 7.5%, respectively, for
1996, 1995 and 1994 and the estimated long-term rate of return of fund assets,
net of income tax effects, were 9.38%, 9.32% and 9.04%, respectively, for
1996, 1995 and 1994. Pre-Medicare health care cost trend rate was 14% for
1994, grading down in 0.5% annual increments to 5.0%. Post-Medicare health
care cost trend rate was 11.5% for 1994, grading down in 0.5% annual
increments to 5.0%. Pre-Medicare trend rates were 13.5% for the first three
months of 1995 and 10% for the remainder of the year, grading down in 0.5%
annual increments to 5.0%. Post-Medicare trend rates were 11% for the first
three months of 1995 and 8% for the remainder of the year, grading down in
0.5% annual increments to 5.0%. The effect of a 1% increase in the health care
cost trend rate for each future year would increase the aggregate of the
service and interest cost components of postretirement benefit costs by
approximately $21 million for 1996.
(15) SEPARATION PLAN COSTS
Operation and maintenance expenses included $12 million for the year 1996
and $97 million for the year 1995 related to a voluntary separation offer for
union employees who accepted and left ComEd's employ combined with separation
plans offered to selected groups of non-union employees. These employee
separation plans reduced net income by $7 million or $0.03 per common share
for the year 1996 and $59 million or $0.27 per common share for the year 1995.
(16) INCOME TAXES
The components of the net deferred income tax liability at December 31, 1996
and 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1996 1995
---------- ----------
(THOUSANDS OF
DOLLARS)
<S> <C> <C>
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs........................... $3,514,300 $3,379,987
Overheads capitalized................................. 261,437 252,910
Repair allowance...................................... 228,426 219,585
Regulatory assets recoverable through future rates.... 1,649,037 1,689,832
Deferred income tax assets:
Postretirement benefits............................... (269,180) (235,360)
Unbilled revenues..................................... (136,406) (116,274)
Alternative minimum tax............................... (80,159) (145,019)
Unamortized investment tax credits to be settled
through future rates................................. (430,297) (452,210)
Other regulatory liabilities to be settled through
future rates......................................... (238,004) (148,792)
Other--net............................................ (44,998) (45,301)
---------- ----------
Net deferred income tax liability...................... $4,454,156 $4,399,358
========== ==========
</TABLE>
B-40
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The $55 million increase in the net deferred income tax liability from
December 31, 1995 to December 31, 1996 is comprised of $163 million increase
of deferred income tax expense and a $108 million decrease in regulatory
assets net of regulatory liabilities pertaining to income taxes for the year.
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 effects of an income tax refund related to prior years were recorded in
1996, resulting in an increase to net income of $26 million or $0.12 per
common share.
The components of net income tax expense charged to continuing operations
for the years 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Operating income:
Current income taxes........................... $328,369 $339,989 $158,342
Deferred income taxes.......................... 161,176 186,529 168,402
Investment tax credits deferred--net........... (33,378) (28,710) (28,757)
Other (income) and deductions................... (7,385) (7,685) (22,498)
-------- -------- --------
Net income taxes charged to continuing
operations..................................... $448,782 $490,123 $275,489
======== ======== ========
</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 years 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net income before extraordinary item......... $ 666,100 $ 659,533 $354,934
Net income taxes charged to continuing
operations.................................. 448,782 490,123 275,489
Provision for dividends on ComEd preferred
and preference stocks....................... 64,424 69,961 64,927
---------- ---------- --------
Pre-tax income before provision for
dividends................................... $1,179,306 $1,219,617 $695,350
========== ========== ========
Effective income tax rate.................... 38.1% 40.2% 39.6%
========== ========== ========
</TABLE>
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the years 1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Federal income taxes computed at statutory rate.. $412,757 $426,866 $243,373
Equity component of AFUDC which was excluded from
taxable income.................................. (7,272) (4,595) (7,920)
Amortization of investment tax credits........... (33,378) (28,710) (28,810)
State income taxes, net of federal income taxes.. 58,387 65,972 40,140
Differences between book and tax accounting,
primarily property-related deductions........... 14,150 27,534 26,505
Other--net....................................... 4,138 3,056 2,201
-------- -------- --------
Net income taxes charged to continuing
operations...................................... $448,782 $490,123 $275,489
======== ======== ========
</TABLE>
Current federal income tax liabilities which were recorded prior to 1995
included excess amounts of AMT over the regular federal income tax, which
amounts were also recorded as decreases to deferred federal income taxes. The
excess amounts of AMT were carried forward and portions were
B-41
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
applied as credits against the post-1994 regular federal income tax
liabilities. The remaining excess amounts of AMT can be carried forward
indefinitely as credits against future years' regular federal income tax
liabilities.
(17) TAXES, EXCEPT INCOME TAXES
Provisions for taxes, except income taxes, for the years 1996, 1995 and 1994
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Illinois public utility revenue............... $227,062 $229,546 $211,263
Illinois invested capital..................... 104,663 106,830 109,373
Municipal utility gross receipts.............. 168,715 167,758 145,011
Real estate................................... 129,770 176,454 180,221
Municipal compensation........................ 78,544 78,602 72,647
Other--net.................................... 74,821 74,107 69,281
-------- -------- --------
$783,575 $833,297 $787,796
======== ======== ========
</TABLE>
The reduction in ComEd's real estate taxes in 1996 results primarily from
ongoing challenges by ComEd of the methodology used by local taxing
authorities to assess the value of ComEd's nuclear generating stations.
Approximately half of the 1996 reduction in ComEd's real estate taxes is
related to the year 1995.
(18) 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 or bank borrowings and $400
million of intermediate term notes, to finance the transactions. With respect
to the commercial paper/bank borrowing portion, $100 million will expire on
November 23, 1998 and $200 million will expire on November 23, 1999. With
respect to the intermediate term notes, a portion expires in November 1997,
and each November thereafter, through November 2001 and in November 2003. At
December 31, 1996, ComEd's obligation to the lessor for leased nuclear fuel
amounted to approximately $687 million. 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, net of executory costs, at December 31, 1996
for capital leases are estimated to aggregate $788 million, including $241
million in 1997, $195 million in 1998, $150 million in 1999, $91 million in
2000, $45 million in 2001 and $66 million in 2002-2043. The estimated interest
component of such rental payments aggregates $106 million. The estimated
portions of obligations due within one year under capital leases of
approximately $174 million and $168 million at December 31, 1996 and 1995,
respectively, are included in current liabilities.
Future minimum rental payments at December 31, 1996 for operating leases are
estimated to aggregate $173 million, including $12 million in 1997, $13
million in 1998, $12 million in 1999, $10 million in 2000, $10 million in 2001
and $116 million in 2002-2024.
(19) 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,
B-42
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
operation or maintenance accounts and provides its own financing. At December
31, 1996, for its share of ownership in the station, ComEd had an investment
of $641 million in production and transmission plant in service (before
reduction of $197 million for the related accumulated provision for
depreciation) and $21 million in construction work in progress.
(20) INVESTMENTS IN URANIUM-RELATED PROPERTIES
In 1994, ComEd recorded a reduction in the carrying value of its investments
in uranium-related properties after completing a review of various
alternatives and reassessing the long-term recoverability of those
investments. The effects of the reduction reduced 1994 net income by $34
million or $0.16 per common share.
(21) COMMITMENTS AND CONTINGENT LIABILITIES
Purchase commitments, principally related to construction and nuclear fuel,
approximated $1,060 million at December 31, 1996, comprised of approximately
$1,018 million for ComEd and the Indiana Company and approximately $42 million
for Unicom Thermal. In addition, ComEd has substantial commitments for the
purchase of coal. ComEd's coal costs are high compared to those of other
utilities. ComEd's western coal contracts and its rail contracts for delivery
of the western coal provide for the purchase of certain coal at prices
substantially above currently prevailing market prices. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Liquidity and Capital Resources," for additional information
regarding ComEd's purchase commitments.
ComEd is a member of NML, established to provide insurance coverage against
property damage to members' nuclear generating facilities. The members are
subject to a retrospective premium adjustment in the event losses exceed
accumulated reserve funds. Capital has been accumulated in the reserve funds
of NML to the extent that ComEd would not be liable for a retrospective
premium adjustment in the event of a single incident. However, ComEd could be
subject to a maximum assessment of approximately $53 million in any policy
year, in the event losses exceed accumulated reserve funds.
ComEd also is a member of NEIL, which provides insurance coverage against
the cost of replacement power obtained during certain prolonged accidental
outages of nuclear generating units and coverage for property losses in excess
of $500 million occurring at nuclear stations. All companies insured with NEIL
are subject to retrospective premium adjustments if losses exceed accumulated
reserve funds. Capital has been accumulated in the reserve funds of NEIL to
the extent that ComEd would not be liable for a retrospective premium
adjustment in the event of a single incident under the replacement power
coverage and the property damage coverage. However, ComEd could be subject to
maximum assessments, in any policy year, of approximately $21 million and $73
million in the event losses exceed accumulated reserve funds under the
replacement power and property damage coverages, respectively.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses,
ComEd would currently be subject to a maximum assessment of $991 million in
the event of an incident, limited to a maximum of $125 million in any calendar
year.
B-43
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
In addition, ComEd participates in the American Nuclear Insurers and Mutual
Atomic Energy Liability Underwriters Master Worker Program which provides
coverage for worker tort claims filed for bodily injury caused by the nuclear
energy hazard. The coverage applies to workers whose "nuclear related
employment" began after January 1, 1988. ComEd would currently be subject to a
maximum assessment of approximately $36 million in the event losses exceed
accumulated reserve funds.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that Cotter has permitted radioactive and other
hazardous material to be released from its mill into areas owned or occupied
by the plaintiffs resulting in property damage and potential adverse health
effects. In February 1994, a federal jury returned nominal dollar verdicts on
eight bellwether plaintiffs' claims in these cases, which verdicts were upheld
on appeal. The remaining claims in the 1989 actions are the subject of a
settlement agreement entered into by counsel for the plaintiffs and Cotter. If
the settlement agreement is implemented, the 1989 actions will be dismissed.
Although the remaining cases will necessarily involve the resolution of
numerous contested issues of fact and law, Unicom's 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 and 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
(1997) dollars. It is expected that the costs associated with investigation
and remediation of former MGP sites will be incurred over a period of
approximately 20 to 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 approximately $25 million has been included on the
Consolidated Balance Sheets as of December 31, 1996 and 1995, which reflects
the low end of the range of ComEd's estimate of the liability associated with
former MGP sites. In addition, as of December 31, 1996 and 1995, a reserve of
$8 million has been included 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.
B-44
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
(22) QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF EARNINGS
COMMON PER
OPERATING OPERATING NET SHARES COMMON
THREE MONTHS ENDED REVENUES INCOME INCOME OUTSTANDING SHARE
- ------------------ ---------- --------- -------- ----------- --------
(THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
March 31, 1995............... $1,578,136 $260,579 $ 88,601 214,429 $0.41
June 30, 1995................ $1,559,521 $276,584 $108,866 214,677 $0.51
September 30, 1995........... $2,190,862 $582,006 $407,433 214,769 $1.90
December 31, 1995............ $1,581,526 $219,327 $ 34,611 214,889 $0.16
March 31, 1996............... $1,683,929 $297,551 $136,932 215,248 $0.64
June 30, 1996................ $1,547,916 $253,063 $100,313 215,438 $0.47
September 30, 1996........... $2,067,901 $474,895 $334,980 215,568 $1.55
December 31, 1996............ $1,637,278 $237,799 $ 93,875 215,747 $0.44
</TABLE>
(23) SUBSEQUENT EVENTS
In January 1997, ComEd issued $150 million principal amount of 7.375% Notes
due January 15, 2004, $150 million principal amount of 7.625% Notes due
January 15, 2007 and $150 million principal amount of Company-obligated
preferred securities of subsidiary trust.
On January 24, 1997, ComEd announced that it would redeem on March 11, 1997
all of its $200 million principal amount of First Mortgage 9 1/2% Bonds,
Series 57, due May 1, 2016.
B-45
<PAGE>
SUBSEQUENT EVENTS
Nuclear Matters. As noted under "Regulation--Nuclear Matters" in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the financial statements included in this Exhibit, Commonwealth
Edison Company ("ComEd") has been working on improvements in operating and
personnel procedures as well as the repair and replacement of equipment at its
nuclear generating stations. As a part of these activities, ComEd's management
has decided to continue the present outages at its LaSalle nuclear generating
station until the performance issues identified with respect to that station
have been appropriately addressed. ComEd presently expects the LaSalle outage
to extend into the fall of 1997.
In February 1997, an operational event occurred in the control room of
ComEd's Zion nuclear generating station. As a result, the Regional staff of
the Nuclear Regulatory Commission ("NRC") has issued a letter confirming
ComEd's commitment to conduct a comprehensive assessment of the event and to
develop and implement a program to ensure adequate personnel performance in
the future, including upgraded operator training. ComEd must brief the staff
on the results of its investigation, its proposed corrective actions and other
matters prior to restarting either Zion unit. The current Zion Unit 2 outage
is expected to extend into and likely beyond the summer of 1997, and Zion Unit
1 is expected to be out of service until early 1998.
The LaSalle and Zion outages are part of several outages of nuclear and
fossil generating stations that several utilities operating in the Midwestern
power grid (including ComEd) are expecting during 1997. ComEd is evaluating
the need for reinforcement of its available generating and transmission
capacity and the availability of power from third parties in light of these
regional circumstances. Such evaluation includes consideration of additional
expenditures of approximately $50 million, a portion of which is capital,
relating to enhancing generating station availability, transmission
reinforcement and purchasing power from other utilities, as well as
consideration of methods of managing customer demand for power. Such
expenditures could include demand charges for purchased power which are not
recoverable through the fuel adjustment clause under these circumstances, but
do not reflect the related energy costs for such purchased power.
As also noted under "Regulation--Nuclear Matters" in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
late January 1997, the NRC required 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 six nuclear generating stations while sustaining
performance improvement at each site. ComEd submitted its response to the
NRC's request on March 28, 1997.
Other Information. See Unicom Corporation's and ComEd's Annual Reports on
Form 10-K for the year ended December 31, 1996, for additional information
regarding events affecting their businesses since the preparation of the
financial statements contained in this Exhibit.
B-46
<PAGE>
[X] Please mark your votes as in this example.
- --------------------------------------------------------------------------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, IT WILL BE VOTED FOR THE ELECTION OF THE DIRECTOR
NOMINEES, FOR ITEMS B, C AND D, AND AGAINST ITEM E.
- --------------------------------------------------------------------------------
FOR WITHHELD
A. Election of Directors (See Reverse) [ ] [ ]
For, except vote withheld from the following nominee(s):
- ----------------------------------------------
B. Amendment and Restatement of the Long-Term Incentive Plan
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
C. Material Terms of Long-Term Performance Unit Awards
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
D. Appointment of Auditors
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
E. Shareholder Proposal to limit Incentive Plan and bonus payments
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
-----------------------------------------
Special Action
-----------------------------------------
Discontinue Annual Report
Mailing for This Account Only. [ ]
Change of Address Noted on
Other Side. [ ]
-----------------------------------------
SIGNATURES(S) DATE
--------------------------- ---------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
The signer hereby revokes all proxies heretofore given by the signer to vote
at said meeting or any adjournments thereof.
- -------------------------------------------------------------------------------
.FOLD AND DETACH HERE.
[UNICOM LOGO]
To Our Shareholders:
We invite you to attend the annual meeting of shareholders of Unicom
Corporation which will be held at 10:30 A.M. (local time), on Thursday, May
29, 1997 in the Wallingford Center of the Clock Tower Resort & Conference
Center, 7801 E. State Street, Rockford, Illinois. Unicom is the corporate
parent of Commonwealth Edison Company (ComEd) and other subsidiary
companies.
The enclosed Proxy Statement describes several items of business to be
considered. As always, your vote is very important. Therefore, I urge you
to sign your proxy and return it as early as possible. This action will
expedite the tabulation process and minimize costs associated with follow-
up contacts.
Even if you now expect to attend the annual meeting, please sign, date
and return the accompanying proxy in the enclosed postage-paid envelope.
You may revoke your proxy at any time before it is voted. You may revoke it
by written notice to David A. Scholz, Secretary, Unicom, by signing and
delivering a more recent proxy or by attending the meeting and voting in
person.
Sincerely,
/s/ James J. O'Connor
James J. O'Connor
Chairman and Chief
Executive Officer
<PAGE>
[UNICOM LOGO] Unicom Corporation
One First National Plaza PROXY
P.O. Box A-3005
P Chicago, Illinois 60690-3005
R --------------------------------------------------------------------------
O
X THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
Y UNICOM CORPORATION FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 29, 1997.
The undersigned appoints James J. O'Connor, Leo F. Mullin, Samuel K.
Skinner and David A. Scholz, or any of them, as Proxies, each with the
power to appoint his substitute, and hereby authorizes them to represent
and to vote, as designated on the reverse side, all shares of Unicom stock
held in the undersigned's name and shares held by agents for the benefit of
the undersigned in the Plans hereafter described, subject to the voting
direction of the undersigned, at the Annual Meeting of Shareholders to be
held on May 29, 1997, or any adjournment thereof and, in the Proxies'
discretion, to vote upon such other business as may properly come before
the meeting, all as more fully set forth in the Proxy Statement related to
such meeting, receipt of which is hereby acknowledged.
Your instructions for the election of Directors may be indicated on
the other side. The nominees are--Brennan, Compton, DeMars, Gin, Jacobs,
Jannotta, Johnson, Mullin, O'Connor and Skinner.
ALL SHARES TO BE VOTED PURSUANT TO THIS PROXY INCLUDE SHARES, IF ANY,
HELD IN THE NAME OF AGENTS, FOR THE BENEFIT OF THE UNDERSIGNED, IN THE
COMPANY'S DIVIDEND REINVESTMENT AND EMPLOYEE STOCK PURCHASE PLANS.
Change of address:
--------------------------------
--------------------------------
------------
-------------------------------- PLEASE SEE
REVERSE SIDE
------------
- --------------------------------------------------------------------------------
.FOLD AND DETACH HERE.
