<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)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
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<PAGE>
[LETTERHEAD OF UNICOM]
April 7, 1999
Dear Unicom Shareholder:
Since we printed the Annual Report, two notable events have occurred. By now you
have undoubtedly read and seen news reports about important decisions your Board
of Directors has made that will enable us to build a competitive financial
structure and redirect our investments for future growth. Let me summarize what
these decisions are, and more importantly, what they will mean in delivering
greater shareholder value.
After announcing our intent last summer to sell our fossil facilities, we
reached agreement with Edison Mission Energy, a subsidiary of Edison
International of Rosemead, California, to purchase our six coal-fired generating
plants, Collins Station and nine peaking units for $4.813 billion. The 9772 MW
generated by these operations represent the largest transfer of capacity
undertaken in our industry. It is also the biggest step any company has taken in
creating a vibrant, open electricity market as our industry restructures.
The gain of $1.7 billion after taxes and after satisfying sales-related
obligations will be used to reduce the cost of ComEd's nuclear-related assets,
currently more than $9 billion. This will provide a more competitive balance
sheet as we make the transition to a completely open market as mandated by the
1997 Illinois Restructuring Act.
Some of the proceeds will help fund our comprehensive program to reinforce and
enhance our transmission and distribution (T&D) system. Going forward, T&D will
be a cornerstone of our business. We will spend approximately $4 billion over
the next five years to ensure our customers have a first-class delivery system.
Our contracts with Edison Mission Energy also guarantee we have access to the
electricity produced at these plants to serve our customers for five years after
the close of the sale, which we anticipate by the end of the year. The sale is
subject to Illinois Commerce Commission approval to ensure the reliability of
electric service will not be adversely affected by the sale.
Our settlement with the City of Chicago was announced the same day and
represents a concrete beginning for an improved relationship. We reached
consensus on a revised combination of ongoing and new initiatives that will
result in over $1 billion to improve electric service in Chicago. Our goal is to
make the City and Mayor Daley satisfied customers and bring long-term
reliability to the citizens of Chicago. Edison Mission Energy has committed to
build 500 MW of clean gas-fired generating capacity in the City of Chicago,
which will fulfill a condition in the settlement of our arbitration with the
City.
As I complete my first year at Unicom, these decisions are especially
gratifying. They clearly demonstrate that the Illinois Restructuring Law is
working and that we are able to chart a new course for our company. I truly
believe this course will bring continued growth for a new Unicom.
Sincerely,
John W. Rowe
Chairman, President and CEO
<PAGE>
UNICOM CORPORATION
[LOGO OF UNICOM] One First National Plaza
P.O. Box A-3005
Chicago, Illinois 60690-3005
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON TUESDAY, MAY 25, 1999 AT 10:30 A.M. (Local Time)
The annual meeting of shareholders of Unicom Corporation ("Unicom" or the
"Company") will be held in the Grand and State Ballrooms of the Palmer House
Hilton, 17 East Monroe Street, Chicago, 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 eleven Directors.
Item B: The approval of an amendment of the Unicom Corporation Long-Term
Incentive Plan.
Item C: The approval of 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 1999.
Item E: The consideration of a shareholder proposal which is set forth and
described in the accompanying proxy statement.
Only shareholders of record on the books of Unicom at 4:00 P.M., Chicago
time, on March 26, 1999, 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).
John P. McGarrity
Secretary
April 7, 1999
<PAGE>
[UNICOM LOGO]
PROXY STATEMENT
April 7, 1999
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 25, 1999.
You may revoke your proxy at any time before it is voted. You may revoke it
by sending a written notice to John P. McGarrity, Secretary, Unicom Corporation,
10 South Dearborn Street, Post Office Box A-3005, Chicago, IL 60690-3005, by
signing and delivering a more recently dated 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 or its subsidiaries 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 1998 Summary Annual Report, this Proxy Statement and the form of
Proxy are first being mailed to shareholders on or about April 7, 1999. The
audited financial statements of Unicom, along with certain other financial
information, are included in Exhibit B to this Proxy Statement.
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 APPROVAL OF THE SHAREHOLDER PROPOSAL DISCUSSED IN ITEM E.
<PAGE>
ITEM A: ELECTION OF DIRECTORS
NOMINEES
George E. Johnson is retiring as a Director of the Company and Commonwealth
Edison Company ("ComEd") after serving as a Director of Unicom since its
incorporation in 1994 and as a Director of ComEd since 1971. His contributions
to the Company and to ComEd have been many and are gratefully appreciated.
Eleven Directors are to be elected at the annual meeting to serve terms of
one year and until their respective successors have been elected. The nominees
for Director, all but one of whom are now serving as Directors of Unicom and
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.
EDWARD A. BRENNAN, age 65. 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 his
retirement in August 1995. Chairman of Compensation Committee.
Other directorships: The Allstate Corporation, AMR
Corporation, Dean Foods Company, Minnesota Mining and
Manufacturing Company, Morgan Stanley Dean Witter & Co. and
The SABRE Group Holdings, Inc.
[PHOTO OF EDWARD A. BRENNAN]
CARLOS H. CANTU, age 65. Director of Unicom and ComEd since
July 31, 1998. President and Chief Executive Officer of The
ServiceMaster Company (service businesses) since January 1,
1994. Member of Compensation Committee. Other directorships:
The ServiceMaster Company, First Tennessee National
Corporation.
[PHOTO OF CARLOS H. CANTU]
JAMES W. COMPTON, age 61. 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 Audit
and Compliance Committee and member of Compensation Committee.
Other directorships: Ariel Mutual Funds and Highland Community
Bank.
[PHOTO OF JAMES W. COMPTON]
BRUCE DeMARS, age 63. Director of Unicom and ComEd since 1996.
Vice President and Secretary of DeMars, Inc. (consulting firm)
since May 1997 and Partner, Trident Merchant Group since May
1998. Admiral, United States Navy and Director, Naval Nuclear
Propulsion Program for more than five years prior to his
retirement in October 1996. Member of Audit and Compliance
Committee. Other directorship: McDermott International.
[PHOTO OF BRUCE DeMARS]
2
<PAGE>
SUE L. GIN, age 57. Director of Unicom since 1994 and ComEd
since 1993. Founder, Owner, Chairman and Chief Executive
Officer of Flying Food Group, Inc. (in-flight catering
company). Member of Compensation and Governance and Nominating
Committees.
[PHOTO OF SUE L. GIN]
DONALD P. JACOBS, age 71. Director of Unicom since 1994 and
ComEd since 1979. Dean of the J. L. Kellogg Graduate School of
Management, Northwestern University. Member of Compensation
and Governance and Nominating Committees. Other directorships:
Everen Capital Corp., Hartmarx Corp., ProLogis (formerly
Security Capital Industrial Trust) and Terex Corporation.
[PHOTO OF DONALD P. JACOBS]
EDGAR D. JANNOTTA, age 67. 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 Governance and Nominating Committee. Other
directorships: AAR Corp., AON Corporation, Bandag,
Incorporated, Molex Incorporated, and Oil-Dri Corporation of
America.
[PHOTO OF EDGAR D. JANNOTTA]
ELIZABETH ANNE MOLER, age 50. Director of Unicom and ComEd
since December 31, 1998. Partner with the law firm of Vinson &
Elkins L.L.P., Washington, D.C. Former Deputy Secretary of the
U.S. Department of Energy, 1997 to 1998, former Chair of the
Federal Energy Regulatory Commission, 1993 to 1997, and former
member of the Federal Energy Regulatory Commission, 1988 to
1993.
[PHOTO OF ELIZABETH ANNE MOLER]
JOHN W. ROGERS, JR., age 41. Nominee for Director of Unicom
and ComEd. President of Ariel Capital Management, Inc., an
institutional money management firm which he founded in 1983.
Ariel Capital Management also serves as the investment
advisor, administrator and distributor for Ariel Mutual Funds.
Other directorships: AON Corporation, Bank One Corporation,
Burrell Communications Group, Inc., and GATX Corporation.
[PHOTO OF JOHN W. ROGERS, JR.]
3
<PAGE>
JOHN W. ROWE, age 53. Director, Chairman, President and Chief
Executive Officer of Unicom and ComEd since March 16, 1998.
President and Chief Executive Officer of New England Electric
System from February 1989 to March 1998. Other directorships:
BankBoston Corporation, UNUM Corporation and Wisconsin Central
Transportation Corporation.
[PHOTO OF JOHN W. ROWE]
RICHARD L. THOMAS, age 68. Director of Unicom and ComEd since
July 31, 1998. Retired. Chairman of First Chicago NBD
Corporation (banking and financial services) from 1995 to 1996
and of The First National Bank of Chicago from 1992 to 1996.
Member of the Audit and Compliance Committee. Other
directorships: IMC Global Inc., The PMI Group, Inc., The SABRE
Group Holdings, Inc., Sara Lee Corporation and Scotsman
Industries, Inc.
[PHOTO OF RICHARD L. THOMAS]
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 $36,200 payable in shares of Unicom
Common Stock under the Unicom Corporation 1996 Directors' Fee Plan. Such
Directors also receive a fee of $1,500 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, so that Directors do not receive duplicate fees. 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 their fees. Prior to
1997, Directors who had never been an officer or an employee of Unicom or any of
its subsidiaries, and who had 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), became eligible for retirement benefits upon
retirement. Such benefits were to be 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 received a $6,200 increase in their
annual fee (from $30,000 to $36,200), effective June 1, 1997 and payable in
shares of Unicom Common Stock.
Other Information--William Blair & Company, L.L.C. was engaged during 1998
by a subsidiary of Unicom to provide certain financial advisory and investment
banking services to assist in obtaining financing for a project. Mr. Jannotta is
a Senior Director of William Blair & Company, L.L.C. Ariel Capital Management,
Inc. has acted as investment manager with respect to a portion of the assets of
an employee benefit plan of ComEd since 1994. During 1998, such firm received
approximately $142,500 in fees. In 1999, it is estimated that such firm will
receive approximately $173,000 in fees. Mr. Rogers is President of Ariel Capital
Management, Inc. In both cases, the Company believes the fees paid or payable
are equivalent to the fees that would have been paid to an unaffiliated third
party for similar services.
4
<PAGE>
Audit and Compliance Committee--The Audit and Compliance Committee consists
of four Directors who are not employees or former employees of Unicom or any
of its subsidiaries. Members serve three-year staggered terms. The Audit and
Compliance Committee acts as the principal agent of the Board of Directors in
fulfilling its responsibilities relating to corporate financial accounting and
disclosure practices, in overseeing the establishment and maintenance of an
appropriate system of internal controls and internal audit functions, and in
monitoring and promoting compliance with applicable laws, regulations and the
Company's policies. Before the reorganization of the committees of the Board
of Directors in May 1998, the functions now served by the Audit and Compliance
Committee were fulfilled by the former Audit Committee. The Audit and
Compliance Committee met two times in 1998; the former Audit Committee met
once. Members of the Committee are James W. Compton (Chairman), Bruce DeMars,
George E. Johnson and Richard L. Thomas.
Compensation Committee--The Compensation Committee consists of five
Directors who are not and have never been employees of Unicom or any of its
subsidiaries. Members serve one-year terms. The Compensation Committee
oversees general compensation policy of the Company, establishes and
administers compensation programs applicable to the principal officers of the
Company, and administers awards under Unicom's Deferred Compensation Unit
Plan, Long-Term Incentive Plan, and 1996 Directors' Fee Plan. Before the
reorganization of the committees of the Board of Directors in May 1998, the
functions now served by the Compensation Committee were fulfilled by the
former Corporate Governance and Compensation Committee and its Incentive
Compensation Subcommittee. The Compensation Committee met two times in 1998;
the former Corporate Governance and Compensation Committee met four times in
1998, while its Incentive Compensation Subcommittee met five times. Members of
the Committee are Edward A. Brennan (Chairman), Carlos H. Cantu, James W.
Compton, Sue L. Gin and Donald P. Jacobs.
Governance and Nominating Committee--The Governance and Nominating Committee
consists of three Directors who are not employees or former employees of
Unicom or its subsidiaries. Members serve one-year terms. The Committee
oversees corporate governance policies, practices and procedures of the
Company and makes such recommendations as it may deem appropriate to the full
Board of Directors, acts as the executive committee of the Board of Directors
when the Board of Directors is not in session, and recommends to the Board of
Directors candidates for election to the Board of Directors. 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 Governance and Nominating Committee, in care of the Secretary of Unicom.
Nominations also may be presented by shareholders at the annual meeting of
shareholders provided that they comply with the nomination procedures set
forth in the Company's By-Laws, which are summarized in this Proxy Statement
under the heading "Shareholder Proposals and Nominations for 2000 Annual
Meeting." Before the reorganization of the committees of the Board of
Directors in May 1998, the functions now served by the Governance and
Nominating Committee were fulfilled by the former Nominating and Executive
committees. The Governance and Nominating Committee met once in 1998; the
former Nominating Committee met five times in 1998, and the former Executive
Committee did not meet in 1998. Members of the Committee are Edgar D. Jannotta
(Chairman), Sue L. Gin and Donald P. Jacobs.
Attendance at Meetings--During 1998, there were thirteen 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 1998, was 95%. Each incumbent Director attended at least
80% of the meetings of Unicom's Board and Board Committees of which the
Director was a member, except Mr. Cantu, who attended 50% of the meetings of
Unicom's Board and Board Committees of which he was a member. Mr. Cantu missed
several meetings as a result of illness.
5
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table lists the beneficial ownership, as defined under the
rules of the Securities and Exchange Commission (the "SEC"), as of March 1,
1999, 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, the nominee for Director, each of the executive officers named
in the Summary Compensation Table on page 16 and Unicom's Directors and
executive officers as a group. In addition, the table includes two columns
describing securities held by such persons that are not considered to be
"beneficially owned" under the rules of the SEC. The column headed "Other
Stock Options" includes stock options held by such persons that are not
exercisable within 60 days of March 1, 1999. The column headed "Deferred Share
Equivalents" includes shares deferred by such persons under the Unicom
Corporation Stock Bonus Deferral Plan or the Unicom Corporation 1996
Directors' Fee Plan or share equivalents held in the Unicom Corporation
Retirement Plan for Directors.
<TABLE>
<CAPTION>
Beneficial
Ownership of Common
Stock
------------------------- Other
Amount and Percent Stock Deferred Share
Name Nature of Class Options(8) Equivalents(10)
---- ---------- -------- ---------- ---------------
<S> <C> <C> <C> <C>
Sanford C. Bernstein &
Co., Inc............... 12,176,692(1) 5.6% -- --
Edward A. Brennan....... 4,301 * -- 254
Carlos H. Cantu......... 1,011 * -- --
James W. Compton........ 5,105 * -- 2,656
Bruce DeMars............ 2,957 * -- 490
Sue L. Gin.............. 10,587 * -- 1,141
Donald P. Jacobs........ 9,798 * -- 9,265
Edgar D. Jannotta....... 7,567 * -- 2,186
George E. Johnson....... 7,139 * -- 10,448
Elizabeth A. Moler...... 0 * -- 495
John W. Rogers, Jr. .... 0 * -- --
Richard L. Thomas....... 2,591 * -- 381
John W. Rowe............ 95,235(2)(3) * 283,166 15,952
Oliver D. Kingsley, Jr.. 35,595(2) * 91,666 15,853
Robert J. Manning....... 42,310(2)(4) * 114,965(9) 13,855(11)
Pamela B. Strobel....... 25,990(2) * 65,666 10,932
John C. Bukovski........ 17,777(2) * 65,332 10,826
James J. O'Connor....... 220,826(2)(5) * -- --
Michael J. Wallace...... 9,150(6) * 13,333 12,423
Directors, the nominee
for Director and
executive officers as a
group (21 persons)..... 554,840(2)(7) * 786,042 112,893
</TABLE>
- - ---------------------
*Less than one percent
(1) Sanford C. Bernstein & Co., Inc. is an investment adviser and broker-
dealer located at 767 Fifth Avenue, New York, New York 10153. According to
its Schedule 13G dated February 5, 1999, it has sole voting power with
respect to 6,880,914 shares, shares voting power with respect to 1,112,735
shares and has sole dispositive power with respect to 12,176,692 shares.
(2) The numbers and percentages of shares shown in the table above include
shares as to which the indicated person(s) had the right to acquire within
60 days of March 1, 1999 upon the exercise of outstanding stock options,
as follows: Mr. Rowe 89,834; Mr. Kingsley 8,334; Mr. Manning 25,335
(includes 5,334 options owned by spouse); Ms. Strobel 13,834; Mr. Bukovski
14,668; Mr. O'Connor 145,000; and all executive officers and directors as
a group (including such individuals) 321,341. Such persons disclaim any
beneficial ownership of the shares subject to such options.
(3) Includes 2,000 shares owned by spouse, beneficial ownership of which is
disclaimed.
(4) Includes 7,189 shares owned by spouse, beneficial ownership of which is
disclaimed.
6
<PAGE>
(5) Includes 1,857 shares owned by family members. Mr. O'Connor disclaims any
beneficial ownership of such shares.
(6) Includes 100 shares jointly owned with a family member, 210 shares owned
by a family member and 200 shares held in a custodial account for a
family member. Mr. Wallace disclaims any beneficial ownership of such
shares.
(7) Includes 9,189 shares owned by spouses, 200 shares held in a custodial
account for a family member, 2,067 shares owned by family members and 100
shares jointly owned with a family member. The directors and executive
officers to whom such beneficial ownership is attributed disclaim any
beneficial ownership of the shares held by such persons.
(8) Includes stock options which are not considered to be "beneficially
owned" under SEC rules because they cannot be exercised within 60 days of
March 1, 1999.
(9) Includes 17,466 stock options held by spouse, beneficial ownership of
which is disclaimed.
(10) Includes share equivalents that are not considered to be "beneficially
owned" under SEC rules because they are deferred under the Unicom
Corporation Stock Bonus Deferral Plan, the Unicom 1996 Directors' Fee
Plan, or the Unicom Corporation Retirement Plan for Directors. Under the
Unicom Corporation Stock Bonus Deferral Plan and the Unicom 1996
Directors' Fee Plan, executives and directors, respectively, may defer
the receipt of the stock portion of certain awards made pursuant to the
Unicom Corporation Long-Term Incentive Plan or certain fees,
respectively. Deferred amounts are only required to be kept in Unicom's
books of account as deferred stock accounts, which are for bookkeeping
purposes only. Unicom has no obligation to set aside or segregate any
actual shares of Unicom Common Stock or other assets in respect of such
accounts. Unicom has elected to issue the deferred shares to trusts
having an institutional trustee, which has sole voting rights with
respect to such shares. At the end of the deferral period (in the case of
the Unicom Stock Bonus Deferral Plan) or upon leaving the Board of
Directors (in the case of the Unicom 1996 Directors' Fee Plan), the share
equivalents are distributed in whole shares of Unicom Common Stock and
cash in lieu of any fractional share. Dividends paid with respect to
deferred shares under the Unicom Stock Bonus Deferral Plan are either
reinvested in Unicom Common Stock and held by such Trustee or are paid to
the executive officer making the deferral. Dividends paid with respect to
deferred shares under the Unicom 1996 Directors' Fee Plan are reinvested
in Unicom Common Stock and held by such Trustee. Under the Unicom
Corporation Retirement Plan for Directors, effective January 1, 1997, the
accrual of further benefits was terminated and directors could elect to
have benefits accrued through such date deferred into share equivalents
to be paid in shares of Unicom Common Stock upon retirement. Accounts
under such Plan are credited with an additional number of share
equivalents determined by assuming the reinvestment of dividend
equivalents on share equivalents in such accounts.
(11) Includes 2,934 deferred share equivalents held by spouse.
ITEM B: APPROVAL OF AN AMENDMENT OF THE
UNICOM CORPORATION LONG-TERM INCENTIVE PLAN
The second item to be considered by shareholders at the annual meeting will
be an amendment of the Unicom Corporation Long-Term Incentive Plan (the
"Incentive Plan") to increase the number of stock options, stock appreciation
rights and performance units that can be awarded to any one person under the
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.
In May 1997, amendments to the Incentive Plan were approved by Unicom and
ComEd shareholders to enable certain future grants or awards under the
Incentive Plan to qualify as "performance-based compensation" under the
Internal Revenue Code. In May 1998, amendments to the Incentive Plan were
approved by Unicom
7
<PAGE>
and ComEd shareholders to increase the number of shares available for awards
under the Incentive Plan by 7,000,000. The proposed amendment, if approved by
shareholders, would (a) amend Section 6.2(h) of the Incentive Plan to increase
the maximum number of shares that may be granted to a participant in any
particular five-year period to 1,000,000, (b) amend Article VII of the
Incentive Plan to increase the maximum number of shares that may be subject to
stock appreciation rights granted to a participant in any particular five-year
period to 1,000,000, and (c) amend Article X of the Incentive Plan to increase
the maximum number of performance units that may be granted to a participant
in any one-year period to 100,000. The full text of the Incentive Plan as it
is proposed to be amended is attached as Exhibit A to this Proxy Statement.
Purposes of Incentive Plan and Amendment
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 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 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.
While the current terms of the Incentive Plan do provide for a high degree
of flexibility, the proposed amendments are intended to provide the
Compensation Committee with additional flexibility to address changes in
competitive compensation practices among companies with which the Company
competes for key employees and to enable the Compensation Committee to make
large grants where appropriate to reward extraordinary performance or to
motivate exceptionally qualified individuals to become employees of the
Company.
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
Compensation Committee of the Board of Directors. Approximately 16,000 persons
are eligible to participate in the Incentive Plan.
The Incentive Plan authorizes the 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 Compensation
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 Compensation
Committee may establish
8
<PAGE>
any exercise price for non-qualified stock options. The exercise price of
an option may, at the discretion of the Compensation 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 Compensation
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
Compensation 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 Compensation 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 Compensation Committee.
Performance Units. Awards may also be granted in the form of "performance
units," which are units valued by reference to criteria chosen by the
Compensation 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 Compensation Committee. Amounts earned under
performance units may be paid in cash, shares of Common Stock or both.
Other Stock-Based Awards. The Compensation 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 Compensation
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 Compensation Committee may include as part of
such award an entitlement to receive dividends or dividend equivalents. At the
discretion of the Compensation Committee, the payment of performance shares or
performance units may be deferred by a participant. The Incentive Plan
currently limits (i) the maximum aggregate number of shares of Common Stock
available for stock option and stock appreciation rights grants to 500,000
(proposed to be amended to 1,000,000) 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 (proposed to be amended to 100,000) for any given
individual in any given year.
9
<PAGE>
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 makes available an aggregate of 11,000,000 shares of
Common Stock for the grant of awards. Of these, 1,454,943 shares have been
issued in payment of awards under the Incentive Plan. There remain 9,545,057
shares available for satisfying currently outstanding awards (including the
4,795,563 shares reserved for the stock options described in the next
paragraph and payment of awards under currently outstanding annual incentive
awards and longer-term incentive awards, which numbers are not presently
determinable), 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, 1999, there were 4,795,563 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
annual 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 1,205,500 shares
were granted in 1996 to employees, including options to purchase 17,500,
12,000, 14,000, 65,000 and 15,000 shares granted to Mr. Manning, Ms. Strobel,
Mr. Bukovski, Mr. O'Connor and Mr. Wallace, respectively; and options to
purchase 137,500 shares granted to all executive officers as a group. Options
to purchase an aggregate of 1,339,350 shares were granted in 1997 to
employees, including options to purchase 25,000, 25,000, 17,500, 16,000,
80,000 and 12,500 shares granted to Mr. Kingsley, Mr. Manning, Ms. Strobel,
Mr. Bukovski, Mr. O'Connor, and Mr. Wallace, respectively; and options to
purchase 203,500 shares granted to all executive officers as a group. Options
to purchase an aggregate of 1,379,525 shares were granted in 1998 to
employees, including options to purchase 250,000, 35,000, 35,000, 20,000, and
25,000 shares granted to Mr. Rowe, Mr. Kingsley, Mr. Manning, Ms. Strobel and
Mr. Bukovski, respectively; and options to purchase 410,000 shares granted to
all executive officers as a group. Options to purchase an aggregate of
1,686,800 shares were granted in January 1999 to employees, including options
to purchase 110,000, 40,000, 40,000, 30,000, and 25,000 shares granted to Mr.
Rowe, Mr. Kingsley, Mr. Manning, Ms. Strobel and Mr. Bukovski, respectively;
and options to purchase 295,000 shares granted to all executive officers as a
group. Non-employee Directors are not eligible to participate in the Incentive
Plan. All such options were granted at the fair market value of the Common
Stock as of the date of grant, which ranged from $22.313 to $35.875. As of
March 1, 1999, the market price of the Common Stock was $35.0625 per share.
Other than the stock options granted in January 1999, benefits under the
Incentive Plan with respect to 1999 and future years are not determinable.
Incentive Plan Administration
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors of the Company. No member of the Compensation Committee is
eligible to participate in the Incentive Plan. Among the powers granted to the
Compensation Committee are the authority to interpret the 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 Compensation Committee also has
the power to modify or waive restrictions on awards, to amend awards and to
grant extensions and accelerate awards.
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<PAGE>
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 the exercise of 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.
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ITEM C: APPROVAL OF MATERIAL TERMS OF PERFORMANCE-BASED
INCENTIVES IN 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 "Award
Program").
Since 1994, the Compensation Committee has annually granted to certain
management-level employees a long-term performance unit award. Some of those
employees are subject to the compensation deduction limitations of Section
162(m) of the Internal Revenue Code ("Section 162(m)"). The deduction
limitations do not apply to certain categories of performance-based
compensation grants that meet the applicable statutory requirements. These
requirements include obtaining shareholder approval of the "material terms" of
the grants. The "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.
The Award Program will be amended beginning with the 1999-2001 performance
period. Payment will be based upon quantitative corporate and business unit
measures.
Eligible Participants
Recipients of the long-term performance unit awards would include the
Company's Chief Executive Officer and its four other most highly paid
officers. Prior and currently outstanding long-term performance unit awards
were granted to select "group level" and "executive level" employees of ComEd
and other subsidiaries of the Company, representing in aggregate approximately
365 recipients. It is expected that future awards will be granted only to
"executive level" employees and other key employees of the Company and its
subsidiaries designated by the Compensation Committee, or approximately 120
recipients.
Business Criteria and Formula for Awards
Each participant is assigned a target percentage of salary (between 15% and
50%) on which the award payment (the "Payment") will be based. The number of
performance units granted to each participant is determined by dividing the
target amount of salary by the average closing price of Unicom Common Stock as
reported in The Wall Street Journal as New York Stock Exchange Composite
Transactions for the fourth quarter of the year immediately preceding the
commencement of the applicable performance period. The total number of
performance units which may be granted to any participant in a year under the
Plan may not exceed 100,000. To reflect the appreciation in value of Unicom
Common Stock over the entire performance period, the number of each
participant's performance units is multiplied by the average closing price of
Unicom Common Stock as reported in The Wall Street Journal as New York Stock
Exchange Composite Transactions for the calendar quarter ending on the last
day of the performance period. This calculation results in a preliminary
dollar award (the "Initial Dollar Award").
The Payment for each participant is determined based upon the performance of
applicable corporate and/or business unit measures, which are variously
weighted for each participant and shall be established by the Compensation
Committee in writing and be stated in terms of the attainment of specified
levels of or percentage changes in any one or more of the following
measurements: (a) cumulative Shareholder Value Added (SVA), (b) customer
satisfaction, (c) revenue, (d) primary or fully-diluted earnings per share of
the Company's common stock, (e) net income, (f) total shareholder return, (g)
earnings before interest and taxes, (h) cash flow from operations, (i) total
cash flow, (j) return on equity, (k) return on capital, (l) return on assets,
(m) net operating profits after taxes, (n) total shareholder return, (o)
return on sales, (p) debt to equity ratio, (q) payout ratio, (r) asset
turnover, (s)
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ratio of share price to book value of shares, (t) price/earnings ratio, (u)
employee satisfaction, (v) diversity, (w) market share, or (x) any individual
performance objective which is measured solely in terms of quantitative
targets related to the Company or the Company's business. Such individual
performance measures related to the Company or the Company's business may
include: (a) production-related factors such as generating capacity factor,
performance against the INPO index, generating equivalent availability, heat
rates and production cost, (b) Transmission and Distribution-related factors
such as customer satisfaction, reliability (based on outage frequency and
duration), and cost, (c) customer service-related factors such as customer
satisfaction, service levels and responsiveness and bad debt collections or
losses, and (d) relative performance against other similar companies in
targeted areas. The measures are weighted differently for participants based
on their management level and the extent to which their responsibilities are
primarily corporate or business unit-related, and may be based in whole or in
part on the performance of the Company, a subsidiary, division and/or other
operational unit, under one or more of such measures.
The degree of payment of awards will be determined based on the written
certification of the Committee based on the extent to which the performance
goals and any other material terms and conditions precedent to such payment
have been satisfied. The Compensation Committee shall have the discretion to
adjust the determinations of the degree of attainment of the pre-established
performance goals; provided, however, that the performance goals applicable to
awards which are designed to qualify for deductibililty under Section 162(m),
and which are held by Named Executive Officers (as defined under the
regulations under the Securities Exchange Act of 1934), may not be adjusted so
as to increase the payment under the award, although the Compensation
Committee retains the discretion to adjust the performance goal upward or
othewise to reduce the amount of the payment of the award relative to the pre-
established performance goals.
If applicable tax or securities laws or regulations change to permit the
Compensation Committee discretion to alter the governing performance measures
without obtaining shareholder approval of such changes, the Compensation
Committee shall have the sole discretion to make such changes without
obtaining shareholder approval. In addition, if the Compensation Committee
determines that it is advisable to grant awards which shall not qualify for
deductibility under Section 162(m), the Compensation Committee may make such
grants which use performance measures other than those specified above.
A minimum, target and maximum performance level is assigned for each
performance measure, with a corresponding payout percentage of 50%, 100% and
200%, respectively. The actual payout percentage is interpolated. Performance
below the minimum for any measure will result in no payout for the
corresponding portion of the Payment. For each participant, the applicable
weighting is applied to each applicable performance measure to determine a
weighted composite payout percentage, which can range between 0% and 200%. The
Payment is determined by multiplying the Initial Dollar Award by the weighted
composite payout percentage.
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 shareholder approval, 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 1999. 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.
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<PAGE>
ITEM E: SHAREHOLDER PROPOSAL
The Company has been notified that two shareholders of the Company intend
to present a proposal for consideration and action at the annual meeting. The
Board of Directors unanimously recommends that shareholders vote AGAINST such
proposal for the reasons set forth below. The Company will provide to any
shareholder the proponents' names and addresses and the number of shares held by
the proponents promptly upon receiving a written or oral request. The
shareholders' proposal is as follows:
"Whereas:
--Economic and environmental interests of stockholders and the public would
be improved by Unicom Corporation initiating a more aggressive company
policy promoting energy efficiency and renewable energy;
--Unicom's primary geographical base for operations and customer revenues
for the near future will be Illinois, and as a matter of good business
practice Unicom has an obligation to behave as a good neighbor to the
people of Illinois;
--Implementation of the federal Clean Air Act and the Kyoto Protocol will
increase costs for fossil fuel use; and increased costs for operation,
maintenance and radioactive waste storage and disposal, and reactor
decommissioning make continued reliance on the Company's nuclear reactors a
less competitive, uneconomic business choice;
--Energy efficiency and some renewable energy sources are already
competitively priced, and all are environmentally superior to Unicom's use
of coal and nuclear plants;
--In 1998 Unicom Corporation actively opposed amendments to Illinois' 1997
deregulation laws that would have provided $4 million annually for energy
efficiency and renewable energy programs; spent virtually no money on
energy efficiency programs in 1997 and 1998, and of all U.S. electric
utilities, ranked last in percentage of revenues spent on energy
efficiency;
--July, 1998 testimony by Chairman John Rowe and Senior Vice President Paul
McCoy before the Illinois Commerce Commission and Illinois Legislature's
Joint Committee on Utility Deregulation indicated that voluntary use of
energy efficiency by Unicom's customers helped prevent full-scale blackout
of the electrical system during June's heatwave, indicating both the
public's willingness to engage in aggressive energy efficiency programs,
and that these programs work effectively;
--Unicom's single-day cost for emergency power during the June heatwave at
$5 per kilowatt on the spot market exceeded $50 million, which by
comparison would have funded for many years the energy efficiency programs
Unicom opposed;
--Greater use of energy efficiency and renewable energy sources would be
economically advantageous in avoiding difficult to amortize capital
financing costs for new generating facilities, especially in the new
business climate of utility deregulation;"
"THEREFORE BE IT RESOLVED that the shareholders of Unicom Corporation
require the Board of Directors to establish the following policies:
--Develop and aggressively implement programs expanding use of energy
efficiency and Illinois-based renewable energy resources, including but not
limited to the use of biomass and wind power;
--Establish an ongoing program of quarterly meetings with Illinois
efficiency and renewable energy vendors, environmental organizations, and
others promoting aggressive expansion of these alternative resources ;
--Report results of these policies to stockholders and customers regularly
through dividend statements, required SEC filings, and the Annual Report. "
14
<PAGE>
The proponents have submitted the following statement in support of the
proposal:
"Several comparable utilities have adopted model energy policies
mandating greater energy efficiency. The energy saved becomes more
profitable than investments in new power plants, making this new energy
policy beneficial to shareholders, rate payers, communities and the
environment. Since the public has demonstrated such strong support for
these safer and cleaner technologies, we urge Unicom Corp. to aggressively
expand this safe energy approach, and to apply it to all segments of
operations."
Opposing Statement of the Board of Directors
The Unicom Board of Directors recommends a vote AGAINST this proposal
because it misleadingly understates the scope of the Company's commitment with
regard to energy conservation, alternative energy sources, and communication
regarding such matters to its shareholders and customers, and because it fails
to take into account the effects of the Illinois legislation restructuring the
electric utility industry. Therefore, the proposal is unnecessary and an undue
imposition on the function of the Board of Directors of the Company.
As our Chairman, President and Chief Executive Officer, John W. Rowe, stated
in the Company's 1998 Annual Report on the Environment, "as a corporate
citizen, we have a professional and ethical duty to protect and preserve our
environment on local, national and global levels." We invite our shareholders
to review the extent of the Company's commitment to environmental leadership
as outlined in that Report.
Of particular relevance to the proposal, the Company is actively involved in
encouraging energy efficiency. It sponsors programs designed to educate
students (the Student Power 2000 program), residential customers (the On-Line
Home Energy Audit program) and businesses (the Energy Insights and Energy
Tracker programs) in ways to reduce energy usage. In 1998, the Company began a
high efficiency light bulb program for residential customers and an Energy
Conservation Fund. The Company also has established programs under which
customers reduce their energy usage in return for incentive payments,
including the Nature First program for residential customers and the ComEd
Energy Cooperative program for commercial, industrial and institutional
customers. The Company is currently evaluating additional energy efficiency
programs for implementation later this year.
Several of Unicom's unregulated businesses are aimed at energy conservation
or alternate energy sources. Unicom's distributed energy business will be
marketing and servicing systems that generate electric power using efficient
and environmentally-friendly natural gas. Unicom's district cooling business
reduces peak daytime energy usage. The Unicom Energy Solutions Group focuses
on assisting customers in making their facilities operate more energy
efficiently. Unicom is also developing energy tracking tools to help customers
monitor their energy usage to maximize energy efficiency.
The Company also engages in the use and development of alternate energy
sources. The Company purchases electric power generated from landfill gas. In
addition, the Company currently operates a wind turbine and a solar
concentrator at The Power House energy museum in Zion, Illinois, and is
helping fund university research in photovoltaic technology. However, the
Company's experience (and that of other companies) with these alternate
technologies has not yet shown them to be competitive and reliable.
The Company regularly reports to its shareholders and customers on such
environmental matters as energy conservation and alternate energy sources. The
Company has prepared and distributed an Annual Report on the Environment for
the last eight years, and the Company's Annual Report and other public
disclosures regularly address issues of energy generation and conservation.
The Company has an active public education and awareness program concerning
environmental concerns.
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<PAGE>
In addition, in response to legislation restructuring the electric industry
in Illinois, Unicom has announced that it is offering for sale all of its
fossil generating plants. The Company expects to complete the sale of the
fossil generating plants in the fourth quarter of this year. To the extent
that the proposal refers to the Company's operation of its fossil-fired
generation plants, the proposal's stated intent to reduce the Company's
capital expenditures and generating costs is misplaced.
Accordingly, the Company has a firm and growing commitment to energy
conservation and to alternative energy sources, and an active program to
communicate about these issues with its shareholders and customers. The Board
does not believe it would be in the best interests of the Company or its
shareholders to impose the proposed policies on the Company. The Board
believes that the Company needs to be flexible in its approach to
environmental concerns as the electric industry in Illinois goes through
restructuring. FOR THE REASONS SET FORTH ABOVE, THE BOARD OF DIRECTORS
RECOMMENDS A VOTE AGAINST THIS PROPOSAL.
EXECUTIVE COMPENSATION
The following table sets forth certain information relating to the
compensation during the past three calendar years of those persons who served
as the Chief Executive Officer at any time during 1998, the other four most
highly compensated executive officers of Unicom or ComEd at December 31, 1998,
and one individual who would have been among the four most highly compensated
executive officers on that date but for the fact that the individual was not
serving as an executive officer on December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
----------------------------------- ----------------------------------------
Bonus Awards Payouts
---------------- ----------------------- ----------------
Other LTIP Payouts
Annual Securities ---------------- All Other
Stock- Compen- Restricted Underlying Stock- Compen-
Name and Principal Salary Cash Based(1) sation(2) Stock(3) Options/SARs Cash Based(1) sation(4)
Position Year $ $ $ $ $ # $ $ $
------------------ ---- ------- ---- -------- --------- ---------- ------------ ---- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
John W. Rowe(5) 1998 726,923 484,209 484,209* 215,117 -- 250,000 343,219 52,537* 2,728,076
Chairman (Chief 1997 -- -- -- -- -- -- -- -- --
Executive Officer) 1996 -- -- -- -- -- -- -- -- --
Unicom and ComEd
Oliver D. Kingsley, 1998 475,000 -- 383,332* 220,713 -- 35,000 -- 187,984* 20,994
Jr.(6) 1997 82,212 -- -- 202,828 560,000 25,000 182,712 10,777* 378,395
Executive Vice 1996 -- -- -- -- -- -- -- -- --
President
Unicom and ComEd
Robert J. Manning 1998 375,035 184,958 61,653* -- -- 35,000 43,469 43,469* 22,132
Executive Vice 1997 312,802 86,319 28,773* -- 291,250 25,000 42,153 42,153* 19,894
President 1996 247,135 15,759 37,842* -- -- 17,500 37,973 37,973* 17,048
Unicom and ComEd
Pamela B. Strobel 1998 341,000 137,341 58,861* -- -- 20,000 42,528 42,528* 20,347
Executive Vice 1997 304,970 41,742 13,914* -- 291,250 17,500 33,605 33,605* 19,247
President 1996 262,300 15,608 63,902* -- -- 12,000 27,263 27,263* 17,445
and General Counsel
Unicom and ComEd
John C. Bukovski 1998 298,400 128,768 42,923* -- -- 25,000 -- 76,134* 17,750
Senior Vice President 1997 276,517 37,800 12,600* -- -- 16,000 -- 60,107* 17,187
Unicom and ComEd 1996 232,565 13,552 41,918* -- -- 14,000 24,653 24,654* 15,233
James J. O'Connor 1998 830,374 427,580 142,526 121,448 -- -- 165,093 165,093 3,575,618
Former Chairman (Chief 1997 929,042 300,000 100,000 -- -- 80,000 185,777 185,778 106,155
Executive Officer) 1996 844,926 253,478 274,601* -- -- 65,000 162,478 162,478 101,174
Unicom and ComEd
Michael J. Wallace 1998 323,440 150,164 50,054 -- -- -- -- 108,504* 16,989
Senior Vice President 1997 328,229 35,656 11,885* -- -- 12,500 -- 99,732* 17,419
ComEd 1996 308,440 21,856 72,248* -- -- 15,000 -- 87,847* 16,488
</TABLE>
- - ------------------
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(1) All of the amounts shown under "Bonus--Stock-Based" and "LTIP Payouts--
Stock-Based" were either paid in shares of Unicom Common Stock or were
deferred and are deemed to be invested in shares of Unicom's Common Stock,
and thus fully "at risk" until the end of the deferment period. Deferred
amounts are noted with an asterisk. See note 10 to the "Security Ownership
of Certain Beneficial Owners and Management" table on page 7.
(2) Excludes perquisites and other benefits, unless the aggregate amount of
such compensation is at least the lesser of either $50,000 or 10% of the
total annual salary and bonus reported for the named executive officer.
For 1998, includes $89,381, $132,077 and $42,416 paid to Messrs. Rowe,
Kingsley, and O'Connor, respectively, for reimbursements for the payment
of taxes, $108,340 paid to Mr. Rowe for moving expenses and $75,000 paid
to Mr. Kingsley as a living cost allowance. For 1997, includes payments to
Mr. Kingsley of $74,065 for moving expenses, $75,000 as a living cost
allowance and $53,251 for reimbursement of taxes.
(3) The value shown is as of the date of grant. Dividends are paid or accrued
on restricted stock awards at the same rate as paid to all shareholders.
As of December 31, 1998, Mr. Manning and Ms. Strobel each had an aggregate
of 10,000 shares of restricted stock worth $385,625 and Mr. Kingsley had
an aggregate of 20,000 shares of restricted stock worth $771,250.
(4) Amounts shown include matching contributions made by ComEd pursuant to the
ComEd Employee Savings and Investment Plan ("ESIP"), incremental interest
earned on deferred compensation which is in excess of 120% of the
corresponding Federal long-term rate, 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 1998,
contributions made to the ESIP amounted to $7,287, $4,246, $4,350, $4,216,
$6,425 and $3,513 on behalf of Mr. Kingsley, Mr. Manning, Ms. Strobel, Mr.
Bukovski, Mr. O'Connor and Mr. Wallace, respectively. The amount of
incremental interest earned during 1998 on deferred compensation totaled
$4,659 and $77 on behalf of Messrs. O'Connor and Wallace, respectively.
Contributions made to the ComEd Excess Benefit Savings Plan during 1998
totaled $31,621, $13,375, $11,079, $9,787, $7,964, $16,757 and $9,536 on
behalf of Mr. Rowe, Mr. Kingsley, Mr. Manning, Ms. Strobel, Mr. Bukovski,
Mr. O'Connor and Mr. Wallace, respectively. Premiums and administrative
service fees paid during 1998 for Split Dollar Life, Accidental Death and
Travel Accident insurance policies for Mr. Rowe, Mr. Kingsley, Mr.
Manning, Ms. Strobel, Mr. Bukovski, Mr. O'Connor and Mr. Wallace,
respectively, are as follows: $96,455, $332, $6,807, $6,210, $5,570,
$65,850, and $3,863. 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 on each
policy to the extent of the premiums and administrative service fees paid
with respect to such policy. Includes a $2,000,000 lump sum payment to Mr.
Rowe in 1998 as partial compensation for actual compensation, benefits and
programs which Mr. Rowe was, or was reasonably expected to become,
entitled to receive from his previous employer, and a payment of $600,000
as an inducement to enter into his employment agreement. For 1997,
includes $375,000 paid to Mr. Kingsley as an inducement to enter into his
employment agreement. During 1998, Mr. O'Connor received a severance
payment of $3,056,000 in connection with his retirement from the Company,
as well as office and secretarial assistance for ten years (costing
approximately a total of $425,927 for the first three years, not including
a proportionate share of operating expenses and real estate taxes, which
vary and cannot be known) and financial counseling and tax preparation
services for five years.
(5) Mr. Rowe commenced employment on March 16, 1998.
(6) Mr. Kingsley commenced employment on November 1, 1997.
17
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------
Number of
Securities % of Total Grant
Underlying Options/SARs Exercise Date
Options/SARs Granted to or Base Present
Granted(1) Employees in Price Expiration Value(2)
Name # Fiscal Year $/Share Date $
---- ------------ ------------ -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
John W. Rowe (CEO)...... 250,000 18.12 $33.438 3/15/08 1,553,750
Oliver D. Kingsley, Jr.. 35,000 2.54 $35.75 7/21/08 234,850
Robert J. Manning....... 35,000 2.54 $35.75 7/21/08 234,850
Pamela B. Strobel....... 20,000 1.45 $35.75 7/21/08 134,200
John C. Bukovski........ 25,000 1.81 $35.75 7/21/08 167,750
James J. O'Connor....... 0 -- -- -- --
Michael J. Wallace...... 0 -- -- -- --
</TABLE>
- - ---------------------
(1) Each option becomes exercisable in equal annual increments on the first,
second and third anniversaries of the grant date, subject to acceleration
in the event that termination after 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 for the
options expiring 7/21/08 are as follows: (i) expected time to exercise of
seven years, (ii) dividend yield rate of 4.48%, (iii) risk-free interest
rate of 5.57% and (iv) expected volatility of 21.74%. The principal
assumptions incorporated into the valuation model by the Company for the
options expiring 3/15/08 are as follows: (i) expected time to exercise of
seven years, (ii) dividend yield rate of 4.80%, (iii) risk-free interest
rate of 5.63% and (iv) expected volatility of 22.85%.
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUE
<TABLE>
<CAPTION>
Underlying Unexercised Value of Unexercised
Options at In-The-Money Options at
Shares December 31, 1998 December 31, 1998(1)
Acquired Value ------------------------- -------------------------
on Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
Name # $ # # $ $
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John W. Rowe (CEO)...... 0 0 0 250,000 0 1,281,125
Oliver D. Kingsley, Jr.. 0 0 8,334 51,666 88,028 274,472
Robert J. Manning....... 0 0 20,001 57,499 287,824 445,445
Pamela B. Strobel....... 0 0 13,834 35,666 199,300 298,067
John C. Bukovski........ 0 0 14,668 40,332 208,600 304,580
James J. O'Connor....... 0 0 145,000 0 2,149,023 0
Michael J. Wallace...... 14,167 173,544 0 13,333 0 200,720
</TABLE>
- - ---------------------
(1) Market value less exercise price, before payment of applicable income
taxes.
18
<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Estimated Future Payouts Under Non-Stock
Number of Price-Based Plans
Shares, Units Performance or Other -----------------------------------------
or Other Period Until Maturation Threshold Maximum
Name Rights(1) or Payout(2) Number Target Number Number
---- ------------- ----------------------- --------------------------- -------------
(Number of Performance Units)
<S> <C> <C> <C> <C> <C>
John W. Rowe (CEO)...... 14,634.15 3 years 7,317.08 14,634.15 29,268.30
Oliver D. Kingsley, Jr.. 6,951.22 3 years 3,475.61 6,951.22 13,902.44
Robert J. Manning....... 5,285.04(3) 3 years 2,642.52 5,285.04 10,570.08
Pamela B. Strobel....... 4,545.80(3) 3 years 2,272.90 4,545.80 9,091.60
John C. Bukovski........ 3,396.42 3 years 1,698.21 3,396.42 6,792.84
James J. O'Connor....... 15,528.46 3 years 7,764.23 15,528.46 31,056.92
Michael J. Wallace...... 3,681.43 3 years 1,840.72 3,681.43 7,362.86
</TABLE>
- - ---------------------
(1) Long-term performance unit awards were established in 1994 for executive
and group level employees under the Unicom Corporation Long-Term Incentive
Plan. The awards are based on a three-year performance period. For the
awards described in the table, the number of units initially awarded to a
participant is determined by dividing a percentage of base salary
(including income from current compensation units under Unicom's and
ComEd's Deferred Compensation Unit Plans) by $30.75. The applicable
percentages for the individuals shown in the table are: 50% for Mr. Rowe
and Mr. O'Connor; 45% for Mr. Kingsley; 45% for January 1, 1999 through
December 31, 2000 and 40% for January 1, 1998 through December 31, 1998
for Mr. Manning; 40% for January 1, 1999 through December 31, 2000 and 35%
for January 1, 1998 through December 31, 1998 for Ms. Strobel; and 35% for
Mr. Bukovski and Mr. Wallace. If a promotion changes the applicable
percentage of salary, awards are pro-rated accordingly. 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 the three-year
performance period ending December 31, 2000. The dollar value of a payout
will be 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, 2000. Payments will be made half in cash and half in the form
of unrestricted shares of Unicom Common Stock. 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, 2000.
(3) Awards for Mr. Manning and Ms. Strobel reflect recalculation and proration
of awards due to their promotions.
19
<PAGE>
SERVICE ANNUITY SYSTEM
The following table sets forth the annual retirement benefits payable under
ComEd's Service Annuity System (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 1998).
<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.............. $ 33,014 $ 43,551 $ 53,446 $ 62,862 $ 71,920 $ 80,711
200,000.............. 66,029 87,101 106,892 125,724 143,841 161,422
300,000.............. 99,043 130,652 160,338 188,586 215,761 242,134
400,000.............. 132,058 174,203 213,783 251,448 287,682 322,845
500,000.............. 165,072 217,753 267,229 314,310 359,602 403,556
600,000.............. 198,086 261,304 320,675 377,173 431,522 484,267
700,000.............. 231,101 304,854 374,121 440,035 503,443 564,978
800,000.............. 264,115 348,405 427,567 502,897 575,363 645,690
900,000.............. 297,129 391,956 481,013 565,759 647,283 726,401
1,000,000.............. 330,144 435,506 534,459 628,621 719,204 807,112
1,100,000.............. 363,158 479,057 587,905 691,483 791,124 887,823
1,200,000.............. 396,173 522,608 641,350 754,345 863,045 968,534
1,300,000.............. 429,187 566,158 694,796 817,207 934,965 1,049,246
1,400,000.............. 462,201 609,709 748,242 880,069 1,006,885 1,129,957
1,500,000.............. 495,216 653,259 801,688 942,931 1,078,806 1,210,668
1,600,000.............. 528,230 696,810 855,134 1,005,794 1,150,726 1,291,379
1,700,000.............. 561,244 740,361 908,580 1,068,656 1,222,647 1,372,090
1,800,000.............. 594,259 783,911 962,026 1,131,518 1,294,567 1,452,802
1,900,000.............. 627,273 827,462 1,015,471 1,194,380 1,366,487 1,533,513
2,000,000.............. 660,288 871,013 1,068,917 1,257,242 1,438,408 1,614,224
</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.
Service Annuity System. ComEd maintains a non-contributory pension plan, the
Service Annuity System, for all regular employees of ComEd. The Service
Annuity System ("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, 1999
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
20
<PAGE>
restored under a supplemental management retirement plan maintained by ComEd,
which also provides retirement benefits granted under employment agreements or
other arrangements. 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. The approximate number of years of
credited service under the Plan or, if applicable, under the supplemental
management retirement plan, for the persons named in the Summary Compensation
Table are as follows: James J. O'Connor, 35 years; John W. Rowe, 21 years;
Robert J. Manning, 35 years; Oliver D. Kingsley, 1 year; Pamela B. Strobel, 6
years; John C. Bukovski, 34 years; and Michael J. Wallace, 29 years. Ms.
Strobel will be credited with an additional nine years upon attaining age 50.
Mr. Kingsley will be credited with 15 years after completing two years of
service. In connection with his retirement from ComEd, and in accordance with
his election, Mr. O'Connor received a discounted lump sum payment of
$9,067,273 under the supplemental management retirement plan in lieu of an
annuity.
EMPLOYMENT AGREEMENTS
John W. Rowe
Unicom and ComEd have an employment agreement with John W. Rowe, pursuant to
which he became Chairman, President and Chief Executive Officer of each
company on March 16, 1998. The agreement provides that Mr. Rowe will be paid
an annual base salary of at least $900,000. Unicom also granted Mr. Rowe an
option to purchase 250,000 shares of Common Stock with an option price equal
to the fair market value of the Common Stock as of March 16, 1998. Such
options become exercisable in equal installments on March 16 of 1999, 2000,
and 2001, and expire on March 15, 2008. In accordance with the terms of his
employment agreement, Mr. Rowe was not entitled to any additional grants of
stock options during 1998. The agreement further provides that Mr. Rowe will
participate in Unicom's Annual Incentive Award Program and will receive an
annual incentive award for 1998 and 1999 that shall equal at least $600,000.
The employment agreement has been amended to provide that Mr. Rowe's annual
incentive awards for 1998 and 1999 will be paid half in cash and half in
Unicom Common Stock, and that the guaranteed portion of Mr. Rowe's annual
incentive award for 1998 and 1999 will be paid 50% in cash and 50% as a grant
of shares of Unicom Common Stock, half of which vest on the date the annual
incentive would otherwise be paid (the "Grant Date") and half of which vest on
the anniversary of the Grant Date. In connection with the grant of shares, Mr.
Rowe will also receive, on the Grant Date, an option to purchase a number of
shares of Unicom Common Stock with a value as of the Grant Date of $90,000
(determined using the pricing models used by the Compensation Committee). Such
option becomes exercisable 50% on the Grant Date and 50% on the first
anniversary thereof. Mr. Rowe also participates in the Unicom Long-Term
Performance Unit Award Program, and any award payable under such Program with
respect to the three-year performance periods ending on December 31, 1998,
1999, or 2000 will be made as though he had participated in the Program
throughout such performance periods (except in the case of a termination of
employment). Mr. Rowe agreed to defer receipt of the stock portion of any
incentive award under the Unicom Corporation Stock Bonus Deferral Plan. As
partial compensation for actual compensation, benefits and programs that Mr.
Rowe was, or was reasonably expected to become, entitled to receive from his
previous employer, he received a lump-sum payment of $2,000,000. In addition,
Mr. Rowe received $600,000 as an inducement to enter into the employment
agreement. Mr. Rowe's agreement provides for a retirement benefit equal to the
amount that would have been payable under the Service Annuity System (plus
amounts payable under the ComEd Supplemental Management Retirement Plan) for
an employee who retires at age 60 (or such greater age if Mr. Rowe should
become eligible for the retirement benefit after attaining the age of 60)
calculated based on the assumption that Mr. Rowe had completed 20 years of
credited service as well as his actual years of credited service. The
agreement further provides for severance payments to Mr. Rowe if he should be
terminated without cause or if he should terminate the employment agreement
for good reason
21
<PAGE>
(as defined in the agreement) equal to his base salary at the time of such
termination, together with a formula annual incentive award (as defined in the
agreement), until the later of March 16, 2001 or one year after termination
(if such termination should occur before March 16, 2001), or one year after
the date of termination (if such termination should occur after March 16,
2001), and a continuation of health and life insurance benefits during such
period, plus retirement benefits. In addition, any unvested options shall
continue to become exercisable during such period, except that any unvested
portion of the deferred shares and additional option granted to Mr. Rowe
pursuant to the amendment to his employment agreement will immediately become
fully exercisable upon any such termination of employment. If the termination
occurs within 24 months following a change in control of the Company, such
benefits will be paid for three years after the date of termination. Mr. Rowe
agreed not to use for his own benefit or disclose any confidential information
of Unicom or ComEd during or after the term of his employment, and not to
compete with Unicom or ComEd or solicit any key employee or interfere with the
relationship with any material customer or supplier of either company until
two years after the term of his employment with the companies.
Oliver D. Kingsley, Jr.
ComEd entered into an employment agreement with Oliver D. Kingsley, Jr.
pursuant to which he became Executive Vice President and President and Chief
Nuclear Officer--Nuclear Generation Group, effective November 1, 1997. The
agreement provides for an annual base salary for 1997 and 1998 equal to
$475,000, and further provides for a guaranteed increase of at least 4% per
year, beginning in 1999. Mr. Kingsley received an option to purchase 25,000
shares of Common Stock with an option price equal to the fair market value of
the Common Stock as of November 1, 1997. Such options become exercisable in
equal installments on November 1 of 1998, 1999 and 2000, and expire on October
31, 2007. Mr. Kingsley also received a grant of 20,000 shares of restricted
stock that vests in equal installments on November 1 of 1998, 1999 and 2000.
The agreement further provides that Mr. Kingsley will participate in Unicom's
Annual Incentive Award Program and will receive an annual incentive award for
1998 and 1999 at least equal to the target award of $213,750. Mr. Kingsley
also participates in the Unicom Long-Term Performance Unit Award Program, and
any award payable under such Program with respect to the three-year
performance periods ending on December 31, 1997, 1998, or 1999 will be made as
though he had participated in the Program throughout such performance periods
(except in the case of a termination of employment). In addition, Mr. Kingsley
received $375,000 as an inducement to enter into the employment agreement, and
an annual living cost allowance equal to $75,000 (increased by the amount of
applicable taxes on such amount as so increased) for the first three years of
the agreement term. Mr. Kingsley's agreement provides for a retirement benefit
equal to the amount that would have been payable under the Service Annuity
System (plus amounts payable under the ComEd Supplemental Management
Retirement Plan) for an employee who retires at age 60 calculated based on the
assumption that Mr. Kingsley had completed 15 years of credited service
beginning with the third year of his employment and that such credited service
increased by five years during each of the next two years, in addition to his
actual years of credited service after five years of employment. The agreement
further provides for a lump sum severance payment to Mr. Kingsley if he should
be terminated without cause equal to two times his base salary at the time of
such termination, and a continuation of health and life insurance benefits for
two years after the date of termination, plus retirement benefits (calculated
as though he had completed at least 15 years of credited service if such
termination occurs during the first two years of employment) and retiree
health care coverage. In addition, any unvested portion of the restricted
stock granted under the agreement will immediately become fully vested and
nonforfeitable. Mr. Kingsley agreed not to use for his own benefit or disclose
any confidential information of Unicom or ComEd during or after the term of
his employment, and not to solicit any employee of ComEd for one year after
the term of his employment with ComEd.
22
<PAGE>
SEVERANCE PLANS
Unicom established the Key Management Severance Plan in 1998 to provide key
employees, including the named executive officers, certain benefits in the
event their employment is terminated by their employer without cause, or in
the event they resign for good reason (both terms as defined in the Plan).
Benefits under the Plan include severance pay equal to the sum of a terminated
executive's current annual base salary plus the average of his annual
incentive awards for the two years preceding the termination, annual incentive
awards and long-term incentive awards (with respect to any performance cycle
for which the executive has completed 24 months) prorated through the date of
termination, continuation of health care coverage, life insurance and long-
term disability coverage, and outplacement services. Payment of severance pay
and continuation of the benefits described above is made over two years, and
the amount of the severance pay and incentive and the payment period is
included for purposes of calculating retirement benefits under the
supplemental management retirement plan and determining eligibility for
retiree health care coverage. As a condition of receiving plan benefits, an
executive must agree not to use for his own benefit or disclose any
confidential information of Unicom or ComEd during or after the term of his
employment, and not to compete with Unicom or ComEd or solicit any key
employee or interfere with the relationship with any material customer or
supplier of either company until two years after the term of his employment
with the companies, and must release the Company from all claims arising out
of his employment as of the date of termination. In the case of Mr. Rowe and
Mr. Kingsley, the severance benefits provided under the terms of their
employment agreements will control, to the extent they exceed the benefits
provided under the Plan.
The Boards of Directors of Unicom and ComEd approved a change in control
policy (the "Policy") in 1998 pursuant to which Mr. Rowe and the other named
executive officers will receive benefits in the event their employment is
terminated without cause or if they resign for good reason (as such terms are
defined under the Policy) within 24 months following a change in control of
the Company. The benefits include a severance payment in a lump sum equal to
three times the sum of the executive's annual base salary plus an amount equal
to the average of the two annual incentive awards paid to the executive or, if
greater, the target award under the annual incentive award program, a prorated
annual incentive award for the year in which termination occurs, continuation
for three years of health care coverage and outplacement services. In
addition, under the terms of the Incentive Plan, all unvested options vest
upon the termination, and long-term incentive awards and unvested options
granted prior to July 22, 1998 will vest immediately upon the change in
control. All retirement benefits vest immediately upon termination of
employment, the severance payment is taken into account for purposes of
determining benefits under the supplemental retirement plan, and the executive
receives three additional years of credited service for purposes of
determining the amount of benefits under such plan and eligibility for retiree
health care coverage. An additional payment to cover excise taxes imposed
under Section 4999 of the Internal Revenue Code is provided only if the after-
tax amount of the benefits exceeds 110% of the amount that would not subject
the executive to any such excise taxes (the "safe harbor"), and payments which
fall between 100% and 110% of the safe harbor will be reduced or eliminated to
equal the amount of the safe harbor. Any benefits under the Policy may be
reduced or eliminated if the timing of a merger, consolidation or other
transaction would prevent the Company from accounting for such change in
control as a pooling of interests. The change in control benefits will be
provided in the form of individual agreements for the named executives, and
Mr. Rowe's employment agreement was amended, effective March 8, 1999, to
reflect the Policy provisions.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee (the "Committee") of the Board of Directors of
Unicom and ComEd have furnished the following report on executive
compensation:
Introduction. The Committee (including its predecessor the Corporate
Governance and Compensation Committee) is responsible for the Company's
executive compensation philosophy and
23
<PAGE>
policies, which form the basis for the Committee's decisions. The overall
objectives of the executive compensation programs are to drive and reinforce
achievement of financial objectives and strategic initiatives, to provide
compensation opportunities that are competitive with top performing energy
services companies and general industry companies, and to link a significant
portion of compensation to performance and increasing shareholder value.
It is the policy of the Committee to compensate executive officers based on
fulfillment of their responsibilities and their achievement of established
corporate and business unit goals. 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. A significant portion of an executive's
total compensation is "pay-at-risk." When excellent performance is achieved,
above-market pay will result. Conversely, when performance fails to meet the
established target, the result is below-market pay.
In 1998, the major components of executive officer compensation were base
salary, consisting of cash salary and current compensation unit income, non-
qualified stock options, 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 salaries began
with a review of the salary levels for various comparable executive positions
at a group of peer companies identified by the Committee. The Committee also
used compensation survey information from several executive compensation-
consulting firms. Competitive data was used as a reference point due to the
similarity of the basic duties and responsibilities of positions outside the
Company and those within the Company. The Committee then considered differences
from other companies in the Company's organizational structure and the
responsibilities of its executive officers, in the size and complexity of the
Company's operations, and in the regulatory environment and competitive
challenges faced by the Company. Salary range increases and salary adjustment
budgets are established annually based on the business and economic conditions
of the Company as well as on competitive practices. Base salaries are adjusted
annually taking into account each executive's performance and individual
contributions to the Company.
The Chairman reviewed the base salary of each officer and recommended an
adjustment after assessing particular responsibilities and performance. The
Chairman's recommendations were reviewed and approved by the Committee.
Percentage increases for individual officers varied and were structured to
recognize changes in industry compensation levels; to reflect the impact,
performance and contributions of individual officers; and to reflect strategic
changes in position responsibilities and assignments.
In 1998, 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. During 1998, no additional units were
awarded by the Committee.
Incentive Compensation Awards. Another component of executive compensation is
incentive compensation earned under awards made by the Committee under the
Incentive Plan. Such incentives are designed to drive and enforce achievement
of established financial, operational, and strategic goals that are critical to
the Company's success including increasing shareholder value. Incentive
opportunities include an annual incentive award, a long-term performance unit
award covering a three-year performance period, and non-qualified stock
options.
24
<PAGE>
The Unicom Corporation 1998 Annual Incentive Award for Management Employees
under the Unicom Corporation Long-Term Incentive Plan (the "annual incentive
program") was established to reward the achievement of certain corporate and
business unit goals during 1998. The annual incentive program helped the
Company drive financial performance, reinforce its strategic direction, and
focus efforts on results that will increase shareholder value. The award is
variable and is designed to encourage achievement of short-term goals.
Employees receive incentive awards only if their business units and the
Company meet or exceed the established performance targets for the year. The
amount of the individual awards is based upon the individual and collective
accomplishments of employees and varies based upon the degree to which the
financial and strategic goals are met or exceeded and upon the Committee's
assessment of individual performance. For key management employees, the annual
incentive award is payable 75% in cash and 25% in Unicom Common Stock.
For management employees other than those in selected sales-related
positions, the 1998 corporate goal was the Unicom Profit Margin (UPM). The UPM
was defined as revenues less operation and maintenance expenditures, fuel and
purchased power expenditures, depreciation charges, income and other tax
charges and interest charges. The target level of UPM performance was
surpassed and awards exceeded the target level for the corporate goal.
Business unit goals ("strategic initiatives") comprised the other component
of the annual incentive program for all incentive program participants,
excluding executive officers. Quantitative goals, such as business unit profit
or shareholder-value-added (SVA) measures and nuclear capacity, were measured
on a scale of performance ranging from "threshold" to "maximum." Other
strategic goals were assessed by eight senior executives, with final approval
by the Committee.
With respect to Messrs. Rowe, O'Connor, and other executive officers, the
final determination of the annual incentive award was based on the UPM, the
accomplishment of corporate strategic goals, and an individual performance
assessment by the Committee.
A long-term performance unit award program was established in 1994 to focus
employees on long-range performance by linking certain incentive payments to
the total return on Unicom Common Stock in relation to that of the other
companies constituting the Dow Jones Utility Stock Index over three-year
performance periods. The Dow Jones Utility Stock Index includes Unicom and ten
other large energy services companies. Incentive opportunities are expressed
as a percentage of base salary and increase with the executive's management
level.
Awards under the performance period ending December 31, 1998 resulted in a
payment equal to 75% of the target award. Payments to certain executive
officers are included in the "Payouts" column under the "Long-Term
Compensation" heading in the Summary Compensation Table. Unicom's shareholder
return increased by 39.7% during that same performance period.
Stock Option Grants in 1998. The Company grants non-qualified stock options
to reward and motivate the Company's management to increase long-term
shareholder value. Option grants are made generally to key employees who are
expected to contribute materially to the Company's success. The option awards
permit grantees to purchase shares of Unicom'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 (for options granted prior to
July 22, 1998, 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 regarding the size of option grants were based on an evaluation of
competitive data drawn from companies in a study conducted in mid-1997 for the
Company by a leading executive compensation consulting firm, as well as the
option recipient's base salary, target mix of other compensation components,
management level, performance and potential.
25
<PAGE>
Compensation of the Chief Executive Officers.
In considering the compensation for 1998 of Mr. O'Connor for the portion of
1998 that he served as Unicom's Chairman and Chief Executive Officer, and of
Mr. Rowe from the time of his election as Chairman, President and Chief
Executive Officer, the Compensation Committee evaluated the Company's 1997
performance, compensation for other chief executive officers, and the Company's
strategic direction.
Salary. The Committee's assessment of the personal performance of James J.
O'Connor was based upon an evaluation of his leadership, achievements and
contributions to the Company during 1997. Mr. O'Connor's total annual salary in
1998 was increased $55,000 to a rate of $955,000 per year, including current
compensation units.
Under the terms of his employment agreement, Mr. Rowe's annual base salary
for 1998 was $900,000. The applicable range was determined by competitive
practice and market comparisons for Chief Executive Officers for comparable
companies.
Incentive Compensation Plans.
Annual Incentive Program. Both Mr. O'Connor and Mr. Rowe participated in the
annual incentive program described earlier in this report. Mr. O'Connor's
target award was 60% of his base salary and current compensation units. The
actual award paid was 149.4% of his target level based on the achievement of
the corporate goals and was pro-rated through his retirement date.
Under the terms of his employment agreement, Mr. Rowe participated in the
annual incentive program as though he had been employed from the beginning of
the year, and was guaranteed a payment of at least $600,000. Mr. Rowe's target
award was 60% of his base salary and he received an award equivalent to 179.3%
of target based on achievement of financial and strategic performance goals and
personal performance. The Committee approved payment of the award 50% in cash
and 50% in Unicom Common Stock. Mr. Rowe deferred the portion of his incentive
that was payable in Unicom Common Stock under the Unicom Corporation Deferred
Stock Bonus Plan.
Long Term Performance Unit Award. Mr. O'Connor's award payable for the
performance cycle that ended on December 31, 1998, was granted in 1996 at a
target level of 50% of his then-current base salary and current compensation
units. The actual award paid was 75% of his target level and was prorated
through his date of retirement.
Mr. Rowe's award payable for the performance cycle that ended on December 31,
1998, was granted upon his election as Chairman, President and Chief Executive
Officer at a target level of 50% of his then-current base salary. The actual
award paid was 75% of his target level. Pursuant to his employment agreement,
the Compensation Committee granted Mr. Rowe full participation in the three
current performance cycles as though he had participated from the beginning of
each award cycle.
Stock Option Award. Due to his retirement, Mr. O'Connor did not receive a
1998 grant of stock options.
Pursuant to his employment agreement, Mr. Rowe was granted 250,000 non-
qualified stock options upon his election as Chairman, President and Chief
Executive Officer and was ineligible for any additional grants during 1998.
Internal Revenue Code Section 162(m) Considerations. Under Section 162(m) of
the Internal Revenue Code, executive compensation in excess of $1 million is
generally not deductible for purposes of corporate income taxes. However,
"qualified performance-based compensation" which is paid pursuant to a plan
meeting certain requirements of the Code and applicable regulations remains
deductible. As noted in previous reports, the Committee intends to continue
reliance on
26
<PAGE>
performance-based compensation programs, consistent with sound executive
compensation policy. Such programs will be designed to fulfill, in the best
possible manner, future corporate business objectives. The Committee's policy
has been to seek to cause executive incentive compensation to qualify as
"performance-based" in order to preserve its deductibility for federal income
tax purposes to the extent possible without sacrificing flexibility in
designing appropriate compensation programs. In 1997, the Company obtained
shareholder approval of performance-based incentives in Long-Term Performance
Unit Awards under the Unicom Long-Term Incentive Plan in order to qualify such
compensation as "performance-based." In 1999, the Company is seeking
shareholder approval of additional performance-based incentives. However, in
order to provide executives with appropriate incentives, the Committee may
also determine, in light of all applicable circumstances, that it would be in
the best interests of the Company for awards to be paid under certain of its
incentive compensation programs or otherwise in a manner that would not
satisfy the requirements to qualify as performance-based compensation under
Code Section 162(m). The portion of Mr. Rowe's incentive compensation that was
guaranteed under his employment agreement does not qualify as performance-
based compensation under Code Section 162(m), and accordingly, to the extent
receipt of such compensation is not deferred, the amount of such incentive
compensation and salary in excess of $1 million will not be deductible by the
Company for purposes of corporate income taxes. Mr. Rowe deferred the portion
of his incentive that was payable in Unicom Common Stock under the Unicom
Corporation Deferred Stock Bonus Plan.
Compensation Committee
Edward A. Brennan, Chairman
Carlos H. Cantu
James W. Compton
Sue L. Gin
Donald P. Jacobs
27
<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, 1998.
CUMULATIVE PERFORMANCE SINCE JANUARY 1, 1994
ASSUMING REINVESTMENT OF DIVIDENDS
(JANUARY 1, 1994 = $100)
[GRAPH]
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG UNICOM COMMON STOCK, DOW JONES UTILITY STOCK INDEX
AND S&P 500 COMPOSITE STOCK INDEX
<TABLE>
<CAPTION>
UCM COMMON STK* DJ UTIL S&P 500 COMPOSITE
--------------- ------- -----------------
<S> <C> <C> <C>
JANUARY 1, 1994........... 100 100 100
DECEMBER 31, 1994......... 91 85 101
DECEMBER 31, 1995......... 132 112 139
DECEMBER 31, 1996......... 116 122 171
DECEMBER 31, 1997......... 141 151 228
DECEMBER 31, 1998......... 184 179 293
</TABLE>
- - ---------------------
* Performance shown for Unicom Common Stock on and after September 1, 1994
and for ComEd common stock prior to that date.
28
<PAGE>
VOTING
Shareholders of record on the books of Unicom at 4:00 p.m., Chicago time,
on March 26, 1999, will be entitled to vote at the annual meeting. Unicom had
outstanding on March 26, 1999, 217,153,777 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 Item A (the
election of Directors), a shareholder may mark the accompanying form of proxy to
(i) vote for the election of all eleven 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 eleven 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 of the Unicom Long-Term Incentive
Plan), Item C (the approval of material terms of performance-based incentives),
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. With respect to Item E (the shareholder
proposal), 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 that item. 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 this matter 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 this item will
not be counted in determining whether a quorum is present for the consideration
of this matter and will not be considered represented at the meeting and
entitled to vote on it.
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
AND FOR APPROVAL OF THE MATTERS DISCUSSED IN ITEMS B, C AND D AND AGAINST THE
MATTER DISCUSSED IN ITEM E. In the event any nominee for Director shall be
unable to serve, an event which is not now contemplated, the proxies may or
may not be voted for a substitute nominee.
29
<PAGE>
SHAREHOLDER PROPOSALS AND NOMINATIONS FOR 2000 ANNUAL MEETING
Any shareholder proposal intended to be presented at the 2000 annual
meeting of Unicom's shareholders must be received at the principal executive
offices of Unicom by the close of business on December 9, 1999, in order to be
considered for inclusion in Unicom's proxy materials relating to that meeting.
In addition, under the Company's By-Laws, in order for a shareholder to bring
business before, or to make a nomination of a candidate for election as a
Director at, an annual meeting, the shareholder must comply with the procedures
set forth in the By-Laws. Under the By-Laws, written notice in proper form of
any business to be brought before an annual meeting must be provided to the
Secretary of the Company not less than 90 nor more than 120 days before the
anniversary date of the preceding annual meeting of shareholders. However, if
the annual meeting is called for a date that is not within 30 days before or
after such anniversary date, notice by the shareholder must be so received by
the Secretary not later than 10 days after the day on which notice of the date
of the annual meeting was mailed or publicly announced. To be in proper written
form, the notice must include a brief description of such business, the reasons
for conducting such business at the annual meeting, and certain information
concerning the identity of the shareholder proposing to bring the business
before the annual meeting. Similarly, under the By-Laws, written notice in
proper form of any nomination of a candidate for election as a Director at an
annual meeting must be provided to the Secretary within the same time limits as
set forth above for business to be brought before a meeting by a shareholder. To
be in proper written form, the notice must set forth all information regarding
the nominee that is required to be disclosed pursuant to Regulation 14A under
the Securities Exchange Act of 1934, as amended, together with certain
information concerning the identity of the shareholder proposing to make the
nomination. A copy of the By-Law provisions specifying the requirements for
shareholders wishing to bring business before the annual meetings or wishing to
make a nomination for election as a Director at such meetings will be furnished
to any shareholder without charge upon written request to the Secretary. Any
such proposal, nomination or request should be directed to the Secretary of
Unicom at 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.
John P. McGarrity
Secretary
April 7, 1999
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 JOHN P. MCGARRITY,
SECRETARY, UNICOM CORPORATION, 10 SOUTH DEARBORN STREET, POST OFFICE BOX
A-3005, CHICAGO, ILLINOIS 60690-3005.
30
<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 11,000,000 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
A-1
<PAGE>
options 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
1,000,000.
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 1,000,000.
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 100,000.
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, 1998 AND 1997
<PAGE>
Unicom Corporation and Subsidiary Companies
Forward-Looking Information
Except for historical data, the information contained herein constitutes
forward-looking statements. Forward-looking statements are inherently
uncertain and subject to risks. Such statements should be viewed with caution.
Actual results or experience could differ materially from the forward-looking
statements as a result of many factors. Forward-looking statements in this
report include, but are not limited to: (1) statements regarding expectations
of revenue reductions and collections of future CTC revenues as a result of
the 1997 Act in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," subcaption "Changes in the Electric Utility
Industry--The 1997 Act," and in Note 2 of Notes to Financial Statements, (2)
statements regarding estimated capital expenditures in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaptions "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction
Program," "Liquidity and Capital Resources--UNREGULATED OPERATIONS--
Construction Program" and "Changes in the Electric Utility Industry--Response
to Regulatory Changes," (3) statements regarding the estimated return to
service of certain nuclear generating units in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Regulation--Nuclear Matters," (4) statements regarding the costs of
decommissioning nuclear generating stations in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Regulation--Nuclear Matters," and in Note 1 of Notes to Financial Statements,
under "Depreciation, Amortization of Regulatory Assets and Decommissioning,"
(5) statements regarding cleanup costs associated with MGPs and other
remediation sites in Note 22 of Notes to Financial Statements, (6) statements
regarding the estimated fair value of forward energy contracts in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--
Market Price Exposure," and (7) statements regarding the risks and
uncertainties relating to Year 2000 issues set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--Year 2000
Conversion," including the projected completion dates in each of Unicom's four
critical business areas, Unicom's dependence upon the Year 2000 readiness of
third parties with whom it has significant business relationships, the
estimated costs of remediating or upgrading embedded systems and software that
would not otherwise be replaced in accordance with Unicom's business plans,
and Unicom's Year 2000 contingency planning process. Management cannot predict
the course of future events or anticipate the interaction of multiple factors
beyond management's control and their effect on revenues, project timing and
costs. The statements regarding revenue reductions and collections of future
CTC revenues are subject to unforeseen developments in the market for
electricity in Illinois resulting from regulatory changes. The statements
regarding estimated capital expenditures, estimated return to service of
nuclear generation units, decommissioning costs, cleanup costs and Year 2000
conversion costs are subject to changes in the scope of work and manner in
which the work is performed and consequent changes in the timing and level of
the projected expenditure, and are also subject to changes in laws and
regulations or their interpretation or enforcement. The statements regarding
expectations for Year 2000 readiness and Unicom's Year 2000 contingency
planning process are subject to the risk that Year 2000 remediation efforts of
Unicom and other parties with whom it has significant business relationships
are not successful. The statements regarding the estimated return to service
of nuclear generating units are subject to the concurrence of the NRC with
proceeding to power operations. The statements regarding the fair value of
forward energy contracts are subject to changes in generating capability and a
reduction in the demand for electricity. Unicom and ComEd make no commitment
to disclose any revisions to the forward-looking statements, or any facts,
events or circumstances after the date hereof that may bear upon forward-
looking statements.
B-1
<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Definitions............................................................... B-3
Summary of Selected Consolidated Financial Data........................... B-4
Price Range and Cash Dividends Paid per Share of Common Stock............. B-4
1998 Consolidated Revenues and Sales...................................... B-4
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... B-5
Report of Independent Public Accountants.................................. B-24
Consolidated Financial Statements--
Statements of Consolidated Operations for the years 1998, 1997 and 1996. B-25
Consolidated Balance Sheets as of December 31, 1998 and 1997............ B-26
Statements of Consolidated Capitalization as of December 31, 1998 and
1997................................................................... B-28
Statements of Consolidated Retained Earnings (Deficit) for the years
1998, 1997 and 1996.................................................... B-29
Statements of Consolidated Cash Flows for the years 1998, 1997 and 1996. B-30
Notes to Financial Statements........................................... B-31
Subsequent Events......................................................... B-60
</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-2
<PAGE>
DEFINITIONS
The following terms are used in this document with the following meanings:
<TABLE>
<CAPTION>
Term Meaning
- - ---------------------- ------------------------------------------------------------------
<S> <C>
1997 Act Illinois Electric Service Customer Choice and Rate Relief Law of
1997
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
CERCLA Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended
CFC Chlorofluorocarbon
Clean Air Amendments Clean Air Act Amendments of 1990
ComEd Commonwealth Edison Company
ComEd Funding ComEd Funding, LLC, a ComEd subsidiary
ComEd Funding Trust ComEd Transitional Funding Trust, a ComEd Funding subsidiary
Congress U.S. Congress
Cotter Cotter Corporation, a ComEd subsidiary
CTC Non-bypassable "competitive transition charge"
DOE U.S. Department of Energy
EEI Edison Electric Institute
EPRI Electric Power Research Institute
EPS Earnings (Loss) per Common Share
ESPP Employee Stock Purchase Plan
FAC Fuel adjustment clause
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FERC Order FERC Open Access Order No. 888 issued in April 1996
GAAP Generally Accepted Accounting Principles
ICC Illinois Commerce Commission
IDR Illinois Department of Revenue
Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd subsidiary
INPO Institute of Nuclear Power Operations
ISO Independent System Operator
MAIN Mid-America Interconnected Network
MGP Manufactured gas plant
NEI Nuclear Electric Institute
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NML Nuclear Mutual Limited
NPL Nuclear Priorities List
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SPEs Special purpose entities
S&P Standard & Poor's
Trusts ComEd Financing I and ComEd Financing II, ComEd subsidiaries
Trust Securities ComEd-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely ComEd's subordinated debt
securities
Unicom Unicom Corporation
Unicom Energy Services Unicom Energy Services Inc., a Unicom Enterprises subsidiary
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
Unicom Thermal Unicom Thermal Technologies Inc., a UT Holdings subsidiary
U.S. EPA U.S. Environmental Protection Agency
UT Holdings UT Holdings Inc., a Unicom Enterprises subsidiary
</TABLE>
B-3
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
Summary of Selected Consolidated Financial Data
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Millions Except per Share Data)
<S> <C> <C> <C> <C> <C>
Operating revenues.............. $ 7,151 $ 7,083 $ 6,937 $ 6,910 $ 6,278
Net income (loss)............... $ 510 $ (853)(1) $ 666 $ 640(2) $ 355
Basic earnings (loss) per common
share.......................... $ 2.35 $ (3.94)(1) $ 3.09 $ 2.98(2) $ 1.66
Diluted earnings (loss) per
common share................... $ 2.34 $ (3.94)(1) $ 3.09 $ 2.98(2) $ 1.66
Cash dividends declared per
common share................... $ 1.60 $ 1.60 $ 1.60 $ 1.60 $ 1.60
Total assets (at end of year)... $25,707 $22,700 $23,388 $23,250 $23,121
Long-term obligations at end of
year excluding current portion:
Long-term debt, preference
stock and preferred securities
subject to mandatory
redemption requirements....... $ 8,229 $ 6,262 $ 6,487 $ 7,011 $ 7,745
Accrued spent nuclear fuel
disposal fee and related
interest...................... $ 728 $ 693 $ 657 $ 624 $ 590
Capital lease obligations...... $ 334 $ 438 $ 477 $ 376 $ 433
Other long-term obligations.... $ 2,951 $ 3,183 $ 1,991 $ 1,826 $ 1,754
</TABLE>
- - ---------------------
(1) Includes an extraordinary loss for the write-off of generation-related net
regulatory assets of $810 million (after-tax), or $3.75 per common share
(basic), the loss on the early retirement of Zion nuclear generating
station of $523 million (after-tax), or $2.42 per common share (basic),
and the positive impact of a one-time cumulative effect for a change in
accounting principle for revenue recognition of $197 million (after-tax),
or $0.91 per common share (basic).
(2) Includes an extraordinary loss related to the early redemption of long-
term debt of $20 million (after-tax), or $0.09 per common share (basic).
Price Range* and Cash Dividends Paid per Share of Common Stock
<TABLE>
<CAPTION>
1998 (by quarters) 1997 (by quarters)
--------------------------------- ---------------------------
Fourth Third Second First Fourth Third Second First
-------- ------ -------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price range:
High................... 41 3/16 38 36 15/16 35 13/16 30 3/4 25 5/8 24 1/4 28 1/4
Low.................... 36 13/16 33 3/8 32 9/16 30 18 1/2 21 18 1/2 19 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, 1998, there were
approximately 124,000 holders of record of Unicom's common stock.
1998 Consolidated Revenues and Sales
<TABLE>
<CAPTION>
% %
Operating Increase/ Kilowatthour Increase/ %
Revenues (Decrease) Sales (Decrease) Increase
(Thousands) Over 1997 (Millions) Over 1997 Customers Over 1997
----------- ---------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Residential............. $2,551,741 -- % 23,942 8.1% 3,134,490 0.4%
Small commercial and
industrial............. 2,187,532 1.6 27,005 4.4 304,208 4.5
Large commercial and
industrial............. 1,406,720 (4.1) 24,043 (0.1) 1,794 14.6
Public authorities...... 510,185 0.8 7,472 2.0 14,049 15.4
Electric railroads...... 31,022 4.2 433 3.6 3 50.0
---------- ------ ---------
Ultimate consumers..... $6,687,200 (0.3) 82,895 3.8 3,454,544 0.8
Provision for revenue
refunds................ (21,848) (52.1) -- -- -- --
---------- ------ ---------
Net ultimate consumers. $6,665,352 -- 82,895 3.8 3,454,544 0.8
Sales for resale........ 397,157 18.0 14,744 (6.0) 62 21.6
Other revenues.......... 88,744 7.1 -- -- -- --
---------- ------ ---------
Total.................. $7,151,253 1.0 97,639 2.2 3,454,606 0.8
========== ====== =========
</TABLE>
B-4
<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. These
changes are attributable to changes in technology and regulation. Federal law
and regulations have been amended to provide for open transmission system
access, and various states, including Illinois, are considering, or have
adopted, new regulatory structures to allow access by some or all customers to
energy suppliers in addition to the local utility.
Electric Utility Industry. The electric utility industry historically has
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serve customers within relatively
defined service territories; and operate under extensive regulation with
respect to rates, operations and other matters. Utilities have operated under
a regulatory compact with the state, with a statutory obligation to serve all
of the electricity needs within their service territory in a nondiscriminatory
manner. Historically, investment and operating decisions have been made based
upon the utilities' respective assessment of the current and projected needs
of their customers. In view of this obligation, regulation has focused on
investment and operating costs, and rates have been based on a recovery of
some or all of such prudently incurred costs plus a return on invested
capital. Such rate regulation, and the ability of utilities to recover
investment and other costs through rates, have provided the basis for
recording certain costs as regulatory assets. These assets represent costs
which are allocated over future periods reflecting related regulatory
treatment, rather than expensed in the current period.
Federal Regulation. The Federal Energy Policy Act of 1992, among other
things, empowered FERC to introduce a greater level of competition into the
wholesale marketplace for electric energy. Under the FERC Order, utilities are
required to file open access tariffs with regard to their transmission
systems. These tariffs set forth the terms, including prices, under which
other parties and the utility's wholesale marketing function may use the
utility's transmission system. ComEd has an approved open access tariff with
the FERC. The FERC Order requires the separation of the transmission
operations and wholesale marketing functions so as to ensure that unaffiliated
third parties have access to the same information as to system availability
and other requirements. The FERC Order further requires utilities to operate
an electronic bulletin board to make transmission price and access data
available to all potential users. A key feature of the FERC Order is that it
contemplates full recovery of a utility's costs "stranded" by competition.
These costs are "stranded" or "strandable" to the extent market-based rates
would be insufficient to allow for their full recovery. To recover stranded
costs, the utility must show that it had a reasonable expectation that it
would continue to serve the customer in question under its regulatory compact.
In addition, some governmental entities, such as cities, may elect to
"municipalize" a utility's distribution facilities through condemnation
proceedings. Such municipalities would then be able to purchase electric power
on a wholesale basis and resell it to customers over the newly acquired
facilities. The FERC Order provides for the recovery of a utility's investment
stranded by municipalization.
The 1997 Act. In December 1997, the Governor of Illinois signed into law the
1997 Act, which established a phased process to introduce competition into the
electric industry in Illinois under a less regulated structure. Major
provisions of the 1997 Act applicable to ComEd include a 15% residential base
rate reduction which became effective August 1, 1998, an additional 5%
residential base rate reduction commencing on May 1, 2002 and gradual customer
access to other electric suppliers. Access for commercial and industrial
customers will occur over a period from October 1999 to December 2000, and
access for residential customers will occur after May 1, 2002. ComEd's
operating revenues were reduced by approximately $170 million in 1998 due to
the rate reduction. ComEd is engaged in certain pricing experiments
contemplated by the 1997 Act, which reduced
B-5
<PAGE>
ComEd's operating revenues by approximately $30 million in 1998 and are
expected to reduce operating revenues by $55 million in 1999, compared to 1997
rate levels; however, such reductions are expected to be offset by the effects
of customer growth. ComEd expects that the 15% residential base rate reduction
will reduce ComEd's operating revenues by approximately $380 million in 1999,
compared to 1997 rate levels.
The 1997 Act also provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006, and can be extended through 2008 with ICC approval. The
CTC will be established in accordance with a formula defined in the 1997 Act.
The CTC, which will be applied on a cents per kilowatthour basis, considers
the revenue which would have been collected from a customer under tariffed
rates, reduced by the revenue the utility will receive for providing delivery
services to the customer, the market price for electricity and a defined
mitigation factor, which represents the utility's opportunity to develop new
revenue sources and achieve cost savings.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. A utility may
request a rate increase during the rate freeze period only when necessary to
ensure the utility's financial viability, but not before January 1, 2000.
Under the earnings provision of the 1997 Act, if the earned return on common
equity of a utility during this period exceeds an established threshold, one-
half of the excess earnings must be refunded to customers. The threshold rate
of return on common equity is based on the 30-Year Treasury Bond rate, plus
5.5% in the years 1998 through 1999 and plus 6.5% in the years 2000 through
2004. The utility's earned return on common equity and the threshold return on
common equity are each calculated on a two year average basis. The earnings
sharing provision is applicable only to utility earnings. Increased
amortization of regulatory assets may be recorded, thereby reducing the earned
return on common equity, if earnings otherwise would have exceeded the maximum
allowable rate of return. The potential for earnings sharing or increased
amortization of regulatory assets could limit earnings in future periods.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based,
regulated rates. The 1997 Act also requires utilities to establish or join an
ISO that will independently manage and control utility transmission systems.
Additionally, the 1997 Act includes the leveling of certain regulatory
requirements to permit operational flexibility, the leveling of certain
regulatory and tax provisions as applied to various electric suppliers and a
new, more stringent, liability standard applicable to ComEd in the event of a
major outage. See "Response to Regulatory Changes" below for additional
information.
The 1997 Act also allows a portion of ComEd's future revenues to be
segregated and used to support the issuance of securities by ComEd or a SPE.
The proceeds from such securities issuances must be used to refinance
outstanding debt and equity or for certain other limited purposes. The total
amount of such securities that may be issued is approximately $6.8 billion;
approximately one-half of that amount can be issued in the twelve-month period
which commenced on August 1, 1998. In December 1998, ComEd initiated the
issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd
Funding and ComEd Funding Trust. See "Liquidity and Capital Resources,"
subcaption "UTILITY OPERATIONS--Capital Resources" below, and Notes 2, 7 and
24 of Notes to Financial Statements, for additional information regarding the
issuance of transitional trust notes and the planned use of the proceeds.
B-6
<PAGE>
As a result of the 1997 Act, prices for the supply of electric energy are
expected to change from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover some of its costs
which might otherwise be unrecoverable under market-based rates. Nonetheless,
ComEd will need to take steps to address the portion of such costs which are
not recoverable through the CTC. Such steps may include cost control efforts,
developing new sources of revenue and potential asset dispositions. See
"Response to Regulatory Changes" below for additional information.
See Note 2 of Notes to Financial Statements for the accounting effects
related to the 1997 Act.
Response to Regulatory Changes. Unicom has announced several business and
operational objectives designed to focus efforts in responding to the energy
market changes that are expected to develop from the 1997 Act. These
objectives contemplate that ComEd will seek additional improvements in its
transmission and distribution operations in order to meet customers'
expectations for reliable delivery and will seek to refocus its generation
activities, with a concentration on improved nuclear generation, and that
Unicom and ComEd will seek to expand their offerings of energy-related
products and services. See Unicom and ComEd's Current Report on Form 8-K dated
July 6, 1998 for more information regarding the objectives announced by
Unicom.
Under the 1997 Act, the role of electric utilities in the supply and
delivery of energy is expected to change. Utilities, such as ComEd,
traditionally have been responsible for providing both adequate supply and
reliable delivery of electricity to customers within their service areas. In
the future, ComEd will continue to be obligated to provide a reliable delivery
system. However, ComEd will be obligated to supply electricity only to those
customers that it continues to serve under tariffs for electricity, but not to
those customers who choose to rely on the marketplace. Nonetheless, during the
transition period to a competitive supply marketplace, ComEd must provide both
an adequate supply and reliable delivery of electricity. Given the tight
capacity situation in ComEd's market, ComEd will continue working to restore
and maintain its available capacity, as well as working to assist in the
development of a competitive supply marketplace in Illinois.
ComEd has a significant commitment to, and investment in, nuclear generating
capacity. ComEd has installed a new management team responsible for improving
nuclear operations. Such improvements are aimed at increasing levels of energy
generation, or capacity factors, at ComEd's nuclear generating units while
simultaneously improving ComEd's record of meeting NRC requirements and INPO
performance standards. Increased capacity factors generally result in lower
unit production costs and an improved opportunity to generate and sell
electricity in a competitive marketplace. Efforts are also being made to
control capital and operating costs through increased efficiencies, such as
the reduction of downtime and expenses associated with generating unit
maintenance and refueling outages.
ComEd also evaluated the recoverability of its generating plant investment
as a result of the 1997 Act. This evaluation, based upon interpretative
guidance issued by the SEC, resulted in a conclusion that the investment was
impaired and should be reduced. See Note 2 of Notes to Financial Statements
for additional information. Notwithstanding these efforts, there continues to
be an ongoing analysis of the ability of ComEd's various nuclear plants to
generate and deliver electric energy safely at competitive prices in the
competitive market for energy. Although short-term system reliability and
capacity constraints are likely to support the continued operation of ComEd's
nuclear units in the near term, expected longer term developments are likely
to make decision-making a function of economic considerations. In the absence
of short-term reliability and capacity constraints, if a generating plant
cannot produce power safely at a cost below the competitive market price, it
will be disposed of or closed. Plant impairment adjustments have reduced the
carrying value of nuclear plants, and depreciation rates reflecting shortened
estimated useful lives for certain stations will reduce the
B-7
<PAGE>
carrying value further during the next several years. However, closure of a
plant could involve additional charges associated with the write-off of its
then-current carrying value. In January 1998, Unicom and ComEd announced its
decision to permanently cease nuclear generating operations at ComEd's Zion
Station. The related retirement resulted in a charge in 1997 of $523 million
(after-tax), or $2.42 per common share (basic), reflecting both a write down
of the plant's carrying value and a liability for future closing costs. A
portion of Zion Station is used to provide voltage support in the transmission
system that serves ComEd's northern region. See Note 5 of Notes to Financial
Statements for additional information.
ComEd is also undertaking steps to offer for sale approximately 9,700
megawatts of fossil generating capacity, representing seven fossil-fired
generating stations, and the oil and gas peaking units located in Illinois.
Such plants have an aggregate book value of approximately $1.3 billion. As a
part of such sales, ComEd expects to enter into transitional power purchase
agreements with the purchasers in order to assure the availability of power
during the period that the competitive market for electric generation is
developing in Illinois. Non-binding proposals from prospective qualified
buyers were received in late 1998, with final, binding proposals due in the
first quarter of 1999. The closing of the sale is anticipated for the fourth
quarter of 1999. Any net gain on the sale of the stations will be offset in
large part by increased amortization of the regulatory asset for impaired
production plant and therefore is not expected to have a material impact on
results of operations. In addition, ComEd continues to examine its other
operations and assets with a view to rationalizing their investment and
operating costs against their ability to contribute to the revenues and
profits of ComEd. As a result of such evaluations, additional asset sales may
be undertaken.
In response to customer expectations and more stringent reliability
standards provided for by the 1997 Act, ComEd's Board of Directors approved a
$307 million increase in capital expenditures on its transmission and
distribution systems over the next three years. See "Liquidity and Capital
Resources," subcaption "UTILITY OPERATIONS--Construction Program" below, for
additional information regarding capital spending for the transmission and
distribution systems.
ComEd joined with other Midwestern utilities to form a regional Midwest ISO
in January 1998. Presently, a number of these utilities have agreed to place
their transmission systems under the control of the Midwest ISO. The Midwest
ISO is a key element in accommodating the restructuring of the electric
industry and will promote enhanced reliability of the transmission system,
equal access to the transmission system and increased competition. The Midwest
ISO has established an independent body that will ultimately direct the
planning and operation of the transmission system for the utilities involved.
The Midwest ISO will have operational control over the transmission system and
will have authority to require modification in the operation of generators
connected to that system during system emergencies. ComEd will retain
ownership of its transmission system. The formation of the Midwest ISO was
approved by FERC in September 1998, subject to certain conditions. The ISO
members elected the Midwest ISO Board of Directors in December 1998.
B-8
<PAGE>
Liquidity and Capital Resources
UTILITY OPERATIONS
Construction Program. ComEd has a construction program for the years 1999-
2001, which consists principally of improvements to its existing nuclear and
other electric production, transmission and distribution facilities. The
program, as currently approved by ComEd, includes the following estimated
expenditures (excluding nuclear fuel expenditures of approximately $676
million):
<TABLE>
<CAPTION>
1999 2000 2001
------ ---- ----
(Millions
of Dollars)
<S> <C> <C> <C>
Production................................................. $ 420 $264 $233
Transmission and Distribution.............................. 515 527 529
General.................................................... 109 83 80
------ ---- ----
$1,044 $874 $842
====== ==== ====
</TABLE>
This program includes an increase in capital expenditures on ComEd's
transmission and distribution systems of approximately $307 million over the
next three years, in addition to the estimated $1.3 billion previously planned
to be spent on these systems over the same time period. A significant portion
of such additional expenditures is intended to increase the reliability of
ComEd's distribution system by replacing certain equipment and increasing
automation to identify distribution problems faster and more quickly restore
power to customers.
ComEd's forecasts of peak load indicate a need for additional resources to
meet demand, either through generating capacity, equivalent purchased power
and/or the development of additional demand-side management resources, in 1999
and each year thereafter for the foreseeable future. However, ComEd believes
that adequate resources, including cost-effective, demand-side management
resources, non-utility generation resources and other-utility power purchases,
can be obtained in sufficient quantities to meet such forecasted needs.
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $335 million at December 31, 1998. In addition,
ComEd's estimated commitments for the purchase of coal are as follows:
<TABLE>
<CAPTION>
Contract Period Commitment (1)
-------------- --------- --------------
<S> <C> <C>
Black Butte Coal Co................................ 1999-2000 $434
Decker Coal Co..................................... 1999-2014 478
Other commitments.................................. 1999-2000 38
----
$950
====
</TABLE>
--------
(1) In millions of dollars, excluding transportation costs. No estimate of
future cost escalation has been made.
For additional information concerning these coal contracts, see Note 22 of
Notes to Financial Statements. See "Changes in the Electric Utility Industry,"
subcaption "Response to Regulatory Changes" above, for additional information.
Capital Resources. In December 1998, ComEd initiated the issuance of $3.4
billion of transitional trust notes through its SPEs, ComEd Funding and ComEd
Funding Trust. The proceeds from the transitional trust notes, net of
transaction costs, must be used to redeem or repurchase debt and equity to
lower ComEd's overall cost of capital. Accordingly, in early 1999 ComEd
redeemed $788 million of long-term debt and $534 million of preference stock,
and reacquired $229 million of outstanding ComEd long-term debt through a
tender offer. In addition, $500 million of the proceeds, of which
approximately $300 million has been utilized, is being used to reduce ComEd's
outstanding short-term debt. As more fully described below, Unicom has
announced plans to repurchase approximately $750 million of Unicom common
stock using the proceeds it receives from ComEd's repurchase of its common
stock held by Unicom. The remaining proceeds will be used for the payment of
fees and additional debt and equity redemptions and repurchases.
B-9
<PAGE>
Unicom has entered into a prepaid forward purchase arrangement with a
financial institution for the repurchase of approximately 15 million shares of
Unicom common stock. The repurchase arrangement provides for final settlement
no later than February 2000, on either a physical (share) basis, or a net cash
basis, at the option of the financial institution. The amount at which the
arrangement can be settled is dependent principally upon the average market
price at which the financial institution purchases such shares, compared to
the forward price per share. The share repurchases will not reduce shares
outstanding for purposes of EPS calculations or reduce common stock equity and
resulting return on common equity calculations until the date of physical
settlement. Unicom currently does not anticipate that settlement will occur in
1999. The repurchase arrangement will initially be recorded as a receivable on
Unicom's Consolidated Balance Sheets and will be adjusted at the end of each
reporting period to reflect the aggregate market value of the shares
deliverable under the arrangement. Consequently, the arrangement could
increase earnings volatility in 1999.
This arrangement supplements a previously announced program to repurchase up
to $200 million of Unicom common stock. Shares repurchased under that program
will also be outstanding for financial statement purposes until the time of
final settlement, which is currently expected to extend to February 2000, on
either a physical (share) basis, or a net cash basis, at the option of Unicom.
As of December 31, 1998, this arrangement has been accounted for as an equity
instrument. If this arrangement had been settled on a physical (share) basis
at December 31, 1998, Unicom would have received approximately 5.1 million
shares of its common stock.
See Note 24 of Notes to Financial Statements for additional information
regarding the redemptions and repurchases of debt and equity.
ComEd forecasts that internal sources will provide approximately three-
fourths of the funds required for ComEd's 1999 construction program and other
capital requirements, including nuclear fuel expenditures, contributions to
nuclear decommissioning funds, sinking fund obligations and scheduled debt
maturities. See Notes 10 and 12 of Notes to Financial Statements for the
summaries of the annual sinking fund requirements and scheduled maturities for
ComEd preference stock and long-term debt, respectively. The forecast takes
into consideration the effects of the 1997 Act and the issuance by ComEd
Funding Trust of $3.4 billion of transitional trust notes in 1998 to refinance
debt and equity, as discussed above.
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of ComEd at the time of such
financing. A portion of ComEd's financing may be provided through the
continued sale and leaseback of nuclear fuel through ComEd's existing nuclear
fuel lease facility. During 1998, ComEd sold and leased back $101 million of
nuclear fuel through its existing nuclear fuel lease facility. See Note 20 of
Notes to Financial Statements for additional information concerning ComEd's
nuclear fuel lease facility. In July 1998, ComEd issued $225 million principal
amount of 6.95% Notes due July 15, 2018, the proceeds of which were used for
general corporate purposes, including the refinancing of existing debt. ComEd
has $1 billion of unused bank lines of credit at December 31, 1998, which may
be borrowed at various interest rates. The interest rate is set at the time of
a borrowing and is based on floating rate bank indices plus a spread, which is
dependent upon the credit ratings of ComEd's outstanding first mortgage bonds
or on a prime interest rate. See Note 13 of Notes to Financial Statements for
information concerning lines of credit. See the Statements of Consolidated
Cash Flows for the construction expenditures and cash flow from operating
activities for the years 1998, 1997 and 1996. Cash flow from operating
activities decreased temporarily for the year 1998, compared to the previous
two years, as a result of an increase in customer receivables due to the
transition to a new customer information and billing system in the latter part
of 1998.
As of February 19, 1999, ComEd has an effective "shelf" registration
statement with the SEC for the future sale of up to an additional $280 million
of debt securities and cumulative preference stock for general corporate
purposes of ComEd, including the discharge or refund of other outstanding
securities.
B-10
<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 BB+ BBB-
Preference stock.................................. baa3 BB+ BBB-
Trust Securities.................................. baa3 BB+ BBB-
Commercial paper.................................. P-2 A-2 D-2
</TABLE>
ComEd Funding Trust's securities are currently rated by three principal
securities rating agencies as follows:
<TABLE>
<CAPTION>
Standard Duff &
Moody's & Poor's Phelps
------- -------- ------
<S> <C> <C> <C>
Transitional trust notes........................... Aaa AAA AAA
</TABLE>
As of January 1999, Moody's rating outlook on ComEd's securities is "Stable"
and S&P's rating outlook is "Positive." Duff & Phelps removed ComEd's
securities from "Rating Watch-Down" in September 1998.
In February 1999, S&P revised the general ratings scale for evaluating
preferred and preference stock issues of corporations. As a result of this
change in scale, ratings on ComEd's preferred and preference stocks, and Trust
Securities were lowered in February 1999.
Capital Structure. ComEd's ratio of long-term debt to total capitalization
increased to 58.0% at December 31, 1998 from 48.5% at December 31, 1997. The
increase is primarily due to the issuance of $3.4 billion of transitional
trust notes, in late December, which had not been applied to redeem long-term
debt and equity as of December 31, 1998. Excluding the effect of the
transitional trust notes, ComEd's ratio of long-term debt to total
capitalization was 45.5% at December 31, 1998. ComEd does not expect the
issuance of the transitional trust notes to adversely affect security ratings
of other outstanding securities. Unicom's retained earnings account had a
positive balance of $143 million at December 31, 1998 and a deficit balance of
$21 million at December 31, 1997. As of December 31, 1998 and 1997, $494
million and $331 million, respectively, of retained earnings had been
appropriated for future dividend payments.
Year 2000 Conversion. Unicom, including ComEd, uses various software
applications and embedded systems throughout its businesses that will be
affected by so-called "Year 2000 issues." These issues may prevent an
application or system from correctly processing dates up to the year 2000 and
beyond. A failure to correct any critical Year 2000 processing problems prior
to January 1, 2000 could have material adverse operational and financial
consequences if the affected systems either cease to function or produce
erroneous data. At this time, Unicom believes the major risks associated with
the inability of systems and software to process Year 2000 data correctly are
a system failure or miscalculation causing disruption of operations, including
among other things, an inability to operate ComEd's nuclear or fossil
generating plants, disruption in the operation of its transmission and
distribution systems or an inability to access interconnections with the
systems of neighboring utilities. Such failures could materially and adversely
affect Unicom's results of operations, financial position and cash flows.
Unicom management established a Year 2000 project team to address Year 2000
issues. The Year 2000 project team is currently composed of over 300 members,
including members of Unicom's senior management. The team is focused on three
elements that are integral to the project: business continuity, project
management and risk management. Business continuity involves the continuation
of reliable electric supply and service in a safe, cost-effective manner.
Project management involves defining and meeting the project scope, schedule
and budget. Risk management involves customer communications, contingency
planning and legal issues.
B-11
<PAGE>
In addition to its internal efforts, Unicom is working with various industry
groups, including NERC, EPRI and EEI to coordinate electric utility industry
Year 2000 efforts with the Clinton Administration's Year 2000 Conversion
Council, the DOE and Congress. The DOE has asked NERC to report on the
integrity of the transmission system for North America and to coordinate and
assess the preparation of the electric systems in North America for the Year
2000. NERC submitted its initial status report and coordination plan to the
DOE in September 1998 and a second report in January 1999; a full status
report is due by July 1999.
Since July 1996, Unicom has been working to identify and address Year 2000
issues. Unicom's approach to identifying and addressing noncompliant software
applications and embedded systems consists of the following stages: inventory,
analysis, renovation, testing and deployment. The first stage is to inventory
all applications and systems. The analysis stage involves assessing whether
software applications and embedded systems are Year 2000 compliant. The
renovation stage involves remediating or upgrading applications and systems to
make them Year 2000 ready. The testing stage determines whether the renovated
applications and systems are Year 2000 ready. The deployment stage is when the
tested applications and systems are implemented. In addition, Unicom is
engaged in contingency planning for Year 2000 problems. Unicom is developing
contingency plans to address the possibility that the applications and systems
may not be Year 2000 ready at the end of this process. An independent
consultant has been engaged to assist Unicom in the assessment of the process
being used to address the Year 2000 issue.
Unicom's Year 2000 project focuses on those facets of its business that are
required to deliver reliable electric service. The project encompasses the
computer systems that support core business functions such as customer
information and billing, finance, procurement, supply and personnel as well as
the components of metering, transmission, distribution and generation support.
The project also focuses on embedded systems, instrumentation and control
systems in facilities and plants. In accordance with business plans, Unicom
has replaced certain of its financial, human resources and customer service
and billing software, and is in the process of replacing its payroll system,
with new software that is Year 2000 compliant, and that addresses Unicom's
strategic needs as it enters a less regulated environment.
The following table summarizes the status as of February 5, 1999 of Unicom's
progress toward achieving Year 2000 readiness. The figures set forth in the
table represent the estimated extent to which Unicom has completed each phase
of the Year 2000 project for software applications and embedded systems.
<TABLE>
<CAPTION>
Software Embedded
Applications Systems
------------ --------
<S> <C> <C>
Inventory........................................... 100% 100%
Analysis............................................ 93% 96%
Renovation.......................................... 87% 74%
Testing............................................. 79% 46%
Deployment.......................................... 78% 91%
</TABLE>
The renovation and testing phases include only those software applications
and embedded systems which are not Year 2000 compliant, and require renovation
and testing. The deployment phase includes all inventoried applications and
systems, including those applications and systems that are Year 2000 compliant
and required no renovation or testing. Accordingly, the percentage of
completion for testing and renovation may be lower than the percentage of
completion for deployment.
The following is a brief summary of estimates of the progress of the Year
2000 project and certain projected completion dates in each of Unicom's four
critical business areas--nuclear generation, fossil generation, transmission
and distribution, and corporate information services:
B-12
<PAGE>
. Nuclear Generation--Software applications analysis is 65% complete and
embedded systems analysis is 98% complete. Testing of software
applications is 36% complete and 55% complete for embedded systems.
Deployment of software applications is 23% complete and embedded systems
are 85% complete. All ten operating nuclear units are expected to be Year
2000 ready by June 30, 1999.
. Fossil Generation--Analysis is 100% complete for software applications
and 96% complete for embedded systems. Testing of software applications
is 63% complete and 4% complete for embedded systems. Deployment of
software applications is 80% complete and embedded systems are 97%
complete and both are expected to be completed by June 30, 1999.
. Transmission and Distribution--Analysis is 100% complete for software
applications and 98% complete for embedded systems. Testing of software
applications is 89% complete and 97% complete for embedded systems.
Deployment of software applications is 89% complete and 97% complete for
embedded systems. Deployment of software applications and embedded
systems is expected to be completed by June 30, 1999.
. Corporate Information Services--Inventory and analysis are 100% complete.
Renovation, testing and deployment are 99% complete. Enterprise-wide
mainframe applications and systems are 100% complete.
Unicom's current schedule is subject to change, depending on developments
that may arise through unforeseen business circumstances, and through the
remediation and testing phases of its compliance effort. Unicom also depends
upon third parties, including customers, suppliers, government agencies and
financial institutions, to reliably deliver its products and services. Unicom
has implemented additional initiatives to assess the degree to which third
parties with whom it has business relationships are addressing Year 2000
issues. These initiatives include analysis of the Year 2000 compliance
programs of Unicom's critical vendors and obtaining Year 2000 warranties in
certain new contracts and licenses. Unicom also has introduced protocols for
assuring that software and embedded systems remain Year 2000 compliant on a
continuing basis. Unicom's contingency planning is addressing mechanisms for
preventing or mitigating interruption caused by its suppliers. Unicom also has
an outreach program in place for communicating Year 2000 project information
to residential and business customers.
Unicom estimates that the total cost of remediating or upgrading software
which would not otherwise be replaced in accordance with its business plans is
approximately $20 million, and the total cost of remediating or upgrading
embedded systems is approximately $20-$40 million. Approximately $26 million
has been expended as of December 31, 1998 for external labor, hardware and
software costs, and for the costs of Unicom employees who are dedicated full-
time to the Year 2000 project. All of such costs are expensed as incurred. The
foregoing amounts do not include the cost of new software applications
installed as a result of strategic replacement projects described earlier.
Such replacement projects were not accelerated because of Year 2000 issues.
The cost of the project and the dates on which Unicom plans to complete its
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third parties' Year 2000
readiness and other factors. Further, Unicom expects to incur additional costs
after 1999 to remediate and replace less critical software applications and
embedded systems.
Unicom has existing contingency plans in place for events such as extreme
heat, storms, equipment failures and accidents. Unicom is preparing Year 2000
contingency plans based on the framework of existing emergency management
system preparation and scenario development.
Unicom has begun the process of developing contingency plans to address the
most reasonably likely worst case scenarios that could occur in the event that
various Year 2000 issues are not resolved in a timely manner. Unicom submitted
the first draft of contingency plans to NERC prior to December 31, 1998, as
NERC requested. In addition, the first draft contingency plans were also
submitted to MAIN. Final plans are due to be submitted to NERC by June 30,
1999. Contingency planning is an ongoing process and will continue through the
fourth quarter of 1999.
B-13
<PAGE>
Unicom is using an approach in its contingency planning process that has
been recognized by NERC and NEI. The phases of the process include: business
impact analysis, contingency planning and testing. Unicom's business impact
analysis requires business unit personnel to evaluate the impact of mission-
critical systems failures on Unicom's core business operations, focusing on
specific failure scenarios and how they can be mitigated. The necessary
conditions for enacting the plans will be documented along with the
appropriate personnel responsible in each of the business units should a Year
2000 failure occur. Additionally, Unicom will participate in the NERC
industry-wide readiness drills scheduled for the spring and fall of 1999.
Based on Unicom's current schedule for completion of Year 2000 tasks, it
believes that its planning is adequate to secure Year 2000 readiness of its
critical systems. Nevertheless, achieving Year 2000 readiness is subject to
various risks and uncertainties, many of which are described above. Unicom is
not able to predict all the factors that could cause actual results to differ
materially from its current expectations as to its Year 2000 readiness.
However, if Unicom or third parties with whom it has significant business
relationships fail to achieve Year 2000 readiness with respect to critical
systems, there could be a material adverse effect on Unicom's results of
operations, financial position and cash flows.
Market Risks. ComEd is exposed to market risk due to changes in interest
rates and the market price for electricity. Exposure for interest rate changes
relates to its long-term debt and preferred equity obligations. Exposure to
electricity market price risk relates to forward activities taken to manage
effectively the supply of, and demand for, the electric generation capability
of ComEd's generating plants. ComEd has implemented an integrated risk
management framework to manage such risks. A corporate Risk Management
Committee defines the Company's risk tolerance and establishes appropriate
position limits, and corporate policies and procedures have been implemented
to minimize the exposure to market risk. ComEd does not currently utilize
derivative commodity or financial instruments for trading or speculative
purposes. See "Energy Risk Management Contracts" in Note 1 of Notes to
Financial Statements regarding the accounting for energy risk management
contracts.
Interest Rate Exposure. The table below provides the fair value and average
interest or fixed dividend rates of Unicom's outstanding debt and preferred
stock equity instruments as of December 31, 1998, excluding the January and
February redemptions of long-term debt and preference stock. See Note 24 of
Notes to Financial Statements for additional information on the redemptions.
<TABLE>
<CAPTION>
Fair
Expected Maturity Date Value as
Unicom and Subsidiary ---------------------------------------- of
Companies (millions) 1999 2000 2001 2002 2003 Thereafter Total 12/31/98
- - --------------------- ---- ---- ---- ---- ---- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt-
Fixed Rate............. $153 $462 $ 9 $308 $108 $4,052 $5,092 $5,476
Average Interest Rate.. 8.7% 7.2% 5.6% 7.9% 6.6% 7.7%
Variable Rate.......... $ 85 $ 92 $ 177 $ 177
Average Interest Rate.. 6.2% 4.1%
Transitional Trust
Notes................. $330 $350 $340 $340 $340 $1,700 $3,400 $3,450
Average Interest Rate.. 5.4% 5.3% 5.3% 5.4% 5.4% 5.6%
Preferred and Preference
Stock-
Subject to Mandatory
Redemption............ $ 69 $ 69 $ 71
Average Dividend Rate.. 6.9%
Not Subject to Manda-
tory Redemption....... $ 75 $ 75 $ 77
Average Dividend Rate.. 9.9%
Trust Securities........ $ 350 $ 350 $ 371
Average Dividend Rate.. 8.5%
</TABLE>
Market Price Exposure. ComEd's energy purchases from other suppliers have
increased as a result of reductions in owned generating capability and system
load growth. The market price of energy is subject to price volatility
associated with changes in supply and demand in the electric supply markets.
In the normal course of business, ComEd utilizes contracts for the forward
sale and
B-14
<PAGE>
purchase of energy to assure system reliability and manage effectively the
utilization of its available generating capability. ComEd also utilizes put
and call option contracts and energy swap arrangements to limit the market
price risk associated with the forward commodity contracts. The estimated fair
value of the forward energy contracts, including options at December 31, 1998,
was approximately $22 million. The estimated fair value is based on the
estimated net settlement value of the contracts derived from forward price
curves and market quotes, discounted at a 10% rate. A sensitivity analysis has
been performed which indicates that the market price risk exposure of these
financial instruments is not material. Notwithstanding these price risk
management activities, an unexpected loss of generating capability or
reduction in demand could increase ComEd's exposure to market price risks and
could have a material adverse effect on operating results.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through subsidiaries, in energy service
activities which are not subject to utility regulation by federal or state
agencies. One of these subsidiaries, UT Holdings, provides district cooling
and related services to offices and other buildings in the central business
district of the city of Chicago and in other cities in North America,
generally working with local utilities. District cooling involves, in essence,
the production of chilled water at one or more central locations and its
circulation to customers' buildings through a closed circuit of supply and
return piping. Such water is circulated through customers' premises primarily
for air conditioning. This process is used by customers in lieu of self-
generated cooling.
Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged
in providing energy services including gas services, performance contracting,
distributed energy and active energy management systems. In 1997, Unicom
Energy Services entered into a joint venture with Sonat Marketing Company L.P.
to market natural gas and related services to larger gas purchasers within
ComEd's service area in Northern Illinois and within other Midwestern areas.
As an entry into the distributed energy market, Unicom Energy Services also
entered into an alliance with AlliedSignal Power Systems, Inc., a subsidiary
of AlliedSignal Inc., to market, install and service an electric energy
generator developed by AlliedSignal, known as a TurboGenerator, in a 12-state
region, the providence of Ontario, Canada and Puerto Rico.
Construction Program. Unicom has approved capital expenditures for 1999 of
approximately $88 million for UT Holdings, primarily related to an expansion
of two of its four Chicago district cooling facilities and the related
distribution piping and plants in other cities. As of December 31, 1998, UT
Holdings' purchase commitments, principally related to construction, were
approximately $21 million.
Unicom has approved capital expenditures for 1999 of approximately $47
million for Unicom Energy Services. As of December 31, 1998, Unicom Energy
Services had purchase commitments of approximately $10 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, which are not
expected, would be subject to prior approval by the ICC.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $115 million was unused as of December 31, 1998.
The credit facility can be used by Unicom Enterprises to finance investments
in unregulated businesses and projects, including UT Holdings and Unicom
Energy Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Interest rates for borrowings under the credit
facility are set at the time of a borrowing and
B-15
<PAGE>
are based on either a prime interest rate or a floating rate bank index plus a
spread which varies with the credit rating of ComEd's outstanding first
mortgage bonds. See Note 13 of Notes to Financial Statements for additional
information regarding certain covenants with respect to Unicom and Unicom
Enterprises' operations.
In July 1998, Unicom Thermal issued $120 million of 7.38% unsecured
guaranteed senior Notes due May 2012, the proceeds of which were used to
refinance existing debt. The Notes are guaranteed by Unicom and include
certain covenants with respect to Unicom and Unicom Thermal's operations.
On April 1, 1998, S&P issued a rating on Unicom's senior debt obligations of
BBB-. Ratings have not been obtained from Moody's or Duff & Phelps.
Regulation
ComEd and the Indiana Company are subject to federal and state regulation in
the conduct of their respective businesses, including the operations of
Cotter. Such regulation includes rates, securities issuance, nuclear
operations, environmental and other matters. Particularly in the cases of
nuclear operations and environmental matters, such regulation can and does
affect operational and capital expenditures.
Rate Matters. See "Changes in the Electric Utility Industry," subcaption
"The 1997 Act" above, for information regarding the effects of the 1997 Act on
rate matters. See "Nuclear Matters" below for information regarding fuel
reconciliation proceedings for the years 1994 and 1996.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd--given the impact of such operations on overall O&M expenses
and the ability of nuclear power plants to produce electric energy at a
relatively low marginal cost. ComEd operates five nuclear power plants,
ranging from the older Dresden and Quad Cities Stations to the more recently
completed LaSalle, Byron and Braidwood Stations, and is intent upon safe,
reliable and efficient operation. See "Changes in the Electric Utility
Industry," subcaption "Response to Regulatory Changes" above, for information
regarding ComEd's permanent cessation of nuclear generation operations at its
Zion Station.
ComEd's LaSalle Station is currently on the NRC's list of plants that
require increased regulatory scrutiny. Dresden Station had been included on
the list since 1992 and LaSalle and Zion Stations were added in January 1997.
In July 1998, the NRC removed Dresden Station from the list because of
improved performance at the station, and also administratively removed Zion
Station from the list because of ComEd's decision to permanently cease further
nuclear operations at that plant. The listing of LaSalle Station does not
prevent ComEd from operating the generating units; however, it does mean that
the NRC will devote additional resources to monitoring ComEd's operating
performance and that ComEd will need to work to demonstrate to the NRC the
sustainability of improvements which it believes it has undertaken and is
continuing to implement. In January 1998, the NRC noted a declining
performance trend at Quad Cities Station. In March 1998, the NRC stated that
weaknesses were observed with respect to certain operations, maintenance and
engineering activities at Quad Cities Station. In July 1998, the NRC stated
that there has not been sufficient operational data to enable it to assess
Quad Cities Station's performance. The NRC indicated that it is monitoring
ComEd's ability to manage its nuclear operations in their entirety and that
the performance at any one facility will be viewed by the NRC in context with
the performance of ComEd's nuclear generating fleet as a whole. The NRC and
representatives of ComEd's management have met, and will continue to meet
periodically in the future, to discuss the status of recovery and restart
efforts and overall performance of the ComEd nuclear program.
ComEd has devoted, and intends to continue to devote, significant resources
to the management and operations of its nuclear generating stations. In recent
years, it has increased and reinforced the Nuclear Generation Group executive
leadership and station management with executives and managers drawn from
other utilities that have resolved similar operational and performance issues.
These efforts include the appointment of a new Chief Nuclear Officer in late
1997. ComEd has also
B-16
<PAGE>
sought to identify, anticipate and address operating and performance issues in
a safe, cost-effective manner, while seeking to improve the availability and
capacity factors of its nuclear generating units.
ComEd's activities, with respect to its nuclear generating stations, have
included improvements in operating and personnel procedures and repair and
replacement of equipment. Although performing such improvements can result in
longer unit outages, the improvements are expected to result in improved
operational performance when completed. LaSalle Units 1 and 2 were shut down
for extensive improvement work in September 1996. LaSalle Unit 1 was returned
to service in August 1998 after the NRC determined that ComEd had made
sufficient improvements at LaSalle Unit 1 for the unit to resume operations.
LaSalle Unit 2 is expected to restart during the second quarter of 1999. The
restart of LaSalle Unit 2 requires the resolution of material condition issues
similar to those of LaSalle Unit 1.
The NERC forecasted the possibility of electric energy shortages in the
summer of 1998 in light of continued outages at nuclear plants operated by
ComEd and other utilities in the Midwest power grid. ComEd took numerous steps
to support the reliability of its system during the summer of 1998. Such steps
included maximizing available on-system generating capacity during periods of
peak demand, arrangements to purchase power from other utilities,
reinforcements to the transmission systems of ComEd and neighboring utilities
to increase capacity and to provide voltage support, and working with
customers to manage the use of and demand for power. As a result of a unique
combination of heat, storms and equipment problems affecting utilities
throughout the Midwest region, on June 25, 1998, ComEd declared a NERC
generation deficiency alert Level 3, which is a statement that firm load loss
is possible. No firm load losses were experienced in 1998. See "Results of
Operations," subcaption "Purchased Power" below, regarding the increased
purchased power expense in 1998.
Generating station availability and performance during a year have been
issues in fuel reconciliation proceedings in assessing the prudence of fuel
and purchased power costs during such year. Final ICC orders have been issued
in fuel reconciliation proceedings related to ComEd's FAC collections for all
years except for 1994. On November 5, 1998, the ICC issued an order in the
proceeding for the year 1994 providing for a refund of approximately $3
million related to nuclear station performance. On February 9, 1999, an
intervenor moved to dismiss its appeal of the 1994 ICC order. On December 29,
1998, the ICC issued an order for the 1996 fuel reconciliation proceeding
requiring ComEd to refund approximately $19 million related to nuclear station
performance. The 1997 Act provides that, because ComEd eliminated its FAC
effective January 1, 1997, the ICC shall not conduct a fuel reconciliation
proceeding for the year 1997 and subsequent years.
Based on ComEd's most recent study approved by the ICC, decommissioning
costs, including the cost of decontamination and dismantling, are estimated to
aggregate to $4.6 billion in current-year (1999) dollars, including a
contingency allowance. ComEd estimates that it will expend approximately $11.6
billion, including a contingency allowance, for decommissioning costs
primarily during the period from 2007 through 2034. Additionally, ComEd
estimates that it will expend an aggregate of approximately $226 million in
current-year (1999) dollars during the period 2000 through 2014 to maintain
Zion Station in a secured mode until decommissioning begins. All such costs
are expected to be funded by external decommissioning trusts, which ComEd
established in compliance with Illinois law and into which ComEd has been
making annual contributions. Future decommissioning cost estimates may be
significantly affected by the adoption of or changes to NRC regulations, as
well as changes in the assumptions used in making such estimates, including
changes in technology, available alternatives for the disposal of nuclear
waste and inflation. See Note 1 of Notes to Financial Statements, under
"Depreciation, Amortization of Regulatory Assets and Decommissioning," for
additional information regarding decommissioning costs.
Environmental Matters. ComEd is involved in administrative and legal
proceedings concerning air quality, water quality and other matters. The
outcome of these proceedings may require increases in future construction
expenditures and operating expenses, and changes in operating procedures. See
Note 22 of Notes to Financial Statements for additional information.
B-17
<PAGE>
Results of Operations
Unicom's basic and diluted earnings (loss) per common share for 1998, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
Basic Earnings (Loss) per Common Share..................... $2.35 $(3.94) $3.09
===== ====== =====
Diluted Earnings (Loss) per Common Share................... $2.34 $(3.94) $3.09
===== ====== =====
</TABLE>
Substantially all of the results of operations for Unicom are the results of
operations for ComEd. The results of Unicom's unregulated subsidiaries
currently are not material to the results of Unicom and subsidiary companies
as a whole. As such, the following section discusses the effect of ComEd's
operations on Unicom's financial results. All EPS computations shown below
reflect the impact on Unicom's basic EPS.
Net Income for the Year 1998. The increase in earnings for 1998 was
primarily due to increased kilowatthour sales, which increased both operating
revenues and energy costs, reduced O&M expenses, lower depreciation and
amortization expenses, lower than expected Zion Station closing costs and
gains on the sales of certain assets. In December 1997, ComEd discontinued
regulatory accounting practices for the generation portion of its business and
recorded other non-recurring accounting charges as a result of the 1997 Act,
which are primarily attributable to the loss for 1997. The 1997 operating
results also include the write-off for the closure of the Zion nuclear
generating station, partially offset by a cumulative one-time positive impact
of $197 million (after-tax), or $0.91 per common share, for a change in
accounting method for revenue recognition to record ComEd's revenues
associated with service which has been provided to customers but has not yet
been billed at the end of each accounting period, retroactive to January 1,
1997.
Kilowatthour sales increased 2% for the year 1998, compared to 1997, driven
largely by increased sales to retail customers due to warmer weather
experienced during the recent year, as well as continued economic growth in
ComEd's service territory. Operating revenues increased 1% during 1998,
compared to 1997. See "Operating Revenues" below for additional information.
Fuel and purchased power costs increased 15% in 1998, compared to the year
1997, reflecting increased demand for electricity, as well as the effects of
higher purchased power prices. See "Purchased Power" below for additional
information.
O&M expenses decreased 7% for the year 1998, compared to the year 1997, as
discussed in "Operation and Maintenance Expenses" below.
The year 1998 includes a 6% decrease in depreciation and amortization
expenses, as discussed in "Depreciation and Amortization" below, and a $15
million (after-tax), or $0.07 per common share, reduction in the estimated
liability for closing costs related to the Zion nuclear generating station,
both of which increased operating results.
Also, 1998 operating results reflect realized gains on the sales of certain
assets of $31 million (after-tax), or $0.14 per common share. The sold assets
consisted principally of surplus inventory of emission allowances.
Net Loss for the Year 1997. ComEd's kilowatthour sales, including sales to
wholesale customers, increased 5% during 1997, compared to 1996, as discussed
below. In 1997, O&M expenses increased 12%, as discussed below.
Also, 1997 operating results were reduced by $336 million for increased fuel
and purchased power costs, as discussed below. In addition, a 4% increase in
depreciation expense, primarily due to an increase in certain nuclear plant
depreciation, resulted in a charge of $23 million (after-tax), or $0.11 per
common share.
B-18
<PAGE>
ComEd discontinued regulatory accounting practices for the generation
portion of its business in the fourth quarter of 1997 due to the expected
transition of electric generation services to market-based pricing as a result
of the 1997 Act. Accordingly, ComEd's generation-related net regulatory
assets, which represent assets and liabilities properly recorded under
regulatory accounting practices but which would not be recorded under GAAP for
non-regulated entities, were written off, resulting in an extraordinary charge
in 1997 of $810 million (after-tax), or $3.75 per common share.
In addition, as permitted under the 1997 Act, ComEd elected to eliminate its
FAC in December 1997, which resulted in a charge in the fourth quarter of 1997
of $44 million (after-tax), or $0.20 per common share. The reduction includes
$25 million (after-tax), or $0.12 per common share, in net FAC charges billed
to its customers in 1997, which were refunded to customers during the first
six months of 1998. The reduction also includes a write-off of $19 million
(after-tax), or $0.08 per common share, in underrecovered energy costs that
ComEd would have been entitled to recover if the FAC had remained in effect.
Also, 1997 operating results included the write down of ComEd's investment
in uranium-related properties to reflect costs which are not expected to be
recovered in a competitive market. The write down resulted in a charge in 1997
of $60 million (after-tax), or $0.28 per common share.
Partially offsetting the charges to operations for 1997 was a change in the
accounting method for revenue recognition to record ComEd's revenues
associated with service which has been provided to customers but has not yet
been billed at the end of each accounting period, retroactive to January 1,
1997. This change in accounting method had a one-time cumulative positive
impact for years prior to 1997 of $197 million (after-tax), or $0.91 per
common share.
The year 1997 also included a charge of $523 million (after-tax), or $2.42
per common share, reflecting the write-off of the unrecoverable portion of the
cost of ComEd's Zion Station plant and inventories, and a liability for future
closing costs, resulting from the decision in January 1998 to permanently
cease nuclear generation operations at Zion Station.
Net Income for the Year 1996. The 1996 operating results reflect, among
other factors, a 1% decrease in overall O&M expenses, compared to 1995, the
positive effects of an income tax refund related to prior years with an
increase in operating results of $26 million (after-tax), or $0.12 per common
share, and a reduction in real estate taxes with an increase in operating
results of $28 million (after-tax), or $0.13 per common share. Approximately
half of the reduction in real estate taxes in 1996 is related to the year
1995. The 1996 results also reflect a 9% reduction in the total 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, resulting in a charge of $20 million (after-tax), or $0.09 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 FAC for years prior to
1997, which were intended to recover variations in ComEd's fuel cost for
generating electric energy and the energy portion of purchased power cost in
relation to the amount included in ComEd's base rates. Operating revenues are
affected by kilowatthour sales and rate levels, kilowatthour sales, in turn,
are affected by weather, the level of economic activity within ComEd's service
area, and off-system or wholesale sales to other utilities. Off-system sales
are affected by a number of factors, including nuclear generating availability
and performance.
In 1998, operating revenues increased $63 million and kilowatthour sales
increased 2%, compared to the year 1997, primarily due to warmer summer
weather experienced in 1998 and continued economic growth in ComEd's service
territory, partially offset by a 15% residential rate reduction and reserves
for various federal and state litigation matters. Operating revenues for 1998
B-19
<PAGE>
also were reduced by approximately $95 million due to a change in presentation
for certain state and municipal taxes. During 1997, electric operating
revenues increased $139 million, primarily due to a 29% increase in
kilowatthour sales to wholesale customers. Kilowatthour sales to ultimate
consumers during 1997 increased 1%, compared to 1996, reflecting continued
economic growth in ComEd's service territory. Operating revenues in 1997 were
reduced by the provision for revenue refunds of $45 million, including revenue
taxes, related to the elimination of the FAC. Operating revenues increased $25
million in the year 1996, compared to 1995, principally reflecting increased
sales to other utilities and increased energy cost recoveries under ComEd's
then effective FAC, although kilowatthour sales to ultimate consumers were
down 1% from the prior year due to the cooler summer weather, compared to the
exceptionally hot summer in the year 1995.
Fuel Costs. Changes in fuel expense for the years 1998, 1997 and 1996
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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cost of fuel consumed (per million Btu):
Nuclear........................................... $0.57 $0.57 $0.53
Coal.............................................. $2.38 $2.28 $2.41
Oil............................................... $3.49 $3.90 $3.41
Natural gas....................................... $2.39 $2.69 $2.75
Average all fuels................................. $1.23 $1.33 $1.17
Net generation of electric energy (millions of kilo-
watthours)......................................... 83,302 85,861 93,048
Fuel sources of kilowatthour generation:
Nuclear........................................... 65% 57% 67%
Coal.............................................. 30 39 30
Oil............................................... -- -- 1
Natural gas....................................... 5 4 2
------ ------ ------
100% 100% 100%
====== ====== ======
</TABLE>
The decreases in the net generation of electric energy for 1998 and 1997,
compared to the prior years, are primarily due to the sales of State Line and
Kincaid Stations in December 1997 and February 1998, respectively, and lower
nuclear plant availability in 1997. See "Regulation," subcaption "Nuclear
Matters" above, for information regarding outages at certain of ComEd's
nuclear generating stations.
Fuel Supply. Compared to other utilities, ComEd has relatively low average
fuel costs as a result of its reliance predominantly on lower cost nuclear
generation. ComEd's coal costs, however, are high compared to those of other
utilities. ComEd's western coal contracts and its rail contracts for delivery
of the western coal provide for the purchase of certain coal at prices
substantially above currently prevailing market prices, and ComEd has
significant purchase commitments under its contracts. For additional
information concerning ComEd's coal purchase commitments, see "Liquidity and
Capital Resources" above and Note 22 of Notes to Financial Statements. For
additional information concerning ComEd's FAC, see Notes 2 and 4 of Notes to
Financial Statements.
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of ComEd's generating units, and the availability and
cost of power from other utilities. Purchased power costs increased $395
million and $255 million in 1998 and 1997, compared to 1997 and 1996,
respectively. The increase in 1998 includes $161 million for the agreements
entered into in connection with the sales of State Line and Kincaid Stations
in December 1997 and February 1998, respectively. The increase in purchased
power costs in 1998 also reflects the effects of an extraordinary combination
of heat, storms and equipment problems experienced throughout the
B-20
<PAGE>
Midwest in late June 1998 which resulted in unprecedented purchased power
price levels. The increase in 1997 is primarily due to outages at certain of
ComEd's nuclear generating stations. See "Regulation," subcaption "Nuclear
Matters" above, for information regarding outages at certain of ComEd's
nuclear generating stations.
The number and average cost of kilowatthours purchased were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -----
<S> <C> <C> <C>
Kilowatthours (millions).............................. 20,704 16,672 6,129
Cost per kilowatthour................................. 3.84c 2.40c 2.37c
</TABLE>
The market price for electricity is subject to price volatility associated
with changes in supply and demand in the electric supply markets. ComEd
utilizes energy put and call option contracts and energy swap arrangements to
limit market price risk associated with forward commodity contracts.
Operation and Maintenance Expenses. O&M expenses include the expenses
associated with operating and maintaining ComEd's generation, transmission and
distribution assets, as well as administrative overhead and support. Given the
variety of expense categories covered, there are a number of factors which
affect the level of such expenses within any given year. Two major components
of such expenses; however, are the costs associated with operating and
maintaining ComEd's nuclear and fossil generating facilities. Generating
station expenses are affected by the cost of materials, regulatory
requirements and expectations, the age of facilities, as well as cost control
efforts.
During the three years presented in the financial statements, the aggregate
level of O&M expenses decreased 7% in 1998 compared to 1997, increased 12% in
1997 compared to 1996, and decreased 1% in 1996 compared to 1995. The year to
year variations reflect increasing efforts in 1997 and 1996 to improve nuclear
generating station availability, as well as to meet regulatory requirements
and expectations. Additional factors in each year also affected the level of
O&M expenses.
O&M expenses associated with nuclear generating stations decreased $172
million and increased $122 million and $88 million for the years 1998, 1997
and 1996, respectively. The decrease in 1998 is principally due to the
permanent cessation of nuclear generation operations at Zion Station. The
increases in 1997 and 1996 were a result of increased levels of activities
associated with the repair, replacement and improvement of nuclear generating
facility equipment. Since 1995, ComEd has increased the number and scope of
maintenance activities associated with its nuclear generating stations. Such
efforts are the result of station performance evaluations performed to
identify the sources and causes of unplanned equipment repairs. The goal of
such efforts is to design and implement cost effective repairs and
improvements to increase station availability. See "Changes in the Electric
Utility Industry," subcaption "Response to Regulatory Changes" above,
regarding the permanent cessation of nuclear operations at Zion Station.
O&M expenses associated with nuclear generating stations have been driven by
ComEd's objective to improve station availability, as well as to meet
regulatory requirements and expectations. ComEd is pursuing a program to
improve the quality of nuclear operations, including safety and efficiency,
which is also expected to achieve a longer term goal of improved availability
and to be positioned to take advantage of opportunities in a more competitive
market. Over the past several years, ComEd has increased and reinforced
station management with managers drawn from other utilities which have
resolved similar operating issues. It has also sought to identify, anticipate
and address nuclear station operation and performance issues in a safe, cost-
effective manner, while seeking to improve the availability and capacity
factors of its nuclear generating units. Such activities 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.
O&M expenses associated with fossil generating stations decreased $5 million
and increased $31 million and $4 million for the years 1998, 1997 and 1996,
respectively. The decrease related to fossil generating stations in 1998,
compared to 1997, is primarily due to the sales of State Line and
B-21
<PAGE>
Kincaid Stations in December 1997 and February 1998, respectively, partially
offset by plant refurbishment costs. The increase related to fossil generating
stations in 1997 is primarily due to an increase in the repair and improvement
of fossil generating facility equipment in order to increase their general
availability, and to ensure their availability during the summer of 1997. That
increase was partially offset by a reduction in personnel.
O&M expenses associated with transmission and distribution systems increased
$32 million, $15 million and $11 million for the years 1998, 1997 and 1996,
respectively. The 1998 and 1997 increases are primarily due to increased
emergency restoration of electric service, higher maintenance expenses and
tree trimming costs. The 1996 increase reflects higher maintenance expenses.
O&M expenses associated with customer-related activities increased $19
million, $11 million and $17 million for the years 1998, 1997 and 1996,
respectively. The increase in 1998 is primarily due to increased marketing
initiatives, uncollectible accounts and customer service personnel costs. The
increase in 1997 is primarily due to an increase in uncollectible accounts.
O&M expenses also include employee benefits expenses. Since 1995, ComEd has
reduced the size of its workforce by offering incentives for employees to
leave the company voluntarily. Such incentives included both current payments
and earlier eligibility for post-retirement health care benefits, in addition
to certain one-time, employee-related costs, resulting in charges of $48
million, $39 million and $12 million for the years 1998, 1997 and 1996,
respectively.
Other employee-related expenses, excluding the effects of employee
separation plans and certain other one-time, employee-related costs, increased
$41 million and decreased $11 million and $47 million for the years 1998, 1997
and 1996, respectively. The increase for the year 1998 is primarily due to
accruals for estimated incentive compensation recorded in 1998. The decrease
in 1997 is primarily due to a reduction in medical costs for active employees.
The decrease in 1996 is primarily related to a reduction in post-retirement
health care benefit costs, primarily due to 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 in 1996.
O&M expenses in 1998 reflect a reduction of $34 million in certain nuclear
maintenance costs due to technological improvements, compared to 1997. O&M
expenses in 1997 include $25 million for the additional write-off of obsolete
materials and supplies. O&M expenses associated with certain administrative
and general costs decreased $22 million and increased $35 million for the
years 1998 and 1997, respectively. The 1997 increase was due to a variety of
reasons including an increase in the provision for vacation pay liability. The
effects of inflation have also increased O&M expenses during the years and are
also reflected in the increases and decreases discussed herein.
Depreciation and Amortization. Depreciation expense decreased in 1998 and
increased for the years 1997 and 1996. The decrease in 1998 reflects the
retirement of Zion Station and the plant impairment recorded by ComEd in the
second quarter of 1998, partially offset by plant additions and shortened
depreciable lives for certain nuclear stations. The decrease also reflects the
sales of State Line and Kincaid Stations in December 1997 and February 1998,
respectively. The increases in 1997 and 1996 are a result of additional
nuclear plant depreciation and additions to plant in service. Depreciation
expense for 1998 and 1997 includes depreciation related to the replacement of
the steam generators at Byron Unit 1 and Braidwood Unit 1 of $34 million and
$59 million for the years 1998 and 1997, respectively. The 1996 increase
includes the additional depreciation initiative of $30 million. See Note 1 of
Notes to Financial Statements, under "Depreciation, Amortization of Regulatory
Assets and Decommissioning," for additional information.
The amortization of the regulatory asset, related to impaired production
plant recorded by ComEd in the second quarter of 1998, partially offset the
reductions in depreciation expense. Such
B-22
<PAGE>
amortization was $65 million for the year 1998. See Note 1 of Notes to
Financial Statements, under "Depreciation, Amortization of Regulatory Assets
and Decommissioning," for additional information.
Interest on Debt. Changes in interest on long-term debt and notes payable
for the years 1998, 1997 and 1996 were due to changes in average interest
rates and in the amounts of long-term debt and notes payable outstanding.
Changes in interest on long-term debt 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>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Long-term debt outstanding:
Average amount (millions).......................... $6,099 $6,256 $6,644
Average interest rate.............................. 7.06% 7.65% 7.67%
Notes payable outstanding:
Average amount (millions).......................... $ 344 $ 153 $ 230
Average interest rate.............................. 5.68% 5.95% 5.79%
</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 the financial statements of electric
utilities. In response to these questions, the FASB is reviewing the
accounting for nuclear decommissioning costs. If current electric utility
industry accounting practices for such decommissioning costs are changed,
annual provisions for decommissioning could increase and the estimated cost
for decommissioning could be recorded as a liability rather than as
accumulated depreciation. Decommissioning costs of currently retired nuclear
plants are recorded as a liability. Unicom and ComEd do not believe that such
changes, if required, would have an adverse effect on results of operations
due to ComEd's ability to recover decommissioning costs through rates.
Other Items. The amounts of AFUDC reflect changes in the average levels of
investment subject to AFUDC and changes in the average annual capitalization
rates as discussed in Note 1 of Notes to Financial Statements, under "AFUDC
and Interest Capitalized." ComEd discontinued SFAS No. 71 regulatory
accounting practices in December 1997 for the generation portion of its
business. As a result, beginning in 1998, ComEd capitalized $28 million in
interest costs on its generation-related construction work in progress and
nuclear fuel in process. AFUDC and interest capitalized do not contribute to
the current cash flow of Unicom or ComEd.
ComEd's ratios of earnings to fixed charges for the years 1998, 1997 and
1996 were 2.67, 0.58 and 2.90, respectively. ComEd's ratios of earnings to
fixed charges and preferred and preference stock dividend requirements for the
years 1998, 1997 and 1996 were 2.29, 0.49 and 2.48, respectively. ComEd's
earnings for 1997 were inadequate to cover fixed charges by approximately $259
million and fixed charges and preferred and preference stock dividend
requirements by approximately $359 million. The deficiency in 1997 is
principally attributable to the earnings impact of the closure of Zion
Station.
Business corporations, in general, have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate
to replace, at increased costs, the productive assets consumed. Electric
utilities, in particular, have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental requirements. Because the
regulatory process limits the amount of depreciation expense included in
ComEd's revenue allowance to the original cost of utility plant investment,
the resulting cash flows are inadequate to provide for replacement of that
investment in future years or preserve the purchasing power of common equity
capital previously invested.
B-23
<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, 1998 and 1997, and the related
statements of consolidated operations, retained earnings (deficit) and cash
flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted
accounting principles.
As discussed in Note 3, effective January 1, 1997, the Company changed its
method of accounting for revenue recognition.
Arthur Andersen LLP
Chicago, Illinois
February 19, 1999
B-24
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the years 1998, 1997
and 1996 reflect the results of past operations and are not intended as any
representation as to results of operations for any future period. Future
operations will necessarily be affected by various and diverse factors and
developments, including changes in electric prices, regulation, population,
business activity, competition, taxes, environmental control, energy use,
fuel, cost of labor, purchased power and other matters, the nature and effect
of which cannot now be determined.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
(Thousands Except per Share Data)
<S> <C> <C> <C>
Operating Revenues....................... $ 7,151,253 $ 7,083,022 $6,937,024
----------- ----------- ----------
Operating Expenses and Taxes:
Fuel................................... $ 1,093,264 $ 1,239,438 $1,157,855
Purchased power........................ 795,355 400,055 145,299
Operation and maintenance.............. 2,285,525 2,438,944 2,162,279
Depreciation and amortization.......... 943,288 1,005,089 968,972
Taxes (except income).................. 699,834 800,886 783,531
Income taxes........................... 355,023 317,558 489,392
Investment tax credits deferred--net... (27,730) (31,015) (33,378)
----------- ----------- ----------
$ 6,144,559 $ 6,170,955 $5,673,950
----------- ----------- ----------
Operating Income......................... $ 1,006,694 $ 912,067 $1,263,074
----------- ----------- ----------
Other Income and (Deductions):
Interest on long-term debt, net of in-
terest capitalized.................... $ (444,322) $ (488,033) $ (515,285)
Interest on notes payable.............. (19,560) (9,134) (13,308)
Allowance for funds used during con-
struction............................. 16,464 42,325 40,202
Income taxes applicable to nonoperating
activities............................ 4,974 11,010 7,659
Provision for dividends--
Preferred and preference stocks of
ComEd............................... (56,884) (60,486) (64,424)
ComEd-obligated mandatorily redeem-
able preferred
securities of subsidiary trusts
holding solely ComEd's
subordinated debt securities........ (29,710) (28,860) (16,960)
Loss on nuclear plant closure.......... -- (885,611) --
Income tax effect of nuclear plant clo-
sure.................................. -- 362,952 --
Miscellaneous--net..................... 32,528 (95,445) (34,858)
----------- ----------- ----------
$ (496,510) $(1,151,282) $ (596,974)
----------- ----------- ----------
Net Income (Loss) before Extraordinary
Item and Cumulative Effect of Change in
Accounting Principle.................... $ 510,184 $ (239,215) $ 666,100
Extraordinary Loss, less Applicable In-
come Taxes.............................. -- (810,335) --
Cumulative Effect of Change in Accounting
Principle............................... -- 196,700 --
----------- ----------- ----------
Net Income (Loss)........................ $ 510,184 $ (852,850) $ 666,100
=========== =========== ==========
Earnings (loss) per common share before
extraordinary item and cumulative effect
of change in accounting principle--
Basic.................................. $ 2.35 $ (1.10) $ 3.09
Diluted................................ $ 2.34 $ (1.10) $ 3.09
Extraordinary loss, less applicable in-
come taxes (basic and diluted).......... $ -- $ (3.75) $ --
Cumulative effect of change in accounting
principle (basic and diluted)........... $ -- $ 0.91 $ --
Earnings (loss) per common share--
Basic.................................. $ 2.35 $ (3.94) $ 3.09
Diluted................................ $ 2.34 $ (3.94) $ 3.09
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-25
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------
ASSETS 1998 1997
------ ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $858 million and
$1,131 million, respectively)..................... $27,801,246 $27,518,690
Less--Accumulated provision for depreciation....... 15,234,320 11,646,445
----------- -----------
$12,566,926 $15,872,245
Nuclear fuel, at amortized cost.................... 874,979 906,043
----------- -----------
$13,441,905 $16,778,288
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 2,267,317 $ 1,855,697
Subsidiary companies............................... 41,643 41,830
Other, at cost..................................... 292,737 216,243
----------- -----------
$ 2,601,697 $ 2,113,770
----------- -----------
Current Assets:
Cash............................................... $ 28,743 $ 18,519
Temporary cash investments......................... 26,935 102,702
Cash held for redemption of securities............. 3,062,816 --
Special deposits................................... 271 271
Receivables--
Customers........................................ 1,369,701 873,418
Other............................................ 136,663 132,449
Provisions for uncollectible accounts............ (48,645) (17,544)
Coal and fuel oil, at average cost................. 135,415 120,664
Materials and supplies, at average cost............ 232,246 255,338
Deferred income taxes related to current assets and
liabilities....................................... 24,339 179,553
Prepayments and other.............................. 20,301 39,203
----------- -----------
$ 4,988,785 $ 1,704,573
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 4,578,427 $ 1,966,889
Other.............................................. 96,266 136,230
----------- -----------
$ 4,674,693 $ 2,103,119
----------- -----------
$25,707,080 $22,699,750
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-26
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
-----------------------
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Capitalization (see accompanying statements):
Common stock equity.................................. $ 5,099,444 $ 4,918,687
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements.......... 74,488 507,053
Subject to mandatory redemption requirements....... 69,475 174,328
ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
ComEd's subordinated debt securities*............... 350,000 350,000
Long-term debt....................................... 7,809,109 5,737,348
----------- -----------
$13,402,516 $11,687,416
----------- -----------
Current Liabilities:
Notes payable........................................ $ 292,963 $ 158,150
Current portion of long-term debt, redeemable prefer-
ence stock and capitalized lease obligations of sub-
sidiary companies................................... 2,314,443 775,296
Accounts payable..................................... 604,936 505,444
Accrued interest..................................... 180,674 169,559
Accrued taxes........................................ 134,976 175,758
Dividends payable.................................... 105,133 107,001
Customer deposits.................................... 56,954 55,214
Accrued plant closing costs.......................... 78,430 135,000
Other................................................ 155,262 165,177
----------- -----------
$ 3,923,771 $ 2,246,599
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes................................ $ 3,805,460 $ 3,850,308
Nuclear decommissioning liability for retired plants. 1,215,400 1,301,000
Accumulated deferred investment tax credits.......... 562,285 602,122
Accrued spent nuclear fuel disposal fee and related
interest............................................ 728,413 692,673
Obligations under capital leases of subsidiary compa-
nies................................................ 333,653 437,950
Regulatory liabilities............................... 595,005 698,750
Other................................................ 1,140,577 1,182,932
----------- -----------
$ 8,380,793 $ 8,765,735
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$25,707,080 $22,699,750
=========== ===========
</TABLE>
*As described in Note 11 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due
September 30, 2035. The sole asset of ComEd Financing II, also a subsidiary
trust of ComEd, is $154.6 million principal amount of ComEd's 8.50%
subordinated deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-27
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
<TABLE>
<CAPTION>
December 31
------------------------
1998 1997
----------- -----------
(Thousands of Dollars)
<S> <C> <C>
Common Stock Equity:
Common stock, without par value--
Outstanding--217,094,560 shares and 216,659,480
shares, respectively............................. $ 4,966,630 $ 4,943,211
Preference stock expense of ComEd.................. (3,199) (3,340)
Retained earnings (deficit)........................ 142,813 (21,184)
Treasury stock--178,982 shares..................... (6,800) --
----------- -----------
$ 5,099,444 $ 4,918,687
----------- -----------
Preferred and Preference Stocks of ComEd--
Without Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--13,499,549 shares.................. $ 504,957 $ 504,957
Current redemption requirements for preference
stock included in current liabilities........... (432,320) --
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--58,211 shares and 65,912 shares,
respectively................................... 1,851 2,096
Prior preferred stock, cumulative, $100 par value
per share-- No shares outstanding............... -- --
----------- -----------
$ 74,488 $ 507,053
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--1,720,345 shares and 2,058,560
shares, respectively........................... $ 171,348 $ 205,016
Current redemption requirements for preference
stock included in current liabilities........... (101,873) (30,688)
----------- -----------
$ 69,475 $ 174,328
----------- -----------
ComEd-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
ComEd's Subordinated Debt Securities................ $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1998 through 2003--6.00% to 9 3/8%...... $ 1,080,000 $ 1,385,000
Maturing 2004 through 2013--3.70% to 8 3/8%...... 1,485,400 1,485,400
Maturing 2014 through 2023--5.85% to 9 7/8%...... 1,981,000 1,981,000
----------- -----------
$ 4,546,400 $ 4,851,400
Transitional trust notes, due 2000 through 2008--
5.29% to 5.74%.................................... 3,400,000 --
Sinking fund debentures, due 1999 through 2011--2
3/4% to 7 5/8%.................................... 94,159 100,298
Pollution control obligations, due 2007 through
2014--3.70% to 5 7/8%............................. 140,700 142,200
Other long-term debt............................... 1,275,811 1,193,818
Current maturities of long-term debt included in
current liabilities............................... (1,585,281) (503,909)
Unamortized net debt discount and premium.......... (62,680) (46,459)
----------- -----------
$ 7,809,109 $ 5,737,348
----------- -----------
$13,402,516 $11,687,416
=========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-28
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Balance at Beginning of Year.................. $(21,184) $1,177,997 $ 856,893
Add--Net income (loss)........................ 510,184 (852,850) 666,100
-------- ---------- ----------
$489,000 $ 325,147 $1,522,993
-------- ---------- ----------
Deduct--
Cash dividends declared on common stock...... $347,161 $ 346,225 $ 344,892
Other capital stock transactions--net........ (974) 106 104
-------- ---------- ----------
$346,187 $ 346,331 $ 344,996
-------- ---------- ----------
Balance at End of Year (Includes $494 million
and $331 million of appropriated retained
earnings at December 31, 1998 and 1997, re-
spectively).................................. $142,813 $ (21,184) $1,177,997
======== ========== ==========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-29
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net income (loss)...................... $ 510,184 $ (852,850) $ 666,100
Adjustments to reconcile net income
(loss) to net cash provided by oper-
ating activities:
Depreciation and amortization........ 994,861 1,051,543 1,006,051
Deferred income taxes and investment
tax credits--net.................... 69,768 (345,042) 129,697
Extraordinary loss related to write-
off of certain net regulatory as-
sets................................ -- 810,335 --
Cumulative effect of change in ac-
counting principle.................. -- (196,700) --
Loss on nuclear plant closure........ -- 885,611 --
Provisions/(payments) for revenue re-
funds--net.......................... (23,622) 45,470 --
Equity component of allowance for
funds used during construction...... (6,959) (23,770) (20,776)
Provisions/(payments) for liability
for separation costs--net........... 9,757 15,986 (29,888)
Net effect on cash flows of changes
in:
Receivables........................ (469,940) 24,083 71,497
Coal and fuel oil.................. (14,751) 19,698 (11,186)
Materials and supplies............. 19,805 41,659 9,053
Accounts payable excluding nuclear
fuel lease principal payments and
separation costs--net............. 97,094 259,810 104,366
Accrued interest and taxes......... (27,201) (17,903) (47,291)
Other changes in certain current
assets and liabilities............ 144,290 39,005 13,850
Other--net........................... (773) 170,832 69,447
----------- ----------- -----------
$ 1,302,513 $ 1,927,767 $ 1,960,920
----------- ----------- -----------
Cash Flow from Investing Activities:
Construction expenditures.............. $ (933,367) $(1,043,311) $ (982,274)
Nuclear fuel expenditures.............. (166,168) (185,373) (281,833)
Sales of generating plants............. 177,454 60,791 --
Equity component of allowance for
funds used during construction........ 6,959 23,770 20,776
Contributions to nuclear
decommissioning funds................. (136,771) (114,825) (119,281)
Other investments and special depos-
its................................... (11,458) (13,246) (2,116)
----------- ----------- -----------
$(1,063,351) $(1,272,194) $(1,364,728)
----------- ----------- -----------
Cash Flow from Financing Activities:
Issuance of securities--
Transitional trust notes............. $ 3,382,629 $ -- $ --
Other long-term debt................. 382,270 362,663 251,902
ComEd-obligated mandatorily redeem-
able preferred securities of
subsidiary trusts holding solely
ComEd's subordinated debt securi-
ties................................ -- 150,000 --
Capital stock........................ 16,644 15,778 17,754
Retirement and redemption of securi-
ties--
Long-term debt....................... (615,858) (736,740) (433,084)
Capital stock........................ (34,066) (44,111) (44,513)
Repurchase of common stock............. (6,800) -- --
Premium paid on early redemption of
long-term debt........................ -- (9,500) --
Cash dividends paid on common stock.... (346,954) (345,936) (344,553)
Proceeds from sale/leaseback of nu-
clear fuel............................ 101,038 149,955 316,617
Nuclear fuel lease principal payments.. (255,605) (166,411) (211,741)
Increase/(decrease) in short-term
borrowings............................ 134,813 29,400 (139,400)
----------- ----------- -----------
$ 2,758,111 $ (594,902) $ (587,018)
----------- ----------- -----------
Change in Net Cash Balance.............. $ 2,997,273 $ 60,671 $ 9,174
Cash, Temporary Cash Investments and
Cash Held for Redemption of Securities:
Balance at Beginning of Year........... 121,221 60,550 51,376
----------- ----------- -----------
Balance at End of Year................. $ 3,118,494 $ 121,221 $ 60,550
=========== =========== ===========
</TABLE>
The accompanying Notes to Financial Statements are an integral part of the
above statements.
B-30
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies
Corporate Structure and Basis of Presentation. Unicom is the parent holding
company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility,
is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated
subsidiary of Unicom and is engaged, through its subsidiaries, in energy
service activities.
The consolidated financial statements include the accounts of Unicom, ComEd,
the Indiana Company, the Trusts, ComEd Funding, ComEd Funding Trust and
Unicom's unregulated subsidiaries. All significant intercompany transactions
have been eliminated. Although the accounts of ComEd Funding and ComEd Funding
Trust, which are SPEs, are included in the consolidated financial statements,
as required by GAAP, ComEd Funding and ComEd Funding Trust are legally
separated from Unicom and ComEd. The assets of the SPEs are not available to
creditors of Unicom or ComEd and the transitional property held by the SPEs
are not assets of Unicom or ComEd.
Use of Estimates. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Due to the transition to a new
customer information and billing system, a larger portion of customer revenues
and receivables were based on estimates in 1998 than in previous years.
Regulation. ComEd is subject to regulation as to accounting and ratemaking
policies and practices by the ICC and FERC. ComEd's accounting policies and
the accompanying consolidated financial statements conform to GAAP applicable
to rate-regulated enterprises for the non-generation portion of its business,
including the effects of the ratemaking process in accordance with SFAS No.
71, Accounting for the Effects of Certain Types of Regulation. Such effects on
the non-generation portion of its business concern mainly the time at which
various items enter into the determination of operating results in order to
follow the principle of matching costs with the applicable revenues collected
from or returned to customers through future rates. See Note 2 for information
regarding the write-off of generation-related regulatory assets and
liabilities in December 1997.
ComEd's investment in generation-related, net utility plant, including
construction work in progress and nuclear fuel, and excluding the
decommissioning costs included in the accumulated provision for depreciation,
not subject to cost-based rate regulation, was $9.2 billion and $12.4 billion
at December 31, 1998 and 1997, respectively. See Note 2 regarding the plant
impairment recorded by ComEd in the second quarter of 1998.
B-31
<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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31
---------------------
1998 1997
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Regulatory assets:
Impaired production plant (1)........................... $2,955,154 $ --
Deferred income taxes (2)............................... 680,356 785,354
Nuclear decommissioning costs--Dresden Unit 1 (3)....... 255,031 268,369
Nuclear decommissioning costs--Zion Units 1 and 2 (4)... 443,130 579,777
Coal reserves (5)....................................... 197,975 281,654
Unamortized loss on reacquired debt (6)................. 46,781 51,735
---------- ----------
$4,578,427 $1,966,889
========== ==========
Regulatory liabilities:
Deferred income taxes (2)............................... $ 595,005 $ 698,750
========== ==========
</TABLE>
- - --------
(1) Amortized over a transition period which is expected to end by 2006, but
may be extended to 2008 with ICC approval. See Note 2 for additional
information.
(2) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for
non-generation related temporary differences.
(3) Amortized over the period 1999 to 2011. See "Depreciation, Amortization of
Regulatory Assets and Decommissioning" below for additional information.
(4) Amortized over the period 1999 to 2013. See "Depreciation, Amortization of
Regulatory Assets and Decommissioning" below for additional information.
(5) Amortized through regulated cash flows as coal is used for the generation
of electricity. See "Depreciation, Amortization of Regulatory Assets and
Decommissioning" below for additional information.
(6) Amortized over the remaining lives of the non-generation related long-term
debt issued to finance the reacquisition. See "Loss on Reacquired Debt"
below for additional information.
Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on
the quantity of heat produced using the unit of production method. As
authorized by the ICC, provisions for spent nuclear fuel disposal costs have
been recorded at a level required to recover the fee payable on the current
nuclear-generated and sold electricity and the current interest accrual on the
one-time fee payable to the DOE for nuclear generation prior to April 7, 1983.
The one-time fee and interest thereon have been recovered and the current fee
and interest on the one-time fee are presently being recovered through base
rates. See Note 14 for additional information concerning the disposal of spent
nuclear fuel, one-time fee and interest accrual on the one-time fee. Nuclear
fuel expenses, including leased fuel costs and provisions for spent nuclear
fuel disposal costs, were $325 million, $298 million and $354 million for the
years 1998, 1997 and 1996, respectively.
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, 1998. It includes the city of Chicago, an area of about 225
square miles with an estimated population of approximately three million from
which ComEd derived approximately one-third of its ultimate consumer revenues
in 1998. ComEd had 3.5 million electric customers at December 31, 1998. See
Notes 3, 4 and 19 for additional information.
B-32
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Depreciation, Amortization of Regulatory Assets and Decommissioning.
Depreciation, decommissioning and amortization of regulatory assets for the
years 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Depreciation expense.............................. $788,057 $ 881,196 $843,516
Decommissioning expense........................... 90,020 108,621 110,184
Amortization of regulatory assets................. 65,211 15,272 15,272
-------- ---------- --------
$943,288 $1,005,089 $968,972
======== ========== ========
</TABLE>
Depreciation is provided on a straight-line basis by amortizing the cost of
depreciable plant and equipment over estimated service lives for each class of
plant. Provisions for depreciation, including nuclear plant, were at average
annual rates of 3.02%, 3.36% and 3.25% for the years 1998, 1997 and 1996,
respectively, of average depreciable utility plant and equipment. The decrease
for the year 1998, compared to 1997, in the average depreciation rates relates
primarily to a reduction in nuclear depreciation rates due to the partial
impairment of production plant, which was recorded as a component of
accumulated depreciation, partially offset by shortened depreciable lives for
certain nuclear stations. The annual rate for nuclear plant and equipment,
excluding separately collected decommissioning costs and depreciation related
to the replacement of the steam generators, was 2.88% for periods ending prior
to July 1, 1998. The nuclear depreciation rate applied to gross depreciable
nuclear plant, beginning July 1, 1998, is 2.16% reflecting the partial
impairment of production plant and shortened depreciable lives for certain
nuclear stations. See Note 2 for additional information on the partial
impairment of production plant.
The regulatory assets for impaired production plant and coal reserves are
being amortized as they are recovered through regulated cash flows over a
transition period which is expected to end by 2006, but may be extended to
2008 with ICC approval. Recovery of these regulatory assets will be realized
through future regulatory revenues, including CTC revenues, and potential
gains on generation asset sales, and will vary from year to year. The
amortization of coal reserves is included in fuel expense on the Statements of
Consolidated Operations.
Nuclear plant decommissioning costs are accrued over the current NRC license
lives of the related nuclear generating units. The accrual is based on an
annual levelized cost of the unrecovered portion of estimated decommissioning
costs, which are escalated for expected inflation to the expected time of
decommissioning and are net of expected earnings on the trust funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Results of Operations--Decommissioning," for a
discussion of questions raised by the staff of the SEC and a FASB review
regarding the electric utility industry's method of accounting for
decommissioning costs. Dismantling is expected to occur relatively soon after
the end of the current NRC license life of each generating station currently
operating. The accrual for decommissioning is based on the prompt removal
method authorized by NRC guidelines. ComEd's ten operating units have
remaining current NRC license lives ranging from 7 to 29 years. ComEd's Zion
Station and its first nuclear unit, Dresden Unit 1, are retired and expected
to be dismantled beginning in the years 2014 and 2012, respectively, which is
consistent with the regulatory treatment for the related decommissioning
costs.
Based on ComEd's most recent study approved by the ICC, decommissioning
costs, including the cost of decontamination and dismantling, are estimated to
aggregate to $4.6 billion in current-year (1999) dollars, including a
contingency allowance. ComEd estimates that it will expend approximately
B-33
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
$11.6 billion, including a contingency allowance, for decommissioning costs
primarily during the period from 2007 through 2034. Additionally, ComEd
estimates that it will expend an aggregate of approximately $226 million in
current-year (1999) dollars during the period 2000 through 2014 to maintain
Zion Station in a secured mode until decommissioning begins. All such costs
are expected to be funded by the external decommissioning trusts, which ComEd
established in compliance with Illinois law and into which ComEd has been
making annual contributions. Future decommissioning cost estimates may be
significantly affected by the adoption of or changes to NRC regulations, as
well as changes in the assumptions used in making such estimates, including
changes in technology, available alternatives for the disposal of nuclear
waste and inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider to its tariffs. The rider allows annual adjustments
to decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. The current estimated
decommissioning costs include a contingency allowance, but, except at Dresden
Unit 1, exclude amounts for spent fuel storage installations, which may be
necessary to store spent fuel during the period beginning at the end of the
NRC license life of the plants to the date when the DOE accepts the spent fuel
for permanent storage. Contingency allowances used in decommissioning cost
estimates provide for currently unspecifiable costs that are likely to occur
after decommissioning begins and generally range from 20% to 25% of the
currently specifiable costs.
In February 1998, the ICC authorized a reduction in the annual
decommissioning cost accrual from $109 million to $84 million. The reduction
primarily reflects stronger than expected after-tax returns on the external
trust funds in 1996 and lower than expected escalation in low-level waste
disposal costs, partially offset by the higher current-year cost estimates,
including a contingency allowance.
The approved annual decommissioning cost accrual of $84 million was
determined using the following assumptions: the decommissioning cost estimate
of $4.6 billion in current-year (1999) dollars, after-tax earnings on the tax-
qualified and nontax-qualified decommissioning funds of 7.30% and 6.26%,
respectively, and an escalation rate for future decommissioning costs of 4.1%.
The annual accrual of $84 million provided over the current NRC license lives
of the nuclear plants, coupled with the expected fund earnings and amounts
previously recovered in rates, is expected to aggregate to approximately $11.6
billion.
For the ten operating nuclear units, decommissioning cost accruals are
recorded as portions of depreciation expense and accumulated provision for
depreciation on the Statements of Consolidated Operations and the Consolidated
Balance Sheets, respectively, as such costs are recovered through rates. As of
December 31, 1998, the total decommissioning costs included in the accumulated
provision for depreciation were $1,870 million.
For ComEd's retired nuclear units, the total estimated liability for nuclear
decommissioning in current-year (1999) dollars is recorded as a liability. The
unrecovered portion of the liability was also recorded as a regulatory asset.
The nuclear decommissioning liability for retired plants as of December 31,
1998 was as follows:
<TABLE>
<CAPTION>
Zion
Dresden Units
Unit 1 1 and 2 Total
-------- -------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Amounts recovered through rates and investment
fund earnings.................................... $101,469 $415,770 $ 517,239
Unrecovered portion of the liability.............. 255,031 443,130 698,161
-------- -------- ----------
Nuclear decommissioning liability for retired
plants.......................................... $356,500 $858,900 $1,215,400
======== ======== ==========
</TABLE>
B-34
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The total estimated liability related to Zion Units 1 and 2, and the
unrecovered portion of that liability, decreased from December 31, 1997 to
December 31, 1998 due to the exclusion of estimated dry cask storage costs.
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts. Consequently, such collections do not add to
the cash flows available for general corporate purposes. The ICC has approved
ComEd's funding plan, which provides for annual contributions of current
accruals and ratable contributions of past accruals over the remaining current
NRC license lives of the nuclear plants. The fair value of funds accumulated
in the external trusts at December 31, 1998 was $2,267 million, which includes
pre-tax unrealized appreciation of $620 million. The earnings on the external
trusts for operating plants accumulate in the fund balance and accumulated
provision for depreciation. Nuclear decommissioning funding as of December 31,
1998 was as follows:
<TABLE>
<CAPTION>
(Thousands of Dollars)
<S> <C>
Amounts recovered through rates and investment fund
earnings for operating plants (included in the accumu-
lated provision for depreciation)...................... $1,870,213
Amounts recovered through rates and investment fund
earnings for retired plants............................ 517,239
Less past accruals not yet contributed to the trusts.... 120,135
----------
Fair value of external trust funds..................... $2,267,317
==========
</TABLE>
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 temporary differences reverse.
Prior years' deferred investment tax credits are amortized through credits to
income generally over the lives of the related property. Income tax credits
resulting from interest charges applicable to nonoperating activities,
principally construction, are classified as other income.
AFUDC and Interest Capitalized. In accordance with the uniform systems of
accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC,
compounded semiannually, which represents the estimated cost of funds used to
finance its construction program for the non-generation portion of its
business. The equity component of AFUDC is recorded on an after-tax basis and
the borrowed funds component of AFUDC is recorded on a pre-tax basis. The
average annual capitalization rates were 8.34%, 9.39% and 9.02% for the years
1998, 1997 and 1996, respectively. ComEd discontinued SFAS No. 71 regulatory
accounting practices in December 1997 for the generation portion of its
business. As a result, beginning in 1998, ComEd capitalized $28 million in
interest costs on its generation-related construction work in progress and
nuclear fuel in process. AFUDC and interest capitalized do not contribute to
the current cash flow of Unicom or ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations were $538 million, $598 million and $626 million for the years
1998, 1997 and 1996, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt of ComEd are being amortized over the lives of the respective
issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from ComEd's reacquisition, in connection with the refinancing of first
mortgage bonds, sinking fund debentures and pollution control obligations
prior to their scheduled maturity dates, is deferred and amortized over the
lives of the long-term debt issued to finance the reacquisition for non-
generation related financings. See "Regulatory Assets and Liabilities" above
and Note 2 for additional information.
B-35
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to
adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure
purposes only. Unicom accounts for its stock option awards and ESPP under APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 8 for
additional information.
Average Common Shares Outstanding. Unicom adopted SFAS No. 128, Earnings per
Share, which established standards for computing and presenting EPS. Unicom
has presented basic and diluted EPS on the Statements of Consolidated
Operations for the years 1998, 1997 and 1996. The number of average
outstanding common shares used to compute basic and diluted EPS for the years
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(Thousands of Shares)
<S> <C> <C> <C>
Average Number of Common Shares Outstanding:
Average Number of Common Shares--Basic................. 216,942 216,330 215,500
Potentially Dilutive Common Shares--Treasury Method:
Stock Options......................................... 633 136 --
Other Convertible Securities.......................... 85 98 110
------- ------- -------
Average Number of Common Shares--Diluted............... 217,660 216,564 215,610
======= ======= =======
</TABLE>
Energy Risk Management Contracts. In the normal course of business, ComEd
utilizes contracts for the forward sale and purchase of energy to manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap arrangements to limit
the market price risk associated with the forward commodity contracts. As
ComEd does not currently utilize financial or commodity instruments for
trading or speculative purposes, any gains or losses on forward commodity
contracts are recognized when the underlying transactions affect earnings.
Revenues and expenses associated with market price risk management contracts
are amortized over the term of such contracts.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded on the
Consolidated Balance Sheets as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value
be recognized currently in earnings, unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item on the Statements of
Consolidated Operations, and requires Unicom and ComEd to formally document,
designate, and assess the effectiveness of transactions that receive hedge
accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
SFAS No. 133 may be implemented prior to June 15, 1999, but such
implementation cannot be applied retroactively. SFAS No. 133 must be applied
to (i) derivative instruments and (ii) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively modified
after December 31, 1997 (and, at the company's election, before January 1,
1998).
Unicom and ComEd have not yet quantified the effects on their financial
statements of adopting SFAS No. 133 and have not determined the timing or
method of adopting SFAS No. 133. However, adoption of SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on operating results.
B-36
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the years 1998, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)............ $450,160 $512,050 $538,351
Income taxes (net of refunds)................... $272,476 $264,802 $234,743
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Capital lease obligations incurred by subsidiary
companies........................................ $106,370 $158,412 $320,975
</TABLE>
(2) Accounting Effects Related to the 1997 Act
In December 1997, the Governor of Illinois signed into law the 1997 Act,
which established a phased process to introduce competition into the electric
industry in Illinois under a less regulated structure. Major provisions of the
1997 Act applicable to ComEd include a 15% residential base rate reduction
which became effective August 1, 1998, an additional 5% residential base rate
reduction commencing on May 1, 2002 and gradual customer access to other
electric suppliers. Access for commercial and industrial customers will occur
over a period from October 1999 to December 2000, and access for residential
customers will occur after May 1, 2002. ComEd's operating revenues were
reduced by approximately $170 million in 1998 due to the rate reduction. ComEd
is engaged in certain pricing experiments contemplated by the 1997 Act, which
reduced ComEd's operating revenues by approximately $30 million in 1998 and
are expected to reduce operating revenues by $55 million in 1999, compared to
1997 rate levels; however, such reductions are expected to be offset by the
effects of customer growth. ComEd expects that the 15% residential base rate
reduction will reduce ComEd's operating revenues by approximately $380 million
in 1999, compared to 1997 rate levels.
The 1997 Act also provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006, and can be extended through 2008 with ICC approval. The
CTC will be established in accordance with a formula defined in the 1997 Act.
The CTC, which will be applied on a cents per kilowatthour basis, considers
the revenue which would have been collected from a customer under tariffed
rates, reduced by the revenue the utility will receive for providing delivery
services to the customer, the market price for electricity and a defined
mitigation factor, which represents the utility's opportunity to develop new
revenue sources and achieve cost savings.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. A utility may
request a rate increase during the rate freeze period only when necessary to
ensure the utility's financial viability, but not before Janaury 1, 2000.
Under the earnings provision of the 1997 Act, if the earned return on common
equity of a utility during this period exceeds an established threshold, one-
half of the excess earnings must be refunded to customers. The threshold rate
of return on common equity is based on the 30-Year Treasury Bond rate, plus
5.5% in the years 1998 through 1999 and plus 6.5% in the years 2000 through
2004. The utility's earned return on common equity and the threshold return on
common equity are each calculated on a two year average basis. The earnings
sharing provision is applicable only to utility
B-37
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
earnings. Increased amortization of regulatory assets may be recorded, thereby
reducing the earned return on common equity, if earnings otherwise would have
exceeded the maximum allowable rate of return. The potential for earnings
sharing or increased amortization of regulatory assets could limit earnings in
future periods.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based,
regulated rates. The 1997 Act also requires utilities to establish or join an
ISO that will independently manage and control utility transmission systems.
Additionally, the 1997 Act includes the leveling of certain regulatory
requirements to permit operational flexibility, the leveling of certain
regulatory and tax provisions as applied to various electric suppliers and a
new, more stringent, liability standard applicable to ComEd in the event of a
major outage.
The 1997 Act also allows a portion of ComEd's future revenues to be
segregated and used to support the issuance of securities by ComEd or a SPE.
The proceeds from such securities issuances must be used to refinance
outstanding debt and equity or for certain other limited purposes. The total
amount of such securities that may be issued is approximately $6.8 billion;
approximately one-half of that amount can be issued in the twelve-month period
which commenced on August 1, 1998. In December 1998, ComEd initiated the
issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd
Funding and ComEd Funding Trust. The proceeds from the transitional trust
notes, net of transaction costs, must be used to redeem or repurchase debt and
equity to lower ComEd's overall cost of capital. Accordingly, in early 1999
ComEd redeemed $788 million of long-term debt and $534 million of preference
stock, and reacquired $229 million of outstanding ComEd long-term debt through
a tender offer. In addition, $500 million of the proceeds, of which
approximately $300 million has been utilized, is being used to reduce ComEd's
outstanding short-term debt. Unicom has announced plans to repurchase
approximately $750 million of Unicom common stock using the proceeds it
receives from ComEd's repurchase of its common stock held by Unicom. The
remaining proceeds will be used for the payment of fees and additional debt
and equity redemptions. See Notes 7 and 24 for additional information
regarding Unicom's share repurchase plans.
As a result of the 1997 Act, prices for the supply of electric energy are
expected to change from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover some of its costs
which might otherwise be unrecoverable under market-based rates. Nonetheless,
ComEd will need to take steps to address the portion of such costs which are
not recoverable through the CTC. Such steps may include cost control efforts,
developing new sources of revenue and potential asset dispositions.
Because the 1997 Act is expected ultimately to lead to market-based pricing
of electric generation services, ComEd discontinued SFAS No. 71 regulatory
accounting practices for the generation portion of its business in December
1997. ComEd evaluated the regulatory assets and liabilities related to the
generation portion of its business and determined that it was not probable
that such costs would be recovered through the cash flows from the regulated
portion of its business. Accordingly, the generation-related regulatory assets
and liabilities were written off in the fourth quarter of 1997, resulting in
an extraordinary charge of $810 million (after-tax), or $3.75 per common share
(basic). These write-offs related principally to previously incurred costs
originally expected to be collected through future revenues, including income
tax benefits previously flowed through to customers, deferred carrying charges
on the Byron Unit 2 and Braidwood Units 1 and 2 nuclear
B-38
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
generating plants, generation-related unamortized loss on reacquired debt and
other miscellaneous generation-related costs. The regulatory asset for the
unrecovered nuclear decommissioning costs of currently retired nuclear plants
was not written off, as the 1997 Act provides for the ongoing recovery of
decommissioning costs through regulated rates. See "Regulatory Assets and
Liabilities" and "Depreciation, Amortization of Regulatory Assets and
Decommissioning" in Note 1 for additional information.
Pursuant to an option contained in the 1997 Act, ComEd filed a tariff in
December 1997 to eliminate its FAC as of January 1, 1997. Under ComEd's
regulated rates, the FAC provided for the recovery of changes in fossil and
nuclear fuel costs and the energy portion of purchased power costs, compared
to the fuel and purchased energy costs included in ComEd's base rates. The
elimination of the FAC required ComEd to refund to customers the net FAC
charges billed during the calendar year 1997 of $25 million (after-tax), or
$0.12 per common share (basic). These costs, as well as deferred
underrecovered energy costs of $19 million (after-tax), or $0.08 per common
share (basic), which ComEd would have been entitled to recover if the FAC had
remained in effect, were recorded as a charge to operating results in the
fourth quarter of 1997.
Additionally, the elimination of the FAC and a transition to market-based
pricing for generation-related costs required ComEd to write down its
investment in uranium-related properties. Projections of the market price for
uranium indicated that the expected incremental costs of mining and milling
uranium at such properties would exceed the expected market price for uranium.
Such costs are not expected to be recoverable in a competitive market. A write
down of ComEd's investment in uranium-related properties to realizable value
resulted in a charge of $60 million (after-tax), or $0.28 per common share
(basic), in December 1997.
The staff of the SEC issued interpretive guidance in the second quarter of
1998 regarding the application of SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, when a
regulated enterprise such as an electric utility discontinues regulatory
accounting practices for separable portions of its operations and assets.
Under SFAS No. 121, an asset is considered impaired, and should be written
down to fair value, if its future cash flows are insufficient to recover the
carrying value of the asset. The interpretive guidance concludes that for
purposes of applying SFAS No. 121, supplemental regulated cash flows, such as
a CTC, should be excluded from the cash flows of assets in the portion of the
business not subject to regulatory accounting practices. If such assets are
determined to be impaired, a regulatory asset should be established if such
costs are recoverable through regulated cash flows. The guidance also
addresses the extent to which assets should be grouped to determine
impairment.
ComEd discontinued the application of regulatory accounting principles in
December 1997 for the generation portion of its business and performed a SFAS
No. 121 impairment analysis that concluded that future revenues, including the
collection of the CTC, expected to be recovered from electric supply services
would be sufficient to cover the costs of its generating assets. However,
reflecting the SEC's interpretive guidance, ComEd's revised impairment
evaluation resulted in a plant impairment of $3 billion. Because future CTC
revenues collected through regulated cash flows are expected to provide
recovery of the impaired plant assets, a regulatory asset was recorded for the
same amount. Accordingly, the impairment, recorded in the second quarter of
1998, had no effect on results of operations. The regulatory asset is being
amortized as it is recovered through regulated cash flows over a transition
period that ends in 2006, but may be extended to 2008 with ICC approval.
Recovery of the regulatory asset will be realized through future regulatory
revenues, including CTC revenues, and potential gains on generation asset
sales, and will vary from year to year.
B-39
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(3) Cumulative Effect of a Change in Accounting Principle
In the fourth quarter of 1997, ComEd changed its accounting method for
revenue recognition to record revenues associated with service which has been
provided to customers but has not yet been billed at the end of each
accounting period, retroactive to January 1, 1997. This change in accounting
method increased operating results for the year 1997 to reflect the one-time
cumulative effect of the change for years prior to 1997 by $197 million
(after-tax), or $0.91 per common share. If the new accounting method had been
in effect for the years 1997 and 1996, the pro forma unaudited net income
(loss) would have been $(1,049,550,000), or $(4.85) per common share (basic),
and $698,229,000, or $3.24 per common share (basic), respectively, excluding
the one-time cumulative effect of a change in accounting principle.
(4) Rate Matters
Final ICC orders have been issued in fuel reconciliation proceedings related
to ComEd's FAC collections for all years except for 1994. On November 5, 1998,
the ICC issued an order in the proceeding for the year 1994 providing for a
refund of approximately $3 million related to nuclear station performance. On
February 9, 1999, an intervenor moved to dismiss its appeal of the 1994 ICC
order. On December 29, 1998, the ICC issued an order for the 1996 fuel
reconciliation proceeding requiring ComEd to refund approximately $19 million
related to nuclear station performance. The 1997 Act provides that, because
ComEd eliminated its FAC effective January 1, 1997, the ICC shall not conduct
a fuel reconciliation proceeding for the year 1997 and subsequent years. See
Note 2 for information regarding the 1997 Act and the elimination of ComEd's
FAC.
Three of ComEd's wholesale municipal customers filed a complaint and request
for refund with the FERC alleging that ComEd failed to properly adjust their
rates, as provided for under the terms of their electric service contracts, to
track certain refunds made to ComEd's retail customers in the years 1992
through 1994. In the third quarter of 1998, the FERC granted the complaint and
directed that refunds be made, with interest. ComEd filed and was granted a
request for rehearing for purposes of reconsideration with the FERC. If the
order is upheld, ComEd must make refunds within 15 days of the resolution for
rehearing.
ComEd's management believes adequate reserves have been established in
connection with the cases discussed above.
(5) Closure and Sale of Plants
In January 1998, the Boards of Directors of Unicom and ComEd authorized the
permanent cessation of nuclear generation operations and retirement of
facilities at ComEd's 2,080 megawatt Zion nuclear generating station. Such
retirement resulted in a charge for 1997 of $523 million (after-tax), or $2.42
per common share (basic). The decision to close Zion Station was a result of
ComEd's ongoing analysis of the economic value of its generating assets in
light of the expected changes in the manner in which electric energy is
marketed and sold. The passage of the 1997 Act provided a clearer basis for
evaluating the costs and benefits of alternative courses of action. In
reaching the decision to cease nuclear generation operations at Zion Station,
the Boards also considered the significant uncertainty associated with
continued operation of the station due to the degradation of the steam
generators and the expected operating costs associated with continued station
operation.
ComEd's fourth quarter 1997 financial results reflected a charge of $406
million (after-tax), representing the undepreciated costs of Zion Station
(excluding the portion which will remain in use to provide voltage support),
materials and supplies inventories, and nuclear fuel inventories. In
B-40
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
addition, as required by GAAP, a liability for future closing costs associated
with the retirement of Zion Station, excluding severance costs, was recorded
resulting in a charge of $117 million (after-tax) in the fourth quarter of
1997. ComEd recorded a reduction to the liability for future closing costs of
$15 million (after-tax), or $0.07 per common share (basic), in the year 1998
to reflect lower than expected closing costs due to employees being reassigned
or removed from payroll sooner than expected, and lower than anticipated
support costs and use of contractors. See Note 17 for information regarding
costs of voluntary employee separation plans.
ComEd completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has exclusive 15-year
purchased power agreements for the output of the stations. The sales of State
Line and Kincaid Stations were completed in December 1997 and February 1998,
respectively. The net proceeds of the sales, after income tax effects and
closing costs, were approximately $190 million. The proceeds were used to
retire or redeem existing debt in the first quarter of 1998. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Response to Regulatory Changes," for information regarding ComEd's
fossil generating plants, and oil and gas peaking units being offered for
sale.
(6) Authorized Shares, Voting Rights and Stock Rights of Capital Stock
At December 31, 1998, Unicom's authorized shares consisted of 400,000,000
shares of common stock. The authorized shares of ComEd preferred and
preference stocks at December 31, 1998 were: preference stock--22,030,345
shares; $1.425 convertible preferred stock--58,211 shares; and prior preferred
stock--850,000 shares. The preference and prior preferred stocks are issuable
in series and may be issued with or without mandatory redemption requirements.
Holders of outstanding Unicom shares are entitled to one vote for each share
held on each matter submitted to a vote of such shareholders; and holders of
outstanding ComEd shares are entitled to one vote for each share held on each
matter submitted to a vote of such shareholders. All such shares have the
right to cumulate votes in elections for the directors of the corporation
which issued the shares.
Pursuant to a plan adopted by the Unicom Board of Directors on February 2,
1998, each share of Unicom's common stock carries the right (referred to
herein as a "Right") to purchase one-thousandth of one share of Unicom's
common stock at a purchase price of $100 per whole share of common stock,
subject to adjustment. The Rights are tradable only with Unicom's common stock
until they become exercisable. The Rights become exercisable upon the earlier
of ten days following a public announcement that a person (an "Acquiring
Person") has acquired 15% or more of Unicom's outstanding common stock or ten
business days (or such later date as may be determined by action of the Board
of Directors) following the commencement of a tender or exchange offer which,
if consummated, would result in a person or group becoming an Acquiring
Person. The Rights are subject to redemption by Unicom at a price of $.01 per
Right, subject to certain limitations, and will expire on February 2, 2008. If
a person or group becomes an Acquiring Person, each holder of a Right will
thereafter have the right to receive, upon exercise, Unicom common stock at a
50% discount from the then current market price. If Unicom is acquired in a
merger or other business combination transaction in which Unicom is not the
survivor, or 50% or more of Unicom's assets or earning power is sold or
transferred, each holder of a Right shall then have the right to receive, upon
exercise, common stock of the acquiring company at a 50% discount from the
then current market price of such common stock. Rights held by an Acquiring
Person become void upon the occurrence of such events.
B-41
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(7) Common Equity
Unicom has entered into a prepaid forward purchase arrangement with a
financial institution for the repurchase of approximately 15 million shares of
Unicom common stock. The repurchase arrangement provides for final settlement
no later than February 2000, on either a physical (share) basis, or a net cash
basis, at the option of the financial institution. The amount at which the
arrangement can be settled is dependent principally upon the average market
price at which the financial institution purchases such shares, compared to
the forward price per share. The share repurchases will not reduce shares
outstanding for purposes of EPS calculations or reduce common stock equity and
resulting return on common equity calculations until the date of physical
settlement. Unicom currently does not anticipate that settlement will occur in
1999. The repurchase arrangement will initially be recorded as a receivable on
Unicom's Consolidated Balance Sheets and will be adjusted at the end of each
reporting period to reflect the aggregate market value of the shares
deliverable under the arrangement. Consequently, the arrangement could
increase earnings volatility in 1999.
This arrangement supplements a previously announced program to repurchase up
to $200 million of Unicom common stock. Shares repurchased under that program
will also be outstanding for financial statement purposes until the time of
final settlement, which is currently expected to extend to February 2000, on
either a physical (share) basis, or a net cash basis, at the option of Unicom.
As of December 31, 1998, this arrangement has been accounted for as an equity
instrument. If this arrangement had been settled on a physical (share) basis
at December 31, 1998, Unicom would have received approximately 5.1 million
shares of its common stock.
See Note 24 for additional information regarding the redemptions and
repurchases of debt and equity.
At December 31, 1998, shares of Unicom common stock were reserved for the
following purposes:
<TABLE>
<S> <C>
Long-Term Incentive Plan........................................ 2,683,264
Employee Stock Purchase Plan.................................... 413,297
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 85,196
1996 Directors' Fee Plan........................................ 167,980
---------
3,749,737
=========
</TABLE>
Common stock for the years 1998, 1997 and 1996 was issued as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Shares of Common Stock Issued:
Long-Term Incentive Plan......................... 494,302 208,104 132,579
Employee Stock Purchase Plan..................... 94,270 196,003 196,513
Employee Savings and Investment Plan............. -- 274,203 339,100
Exchange for ComEd common stock not held by
Unicom.......................................... 12,757 12,370 25,323
1996 Directors' Fee Plan......................... 12,733 14,175 5,112
------- ------- -------
614,062 704,855 698,627
======= ======= =======
<CAPTION>
(Thousands of Dollars)
<S> <C> <C> <C>
Amount of Common Stock Issued:
Total issued..................................... $16,847 $15,768 $17,733
Held by trustee for Unicom Stock Bonus Deferral
Plan............................................ 6,775 (2,476) (4,300)
Other............................................ (203) 10 38
------- ------- -------
$23,419 $13,302 $13,471
======= ======= =======
</TABLE>
B-42
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
In December 1998, 178,982 shares of Unicom common stock were reacquired and
held as treasury stock at a cost of $6.8 million.
At December 31, 1998 and 1997, 76,079 and 76,868, respectively, of ComEd
common stock purchase warrants were outstanding. The warrants entitle the
holders to convert such warrants into common stock of ComEd at a conversion
rate of one share of common stock for three warrants.
Unicom's retained earnings account had a positive balance of $143 million at
December 31, 1998 and a deficit balance of $21 million at December 31, 1997.
As of December 31, 1998 and 1997, $494 million and $331 million, respectively,
of retained earnings had been appropriated for future dividend payments.
(8) Stock Option Awards/Employee Stock Purchase Plan
Unicom has a nonqualified stock option awards program under its Long-Term
Incentive Plan. The stock option awards program was adopted by Unicom in July
1996 to reward valued employees responsible for, or contributing to, the
management, growth and profitability of Unicom and its subsidiaries. The stock
options granted expire ten years from their grant date. One-third of the
shares subject to the options vest on each of the first three anniversaries of
the option grant date. In addition, the stock options become fully vested
immediately if the holder dies, retires, is terminated by the Company, other
than for cause, or qualifies for long-term disability and will also vest in
full upon a change in control.
Stock option transactions for the years 1998, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
--------- --------
<S> <C> <C>
Outstanding at the beginning of 1996........................ -- $ --
Granted during the year..................................... 1,205,500 25.500
Expired/cancelled during the year........................... (17,500) 25.500
---------
Outstanding as of December 31, 1996......................... 1,188,000 25.500
Granted during the year..................................... 1,339,350 22.313
Exercised during the year................................... (23,423) 25.500
Expired/cancelled during the year........................... (212,549) 23.632
---------
Outstanding as of December 31, 1997......................... 2,291,378 23.810
Granted during the year..................................... 1,379,525 35.234
Exercised during the year................................... (404,082) 24.244
Expired/cancelled during year............................... (124,594) 25.714
---------
Outstanding as of December 31, 1998......................... 3,142,227 28.694
=========
</TABLE>
Of the stock options outstanding at December 31, 1998, 943,851 have vested
with a weighted average exercise price of $24.234.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Stock Option Grant Date
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected option life............................... 7 years 7 years 7 years
Dividend yield..................................... 4.54% 7.20% 6.30%
Expected volatility................................ 21.95% 22.29% 20.98%
Risk-free interest rate............................ 5.58% 6.25% 6.64%
</TABLE>
B-43
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The estimated weighted average fair value for each stock option granted for
the years 1998, 1997 and 1996 was $6.62, $2.79 and $3.74, respectively.
The ESPP allows employees to purchase Unicom common stock at a 10% discount
from market value. Substantially all of the employees of Unicom, ComEd and
certain subsidiaries are eligible to participate in the ESPP. Unicom issued
94,270, 196,003 and 196,513 shares of common stock for the years 1998, 1997
and 1996, respectively, under the ESPP at a weighted average annual purchase
price of $33.11, $19.15 and $23.52, respectively.
Unicom has adopted the disclosure-only provisions of SFAS No. 123. For
financial reporting purposes, Unicom has adopted APB No. 25 and thus no
compensation cost has been recognized for the stock option awards program or
ESPP. If Unicom had recorded compensation expense for the stock options
granted and the shares of common stock issued under the ESPP in accordance
with SFAS No. 123 using the fair value based method of accounting, the
additional charges to operations would have been $2 million (after-tax), or
$0.01 per common share (basic), $2 million (after-tax), or $0.01 per common
share (basic), and $1 million (after-tax), or less than $0.01 per common share
(basic), for the years 1998, 1997 and 1996, respectively.
(9) ComEd Preferred and Preference Stocks Without Mandatory Redemption
Requirements
No shares of ComEd preferred or preference stocks without mandatory
redemption requirements were issued or redeemed during 1998, 1997 and 1996.
The series of ComEd preference stock without mandatory redemption requirements
outstanding at December 31, 1998 are summarized as follows:
<TABLE>
<CAPTION>
Involuntary
Shares Aggregate Redemption Liquidation
Series Outstanding Stated Value Price(1) Price(1)
------ ----------- ------------ ---------- -----------
(Thousands
of Dollars)
<S> <C> <C> <C> <C>
$1.90 4,249,549 $106,239 $ 25.25 $25.00
$2.00 2,000,000 51,560 $ 26.04 $25.00
$1.96 2,000,000 52,440 $ 27.11 $25.00
$7.24 750,000 74,340 $101.00 $99.12
$8.40 750,000 74,175 $101.00 $98.90
$8.38 750,000 73,566 $100.16 $98.09
$2.425 3,000,000 72,637 $ 25.00 $25.00
---------- --------
13,499,549 $504,957
========== ========
</TABLE>
--------
(1) Per share plus accrued and unpaid dividends, if any.
The outstanding shares of ComEd's $1.425 convertible preferred stock are
convertible at the option of the holders thereof, at any time, into common
stock of ComEd at the rate of 1.02 shares of common stock for each share of
convertible preferred stock, subject to future adjustment. The convertible
preferred stock may be redeemed by ComEd at $42 per share, plus accrued and
unpaid dividends, if any. The involuntary liquidation price of the $1.425
convertible preferred stock is $31.80 per share, plus accrued and unpaid
dividends, if any.
ComEd redeemed $432 million of preference stock without mandatory redemption
requirements on January 19, 1999. The redemption retires all series other than
Series $2.425 and $1.425. See Note 24 for additional information regarding the
redemption of ComEd preference stocks.
B-44
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(10) ComEd Preference Stock Subject to Mandatory Redemption Requirements
During 1998, 1997 and 1996, 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,
1998 are summarized as follows:
<TABLE>
<CAPTION>
Shares Aggregate
Series Outstanding Stated Value Optional Redemption Price(1)
- - -------------- ----------- ------------ -----------------------------------------------
(Thousands
of Dollars)
<S> <C> <C> <C>
$8.20 142,845 $ 14,285 $101
$8.40 Series B 240,000 23,838 $101
$8.85 187,500 18,750 $101
$9.25 450,000 45,000 $103 through July 31, 1999; and $101 thereafter
$6.875 700,000 69,475 Non-callable
--------- --------
1,720,345 $171,348
========= ========
</TABLE>
- - --------
(1) Per share plus accrued and unpaid dividends, if any.
ComEd redeemed $102 million of preference stock with mandatory redemption
requirements on January 19, 1999. The redemption retires all series other than
Series $6.875, all of which is required to be redeemed on May 1, 2000. The
sinking fund price for Series $6.875 is $100 and the involuntary liquidation
price is $99.25 per share plus accrued and unpaid dividends, if any. See Note
24 for additional information regarding the redemption of ComEd preference
stocks.
After reflecting the redemption, the remaining sinking fund requirement is
$69 million in the year 2000. During 1998, 338,215 shares and in each of the
years 1997 and 1996, 438,215 shares of ComEd preference stock subject to
mandatory redemption requirements were reacquired to meet sinking fund
requirements plus any optional additional sinking fund payments.
Sinking fund requirements and the redemption due within one year are
included in current liabilities.
(11) ComEd-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding Solely ComEd's Subordinated Debt Securities
In September 1995, ComEd Financing I, a wholly-owned subsidiary trust of
ComEd, issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable
preferred securities. The sole asset of ComEd Financing I is $206.2 million
principal amount of ComEd's 8.48% subordinated deferrable interest notes due
September 30, 2035. In January 1997, ComEd Financing II, a wholly-owned
subsidiary trust of ComEd, issued 150,000 of its 8.50% ComEd-obligated
mandatorily redeemable capital securities. The sole asset of ComEd Financing
II is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable
interest debentures due January 15, 2027. There is a full and unconditional
guarantee by ComEd of the Trusts' obligations under the securities issued by
the Trusts. However, ComEd's obligations are subordinate and junior in right
of payment to certain other indebtedness of ComEd. ComEd has the right to
defer payments of interest on the subordinated deferrable interest notes by
extending the interest payment period, at any time, for up to 20 consecutive
quarters. Similarly, ComEd has the right to defer payments of interest on the
subordinated deferrable interest debentures by extending the interest payment
period, at any time, for up to ten consecutive semi-annual periods. If
interest payments on the subordinated deferrable interest notes or debentures
are so deferred, distributions on the preferred securities will also be
B-45
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
deferred. During any deferral, distributions will continue to accrue with
interest thereon. In addition, during any such deferral, ComEd may not declare
or pay any dividend or other distribution on, or redeem or purchase, any of
its capital stock.
The subordinated deferrable interest notes are redeemable by ComEd, in whole
or in part, from time to time, on or after September 30, 2000, and with
respect to the subordinate deferrable interest debentures, on or after January
15, 2007, or at any time in the event of certain income tax circumstances. If
the subordinated deferrable interest notes or debentures are redeemed, the
Trusts must redeem preferred securities having an aggregate liquidation amount
equal to the aggregate principal amount of the subordinated deferrable
interest notes or debentures so redeemed. In the event of the dissolution,
winding up or termination of the Trusts, the holders of the preferred
securities will be entitled to receive, for each preferred security, a
liquidation amount of $25 for the securities of ComEd Financing I and $1,000
for the securities of ComEd Financing II, plus accrued and unpaid
distributions thereon, including interest thereon, to the date of payment,
unless in connection with the dissolution, the subordinated deferrable
interest notes or debentures are distributed to the holders of the preferred
securities.
(12) Long-Term Debt
ComEd initiated the issuance of $3.4 billion of transitional trust notes
through its SPEs, ComEd Funding and ComEd Funding Trust, in the fourth quarter
of 1998, as follows:
<TABLE>
<CAPTION>
Interest Principal
Rate Class and Scheduled Maturity Dates Amount
-------- ---------------------------------- ----------
(Thousands
of Dollars)
<C> <S> <C>
5.38% A-1 due March 25, 2000............................... $ 424,967
5.29% A-2 due June 25, 2001................................ 425,033
5.34% A-3 due March 25, 2002............................... 258,861
5.39% A-4 due June 25, 2003................................ 421,139
5.44% A-5 due March 25, 2005............................... 598,511
5.63% A-6 due June 25, 2007................................ 761,489
5.74% A-7 due December 25, 2008............................ 510,000
----------
$3,400,000
==========
</TABLE>
The proceeds, net of transaction costs, from the transitional trust notes
must be used to redeem debt and equity. On January 27, 1999, ComEd redeemed
$730 million of first mortgage bonds. On February 16, 1999, ComEd redeemed $58
million of sinking fund debentures. In response to a tender offer, ComEd
reacquired $229 million of first mortgage bonds in early February 1999. See
Note 24 for additional information regarding the redemptions of first mortgage
bonds and sinking fund debentures, and the reacquired first mortgage bonds.
For accounting purposes, the liabilities of ComEd Funding Trust for the
transitional trust notes are reflected as long-term debt on the Consolidated
Balance Sheets of Unicom and ComEd.
Sinking fund requirements and scheduled maturities remaining through 2003,
after reflecting the redemptions, for ComEd's first mortgage bonds,
transitional trust notes, sinking fund debentures and other long-term debt
outstanding at December 31, 1998, are summarized as follows: 1999--$481
million; 2000--$727 million; 2001--$346 million; 2002--$645 million; and
2003--$445 million. Unicom Enterprises' note payable to bank of $85 million
will mature in 1999.
B-46
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
After reflecting the redemptions of first mortgage bonds, ComEd's
outstanding first mortgage bonds maturing through 2003 were as follows:
<TABLE>
<CAPTION>
Principal Amount
Series ----------------------
(Thousands of Dollars)
<S> <C>
9 3/8% due February 15, 2000....................... $ 42,345
6 1/2% due April 15, 2000.......................... 230,000
6 3/8% due July 15, 2000........................... 100,000
7 3/8% due September 15, 2002...................... 200,000
6 5/8% due July 15, 2003........................... 100,000
--------
$672,345
========
</TABLE>
Other long-term debt outstanding at December 31, 1998 is summarized as
follows:
<TABLE>
<CAPTION>
Principal
Debt Security Amount Interest Rate
- - ------------------------------------- ---------- ------------------------------------------------------
(Thousands
of
Dollars)
<S> <C> <C>
Unicom--
Loans Payable:
Loan due January 1, 2003 $ 6,775 Interest rate of 8.31%
Loan due January 1, 2004 7,690 Interest rate of 8.44%
----------
$ 14,465
----------
ComEd--
Notes:
Medium Term Notes, Series 3N due
various dates through October 15,
2004 $ 296,000 Interest rates ranging from 9.00% to 9.20%
Notes due January 15, 2004 150,000 Interest rate of 7.375%
Notes due October 15, 2005 235,000 Interest rate of 6.40%
Notes due January 15, 2007 150,000 Interest rate of 7.625%
Notes due July 15, 2018 225,000 Interest rate of 6.95%
----------
$1,056,000
----------
Purchase Contract Obligation due
April 30, 2005 $ 346 Interest rate of 3.00%
----------
Total ComEd $1,056,346
----------
Unicom Enterprises--
Long-Term Note Payable to Bank
due November 15, 1999 $ 85,000 Prevailing interest rate of 6.20% at December 31, 1998
----------
Unicom Thermal--
Guaranteed Senior Note due
May 30, 2012 $ 120,000 Interest rate of 7.38%
----------
Total Unicom $1,275,811
==========
</TABLE>
Long-term debt maturing within one year, including long-term debt redeemed
in January and February of 1999, have been included in current liabilities.
ComEd's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by ComEd.
In July 1998, Unicom Thermal issued $120 million of 7.38% unsecured
guaranteed senior Notes due May 2012, the proceeds of which were used to
refinance existing debt. The Notes are guaranteed by Unicom and include
certain covenants with respect to Unicom and Unicom Thermal's operations. Such
covenants include, among other things, (i) a requirement that Unicom and its
B-47
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
consolidated subsidiaries maintain a tangible net worth at least $10 million
greater than that of ComEd and its consolidated subsidiaries, (ii) a
requirement that Unicom's consolidated debt to consolidated capitalization not
exceed 0.65 to 1, (iii) restrictions on the indebtedness for borrowed money
that Unicom Thermal may incur, and (iv) a requirement that Unicom own,
directly or indirectly, 51% of the outstanding stock of Unicom Thermal and at
least 80% of the outstanding stock of ComEd.
(13) Lines of Credit
ComEd had total unused bank lines of credit of $1 billion at December 31,
1998. Of that amount, $500 million expires on October 7, 1999 and $500 million
expires on October 8, 2003. The interest rate is set at the time of a
borrowing and is based on several floating rate bank indices plus a spread,
which is dependent upon the credit rating of ComEd's outstanding first
mortgage bonds or on a prime interest rate. ComEd is obligated to pay
commitment fees with respect to the unused portion of such lines of credit.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $115 million was unused as of December 31, 1998.
The credit facility can be used by Unicom Enterprises to finance investments
in unregulated businesses and projects, including UT Holdings and Unicom
Energy Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Such covenants include, among other things,
(i) a requirement that Unicom and its consolidated subsidiaries maintain a
tangible net worth at least $10 million over that of ComEd and its
consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt
to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the
indebtedness for borrowed money that Unicom (excluding ComEd) and Unicom
Enterprises may incur, and (iv) a requirement that Unicom own 100% of the
outstanding stock of Unicom Enterprises and at least 80% of the outstanding
stock of ComEd; and provide that Unicom may not declare or pay dividends
during the continuance of an event of default. Interest rates for borrowings
under the credit facility are set at the time of a borrowing and are based on
either a prime interest rate or a floating rate bank index plus a spread which
varies with the credit rating of ComEd's outstanding first mortgage bonds.
Unicom Enterprises is obligated to pay commitment fees with respect to the
unused portion of such lines of credit.
(14) Disposal of Spent Nuclear Fuel
Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the
selection and development of repositories for, and the disposal of, spent
nuclear fuel and high-level radioactive waste. ComEd, as required by that Act,
has signed a contract with the DOE to provide for the disposal of spent
nuclear fuel and high-level radioactive waste from ComEd's nuclear generating
stations. That contract provided for acceptance by the DOE of such materials
to begin in January 1998; however, that date was not met by the DOE and is
expected to be delayed significantly. The DOE's current estimate for opening a
facility to accept such waste is 2010. This extended delay in spent nuclear
fuel acceptance by the DOE has led to ComEd's consideration of additional dry
storage alternatives. On July 30, 1998, ComEd filed a complaint against the
United States in the United States Court of Federal Claims seeking to recover
damages caused by the DOE's failure to honor its contractual obligation to
begin disposing of spent nuclear fuel in January 1998. The contract with the
DOE requires ComEd to pay the DOE a one-time fee applicable to nuclear
generation through April 6, 1983 of $277 million, with interest to date of
payment, and a fee payable quarterly equal to one mill per kilowatthour of
nuclear-generated and sold electricity after April 6, 1983. Pursuant to the
B-48
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
contract, ComEd has elected to pay the one-time fee, with interest, just prior
to the first delivery of spent nuclear fuel to the DOE. The liability for the
one-time fee and related interest is reflected on the Consolidated Balance
Sheets.
(15) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of financial instruments either held or issued and outstanding. The disclosure
of such information does not purport to be a market valuation of Unicom and
subsidiary companies as a whole. The impact of any realized or unrealized
gains or losses related to such financial instruments on the financial
position or results of operations of Unicom and subsidiary companies is
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, 1998 and
1997 was as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------- --------------------------------
Cost Unrealized Fair Cost Unrealized Fair
Basis Gains Value Basis Gains Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
Short-term investments.. $ 40,907 $ 42 $ 40,949 $ 33,524 $ 2 $ 33,526
U.S. Government and
Agency issues.......... 197,240 20,213 217,453 170,240 15,882 186,122
Municipal bonds......... 416,121 24,124 440,245 306,104 20,598 326,702
Corporate bonds......... 241,111 8,790 249,901 231,738 4,293 236,031
Common stock............ 740,956 565,630 1,306,586 667,657 385,851 1,053,508
Other................... 11,345 838 12,183 17,300 2,508 19,808
---------- -------- ---------- ---------- -------- ----------
$1,647,680 $619,637 $2,267,317 $1,426,563 $429,134 $1,855,697
========== ======== ========== ========== ======== ==========
</TABLE>
At December 31, 1998, the debt securities held by the nuclear
decommissioning funds had the following maturities:
<TABLE>
<CAPTION>
Cost Basis Fair Value
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Within 1 year....................................... $ 29,421 $ 29,431
1 through 5 years................................... 185,810 192,159
5 through 10 years.................................. 254,024 273,255
Over 10 years....................................... 411,607 439,643
</TABLE>
The net earnings of the nuclear decommissioning funds, which are recorded as
increases to the accumulated provision for depreciation, for the years 1998,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Gross proceeds from sales of securities........ $1,795,484 $2,163,522 $2,335,974
Less cost based on specific identification..... 1,728,092 2,088,300 2,300,038
---------- ---------- ----------
Realized gains on sales of securities.......... $ 67,392 $ 75,222 $ 35,936
Other realized fund earnings net of expenses... 40,374 39,123 33,008
---------- ---------- ----------
Total realized net earnings of the funds....... $ 107,766 $ 114,345 $ 68,944
Unrealized gains .............................. 190,503 198,741 65,516
---------- ---------- ----------
Total net earnings of the funds............... $ 298,269 $ 313,086 $ 134,460
========== ========== ==========
</TABLE>
B-49
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Current Assets. Cash, temporary cash investments, cash held for redemption
of securities and other cash investments, which include U.S. Government
obligations and other short-term marketable securities, and special deposits,
which primarily includes cash deposited for the redemption, refund or
discharge of debt securities, are stated at cost, which approximates their
fair value because of the short maturity of these instruments. The securities
included in these categories have been classified as "available for sale"
securities.
Capitalization. The estimated fair values of ComEd preferred and preference
stocks, ComEd-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely ComEd's subordinated debt securities,
transitional trust notes, 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, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------- ----------------------------------
Carrying Unrealized Fair Carrying Unrealized Fair
Value Losses Value Value Losses Value
---------- ---------- ---------- ----------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C> <C> <C> <C>
ComEd preferred and
preference stocks...... $ 678,156 $ 11,500 $ 689,656 $ 712,069 $ 11,970 $ 724,039
ComEd-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely ComEd's
subordinated debt
securities............. $ 350,000 $ 20,678 $ 370,678 $ 350,000 $ 21,701 $ 371,701
Transitional trust
notes.................. $3,382,821 $ 67,168 $3,449,989 $ -- $ -- $ --
Long-term debt.......... $5,911,757 $451,240 $6,362,997 $ 5,913,942 $ 380,890 $ 6,294,832
</TABLE>
Long-term notes payable, which are not included in the above table, amounted
to $100 million and $327 million at December 31, 1998 and 1997, respectively.
Such notes, for which interest is paid at fixed and prevailing rates, are
included in the consolidated financial statements at cost, which approximates
their fair value.
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
portions of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of accrued spent nuclear
fuel disposal fee and related interest represents the settlement value as of
December 31, 1998 and 1997; therefore, the carrying value is equal to the fair
value.
(16) Pension and Postretirement Benefits
As of December 31, 1998, ComEd had a qualified non-contributory defined
benefit pension plan which covers all regular employees of ComEd and certain
of Unicom's subsidiaries. Benefits under this plan reflect each employee's
compensation, years of service and age at retirement. Funding is based upon
actuarially determined contributions that take into account the amount
deductible for income tax purposes and the minimum contribution required under
the Employee Retirement Income Security Act of 1974, as amended. The December
31, 1998 and 1997 pension liabilities and related data were determined using
the January 1, 1998 actuarial valuation. Additionally, ComEd maintains a
B-50
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
nonqualified supplemental retirement plan which covers any excess pension
benefits that would be payable to management employees under the qualified
plan but which are limited by the Internal Revenue Code. On January 19, 1998,
Indiana Company's qualified defined benefit pension plan was merged into the
ComEd pension plan as a result of the sale of Indiana Company's State Line
Station and the transfer of its remaining employees to ComEd.
ComEd, the Indiana Company and certain of Unicom's subsidiaries provide
certain postretirement medical, dental and vision care, and life insurance for
retirees and their dependents and for the surviving dependents of eligible
employees and retirees. The employees become eligible for postretirement
benefits when they reach age 55 with ten years of service. The liability for
postretirement benefits is funded through trust funds based upon actuarially
determined contributions that take into account the amount deductible for
income tax purposes. The health care plans are contributory, funded jointly by
the companies and the participating retirees. The December 31, 1998 and 1997
postretirement benefit liabilities and related data were determined using the
January 1, 1998 actuarial valuations.
Reconciliations of the beginning and ending balances of the projected
pension benefit obligation and the accumulated postretirement benefit
obligation and the funded status of these plans for the years 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997
-------------------------- --------------------------
Other Other
Pension Postretirement Pension Postretirement
Benefits Benefits Benefits Benefits
---------- -------------- ---------- --------------
(Thousands of Dollars)
Change in benefit
obligation
- - -----------------
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of period.... $4,010,000 $1,139,000 $3,579,000 $1,035,000
Service cost............ 115,000 38,000 100,000 34,000
Interest cost........... 273,000 78,000 261,000 76,000
Plan participants' con-
tributions............. -- 3,000 -- 3,000
Curtailment gain........ -- -- (5,000) --
Actuarial loss.......... 165,000 37,000 282,000 32,000
Benefits paid........... (236,000) (46,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,327,000 $1,249,000 $4,010,000 $1,139,000
---------- ---------- ---------- ----------
<CAPTION>
Change in plan assets
- - ---------------------
<S> <C> <C> <C> <C>
Fair value of plan as-
sets at beginning of
period................. $3,706,000 $ 767,000 $3,281,000 $ 665,000
Actual return on plan
assets................. 534,000 108,000 631,000 128,000
Employer contribution... 11,000 20,000 1,000 12,000
Plan participants' con-
tributions............. -- 3,000 -- 3,000
Benefits paid........... (236,000) (46,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $4,015,000 $ 852,000 $3,706,000 $ 767,000
---------- ---------- ---------- ----------
Plan assets less than
benefit obligation..... $ (312,000) $ (397,000) $ (304,000) $ (372,000)
Unrecognized net actuar-
ial loss (gain)........ 37,000 (345,000) 68,000 (350,000)
Unrecognized prior serv-
ice cost (asset)....... (60,000) 48,000 (64,000) 52,000
Unrecognized transition
obligation (asset)..... (101,000) 323,000 (114,000) 345,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (436,000) $ (371,000) $ (414,000) $ (325,000)
========== ========== ========== ==========
</TABLE>
The assumed discount rate used to determine the benefit obligation as of
December 31, 1998 and 1997 was 6.75% and 7.00%, respectively. The fair value
of pension plan assets excludes $21 million and $17 million held in grantor
trust as of December 31, 1998 and 1997, respectively, for the payment of
benefits under the supplemental plan.
B-51
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of pension and other postretirement benefit costs, portions
of which were recorded as components of construction costs, for the years
1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Pension Benefit Costs --------- --------- ---------
- - --------------------- (Thousands of Dollars)
<S> <C> <C> <C>
Service cost............ $ 115,000 $ 100,000 $ 93,000
Interest cost on pro-
jected benefit
obligation............. 273,000 261,000 247,000
Expected return on plan
assets................. (342,000) (310,000) (289,000)
Amortization of transi-
tion asset............. (12,000) (13,000) (13,000)
Amortization of prior
service asset.......... (4,000) (4,000) (4,000)
Recognized loss......... 2,000 2,000 2,000
Curtailment gain........ -- (5,000) --
--------- --------- ---------
Net periodic benefit
cost.................. $ 32,000 $ 31,000 $ 36,000
========= ========= =========
<CAPTION>
Other Postretirement
Benefit Costs
- - --------------------
<S> <C> <C> <C>
Service cost............ $ 38,000 $ 34,000 $ 32,000
Interest cost on accumu-
lated benefit
obligation............. 78,000 76,000 73,000
Expected return on plan
assets................. (69,000) (61,000) (55,000)
Amortization of transi-
tion obligation........ 22,000 22,000 22,000
Amortization of prior
service cost........... 4,000 4,000 3,000
Recognized gain......... (14,000) (13,000) (9,000)
Severance plan cost..... 6,000 8,000 4,000
--------- --------- ---------
Net periodic benefit
cost.................. $ 65,000 $ 70,000 $ 70,000
========= ========= =========
</TABLE>
In accounting for the pension costs and other postretirement benefit costs
under the plans, the following weighted average actuarial assumptions were
used for the years 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Other
Pension Benefits Postretirement Benefits
----------------- -----------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Annual discount rate................. 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Annual long-term rate of return on
plan assets......................... 9.50% 9.75% 9.75% 9.20% 9.40% 9.38%
Annual rate of increase in future
compensation levels................. 4.00% 4.00% 4.00% -- -- --
</TABLE>
The pension curtailment gain in December 1997 represents the recognition of
prior service costs, the transition asset and the decrease in the projected
benefit obligation related to the reduction in the number of employees due to
the sale of State Line Station by the Indiana Company.
Postretirement health care costs for the years 1998, 1997 and 1996 included
$6 million, $8 million and $4 million, respectively, related to voluntary
separation offers to certain employees of ComEd and the Indiana Company.
The health care cost trend rates used to measure the expected cost of the
postretirement medical benefits are assumed to be 8.5% for pre-Medicare
recipients and 6.5% for Medicare recipients for 1998. Those rates are assumed
to decrease in 0.5% annual increments to 5% for the years 2005 and 2001,
respectively, and to remain level thereafter. The health care cost trend
rates, used to measure the expected cost of postretirement dental and vision
benefits, are a level 3.5% and
B-52
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
2.0% per year, respectively. Assumed health care cost trend rates have a
significant effect on the amounts reported for the health care plans. A one
percentage point change in the assumed health care cost trend rates would have
the following effects:
<TABLE>
<CAPTION>
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(Thousands of Dollars)
<S> <C> <C>
Effect on total annual service and interest cost
components...................................... $ 24,000 $ (18,000)
Effect on postretirement benefit obligation...... 225,000 (176,000)
</TABLE>
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay. The participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $32 million, $33
million and $30 million for the years 1998, 1997 and 1996, respectively.
(17) Separation Plan Costs
O&M expenses included $48 million, $39 million and $12 million for the years
1998, 1997 and 1996, respectively, for costs related to voluntary separation
offers to certain employees of ComEd and the Indiana Company, as well as
certain one-time, employee-related costs. Such costs resulted in charges of
$29 million (after-tax), or $0.13 per common share (basic), $24 million
(after-tax), or $0.11 per common share (basic), and $7 million (after-tax), or
$0.03 per common share (basic), for the years 1998, 1997 and 1996,
respectively.
(18) Income Taxes
The components of the net deferred income tax liability at December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
December 31
----------------------
1998 1997
---------- ----------
(Thousands of
Dollars)
<S> <C> <C>
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs........................... $4,028,351 $4,062,801
Overheads capitalized................................. 140,922 131,509
Repair allowance...................................... 233,861 231,697
Regulatory assets recoverable through future rates.... 680,356 785,354
Deferred income tax assets:
Postretirement benefits............................... (331,651) (305,242)
Unamortized investment tax credits.................... (191,135) (206,112)
Regulatory liabilities to be settled through future
rates................................................ (595,005) (698,750)
Nuclear plant closure................................. (38,354) (194,244)
Other--net............................................ (146,224) (136,258)
---------- ----------
Net deferred income tax liability...................... $3,781,121 $3,670,755
========== ==========
</TABLE>
The $110 million increase in the net deferred income tax liability from
December 31, 1997 to December 31, 1998 is comprised of $111 million of
deferred income tax expense and a $1 million decrease in regulatory assets net
of regulatory liabilities pertaining to income taxes for the year. The amount
of accelerated cost recovery and liberalized depreciation included in deferred
income tax
B-53
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
liabilities as of December 31, 1998 includes amounts related to the regulatory
asset for impaired production plant. The amount of regulatory assets included
in deferred income tax liabilities primarily relates to the equity component
of AFUDC which is recorded on an after-tax basis, the borrowed funds component
of AFUDC which was previously recorded net of tax and other temporary
differences for which the related tax effects were not previously recorded.
The amount of other regulatory liabilities included in deferred income tax
assets primarily relates to deferred income taxes provided at rates in excess
of the current statutory rate.
The components of net income tax expense charged (credited) to continuing
operations for the years 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Operating income:
Current income taxes.......................... $304,889 $ 255,057 $328,216
Deferred income taxes......................... 50,134 62,501 161,176
Investment tax credits deferred--net.......... (27,730) (31,015) (33,378)
Other (income) and deductions:
Current income taxes.......................... (51,816) 1,116 (12,349)
Deferred income taxes......................... 59,458 (385,994) 5,117
Investment tax credits........................ (12,107) (22,526) --
-------- --------- --------
Net income taxes charged (credited) to continu-
ing operations................................ $322,828 $(120,861) $448,782
======== ========= ========
</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 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ----------
(Thousands of Dollars)
<S> <C> <C> <C>
Net income (loss) before extraordinary item
and cumulative effect of change in accounting
principle.................................... $510,184 $(239,215) $ 666,100
Net income taxes charged (credited) to
continuing operations........................ 322,828 (120,861) 448,782
Provision for dividends on ComEd preferred and
preference stocks............................ 56,884 60,486 64,424
-------- --------- ----------
Pre-tax net income (loss) before extraordinary
item, cumulative effect and provision for
dividends.................................... $889,896 $(299,590) $1,179,306
======== ========= ==========
Effective income tax rate..................... 36.3% 40.3% 38.1%
======== ========= ==========
</TABLE>
The principal differences between net income taxes charged (credited) to
continuing operations and the amounts computed at the federal statutory rate
of 35% for the years 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Federal income taxes computed at statutory rate. $311,464 $(104,857) $412,757
Equity component of AFUDC which was excluded
from taxable income............................ (390) (8,320) (7,272)
Amortization of investment tax credits.......... (25,503) (53,541) (33,378)
State income taxes, net of federal income taxes. 40,899 (682) 58,387
Differences between book and tax accounting,
primarily property-related deductions.......... (3,642) 46,539 18,288
-------- --------- --------
Net income taxes charged (credited) to
continuing operations.......................... $322,828 $(120,861) $448,782
======== ========= ========
</TABLE>
The effects of an income tax refund related to prior years were recorded in
1996, resulting in a positive impact of $26 million (after-tax), or $0.12 per
common share (basic).
B-54
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(19) Taxes, Except Income Taxes
Provisions for taxes, except income taxes, for the years 1998, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(Thousands of Dollars)
<S> <C> <C> <C>
Illinois electricity excise tax............... $126,481 $228,350 $227,062
Illinois invested capital..................... -- 99,503 104,663
Illinois electricity distribution tax......... 110,025 -- --
Municipal utility gross receipts.............. 152,879 168,094 168,715
Real estate................................... 125,521 151,508 129,770
Municipal compensation........................ 78,010 78,286 78,544
Other--net.................................... 106,918 75,145 74,777
-------- -------- --------
$699,834 $800,886 $783,531
======== ======== ========
</TABLE>
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
Effective August 1, 1998, as provided for by the 1997 Act, the Illinois
electricity excise tax and certain municipal utility taxes are recorded as
liabilities. Previously, similar taxes were presented on the Statements of
Consolidated Operations as revenue and expense. The reduction in operating
revenues and taxes, except income taxes, due to the change in presentation for
such taxes was approximately $95 million for 1998. This change in the
presentation for such taxes did not have an effect on results of operations.
ComEd's real estate taxes in 1996 reflect a credit of $23 million which
related to the year 1995.
See Note 22 for additional information regarding Illinois invested capital
taxes.
(20) Lease Obligations of Subsidiary Companies
Under its nuclear fuel lease arrangement, ComEd may sell and lease back
nuclear fuel from a lessor who may borrow an aggregate of $700 million,
consisting of $300 million of commercial paper/bank borrowings and $400
million of intermediate term notes, to finance the transactions. With respect
to the commercial paper/bank borrowings portion, $300 million will expire on
November 23, 1999. With respect to the intermediate term notes, $60 million
expires on November 23, 1999, and an additional portion each November 23
thereafter through November 23, 2003. At December 31, 1998, ComEd's obligation
to the lessor for leased nuclear fuel amounted to approximately $529 million.
As a result of the permanent cessation of nuclear generation operations at
Zion Station, ComEd repurchased approximately $100 million of nuclear fuel
assemblies held under the nuclear fuel lease arrangements at Zion Station in
June 1998. See Note 5 for additional information regarding the permanent
cessation of nuclear generation operations at Zion Station. ComEd has agreed
to make lease payments which cover the amortization of the nuclear fuel used
in ComEd's reactors plus the lessor's related financing costs. ComEd has an
obligation for spent nuclear fuel disposal costs of leased nuclear fuel.
As of December 31, 1998, future minimum rental payments, net of executory
costs, for capital leases are estimated to aggregate to $589 million,
including $217 million in 1999, $164 million in 2000, $99 million in 2001, $60
million in 2002, $33 million in 2003 and $16 million in 2004-2005. The
estimated interest component of such rental payments aggregates $64 million.
The estimated portions of obligations due within one year under capital leases
of $195 million and $241 million at December 31, 1998 and 1997, respectively,
were included in current liabilities on the Consolidated Balance Sheets.
B-55
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Future minimum rental payments at December 31, 1998 for operating leases are
estimated to aggregate to $316 million, including $38 million in 1999, $35
million in 2000, $30 million in 2001, $27 million in 2002, $25 million in 2003
and $161 million in 2004-2043.
(21) Joint Plant Ownership
ComEd has a 75% undivided ownership interest in the Quad Cities nuclear
generating station. Further, ComEd is responsible for 75% of all costs which
are charged to appropriate investment and O&M accounts, and provides its own
financing. ComEd's net plant investment, including construction work in
progress, in Quad Cities Station on the Consolidated Balance Sheets was $5
million at December 31, 1998, after reflecting the accounting impairment
recorded in the second quarter of 1998. See Note 2 for additional information.
(22) Commitments and Contingent Liabilities
Purchase commitments, principally related to construction and nuclear fuel,
approximated $366 million at December 31, 1998, comprised of $335 million for
ComEd, $21 million for UT Holdings and $10 million for Unicom Energy Services.
In addition, ComEd has substantial commitments for the purchase of coal.
ComEd's coal costs are high compared to those of other utilities. ComEd's
western coal contracts and its rail contracts for delivery of the western coal
provide for the purchase of certain coal at prices substantially above
currently prevailing market prices. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations," subcaption "Liquidity and
Capital Resources--UTILITY OPERATIONS--Construction Program," for additional
information regarding ComEd's purchase commitments.
ComEd is a member of NEIL which provides insurance coverage against property
damage and associated replacement power costs occurring at members' nuclear
generating facilities. All companies insured with NEIL are subject to
retrospective premium adjustments if losses exceed accumulated reserve funds.
Capital has been accumulated in the reserve funds such that ComEd would not be
liable for any single incident. However, ComEd could be subject to assessments
in any policy year for each of three types of coverage provided. The maximum
assessments are approximately $53 million for primary property damage, $73
million for excess property damage and $22 million for replacement power.
Prior to January 1, 1998, the primary property damage coverage described was
provided by NML, another mutual insurance company which merged into NEIL. The
merger did not affect ComEd's obligations or coverage.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses,
ComEd would currently be subject to a maximum assessment of $1,145 million in
the event of an incident, limited to a maximum of $130 million in any calendar
year.
In addition, ComEd participates in the American Nuclear Insurers Master
Worker Program, which provides coverage for worker tort claims filed for
bodily injury caused by the nuclear energy hazard. This program was modified,
effective January 1, 1998, to provide coverage to all workers whose "nuclear-
related employment" began on or after the commencement date of reactor
operations. ComEd will not be liable for a retrospective assessment under this
new policy. However, ComEd is still subject to a maximum retroactive assesment
of up to $36 million in the event losses incurred under the small number of
policies in the old program exceed accumulated reserves.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that
B-56
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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. With respect to Cotter,
in 1994 a federal jury returned nominal dollar verdicts against Cotter on
eight bellwether plaintiffs' claims in the 1989 cases, which verdicts were
upheld on appeal. The remaining claims in the 1989 actions have been settled
and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v.
Cotter (United States District Court for the District of Colorado, Civil
Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991
cases. The verdict against Cotter included compensatory and punitive damages
totaling approximately $3 million (not including prejudgment interest, which
has not yet been calculated, and which Cotter anticipates may bring the total
award to under $6 million), together with medical monitoring. The matter is
currently on appeal. Although the other 1991 cases will necessarily involve
the resolution of numerous contested issues of fact and law, Unicom and
ComEd's determination is that these actions will not have a material impact on
their financial position or results of operations.
ComEd is involved in administrative and legal proceedings concerning air
quality, water quality and other matters. The outcome of these proceedings may
require increases in future construction expenditures and operating expenses
and changes in operating procedures. ComEd and its subsidiaries are or are
likely to become parties to proceedings initiated by the U.S. EPA, state
agencies and/or other responsible parties under CERCLA with respect to a
number of sites, including MGP sites, or may voluntarily undertake to
investigate and remediate sites for which they may be liable under CERCLA.
ComEd generally did not operate MGPs as a corporate entity but did, however,
acquire MGP sites as part of the absorption of smaller utilities.
Approximately half of these sites were transferred to Northern Illinois Gas
Company as part of a general conveyance in 1954. ComEd also acquired former
MGP sites as vacant real estate on which ComEd facilities have been
constructed. To date, ComEd has identified 44 former MGP sites for which it
may be liable for remediation. ComEd presently estimates that its costs of
former MGP site investigation and remediation will aggregate from $25 million
to $150 million in current-year (1999) dollars. It is expected that the costs
associated with investigation and remediation of former MGP sites will be
incurred over a period not to exceed 30 years. Because ComEd is not able to
determine the most probable liability for such MGP costs, in accordance with
accounting standards, a reserve of $25 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets as of December 31,
1998 and 1997, which reflects the low end of the range of ComEd's estimate of
the liability associated with former MGP sites. In addition, as of December
31, 1998 and 1997, a reserve of $8 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets, representing
ComEd's estimate of the liability associated with cleanup costs of remediation
sites other than former MGP sites. Approximately half of this reserve relates
to anticipated cleanup costs associated with a property formerly used as a
tannery which was purchased by ComEd in 1973. Unicom and ComEd presently
estimate that ComEd's costs of investigating and remediating the former MGP
and other remediation sites, pursuant to CERCLA and state environmental laws,
will not have a material impact on the financial position or results of
operations of Unicom or ComEd. These cost estimates are based on currently
available information regarding the responsible parties likely to share in the
costs of responding to site contamination, the extent of contamination at
sites for which the investigation has not yet been completed and the cleanup
levels to which sites are expected to have to be remediated.
The IDR has issued Notices of Tax Liability to ComEd alleging deficiencies
in Illinois invested capital tax payments for the years 1988 through 1996. The
alleged deficiencies including interest
B-57
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
and penalties totaled approximately $45 million as of December 31, 1998. ComEd
has protested the notices, and the matter is currently pending before the
IDR's Office of Administrative Hearings. Interest will continue to accrue on
the alleged tax deficiencies.
(23) Quarterly Financial Information
<TABLE>
<CAPTION>
Average Basic
Number of Earnings/
Common (Loss)
Net Shares Per
Operating Operating Income/ Outstanding Common
Three Months Ended(a) Revenues Income (Loss) (Basic) Share
- - --------------------- ---------- --------- ----------- ----------- ---------
(Thousands Except per Share Data)
<S> <C> <C> <C> <C> <C>
March 31, 1998.......... $1,712,235 $190,414 $ 53,715 216,707 $ 0.25
June 30, 1998........... $1,779,146 $215,146 $ 80,458 216,897 $ 0.37
September 30, 1998...... $2,095,699 $394,707 $ 264,822 217,024 $ 1.22
December 31, 1998....... $1,564,173 $206,427 $ 111,189 217,141 $ 0.51
March 31, 1997.......... $1,670,722 $214,912 $ 262,370 216,053 $ 1.21
June 30, 1997........... $1,686,422 $153,076 $ 5,494 216,368 $ 0.03
September 30, 1997...... $2,070,912 $386,999 $ 240,332 216,409 $ 1.11
December 31, 1997....... $1,654,966 $157,080 $(1,361,046) 216,489 $(6.29)
</TABLE>
(a) The March 31, 1997 Net Income/(Loss) includes $197 million (after-tax), or
$0.91 per common share (basic), for the cumulative effect of a change in
accounting principle.
(24) Subsequent Events
ComEd redeemed the following preference stock, first mortgage bonds and
sinking fund debentures on January 19, 1999, January 27, 1999 and February 16,
1999, respectively.
<TABLE>
<CAPTION>
Preference Stock
--------------------------------------------------------------------------
Shares
Series Outstanding Principal Amount
------ ----------- ----------------------
(Thousands of Dollars)
<S> <C> <C>
$8.40.................................. 750,000 $ 74,175
$8.38.................................. 750,000 73,566
$2.00.................................. 2,000,000 51,560
$1.96.................................. 2,000,000 52,440
$1.90.................................. 4,249,549 106,239
$7.24.................................. 750,000 74,340
$9.25.................................. 450,000 45,000
$8.85.................................. 187,500 18,750
$8.40 Series B......................... 240,000 23,838
$8.20.................................. 142,845 14,285
---------- --------
11,519,894 $534,193
========== ========
</TABLE>
B-58
<PAGE>
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Concluded
<TABLE>
<CAPTION>
First Mortgage Bonds
-------------------------------------------------------------------------
Principal Amount
Series ----------------------
------------------------------
(Thousands of Dollars)
<S> <C>
9 1/8% due October 15, 2021....................... $125,000
8 7/8% due October 1, 2021........................ 100,000
8 1/8% due January 15, 2007....................... 180,000
8% due October 15, 2003........................... 125,000
7 5/8% due June 1, 2003........................... 100,000
7 1/2% due January 1, 2001........................ 100,000
--------
$730,000
========
</TABLE>
<TABLE>
<CAPTION>
Sinking Fund Debentures
-------------------------------------------------------------------------
Principal Amount
Series ----------------------
------------------------------
(Thousands of Dollars)
<S> <C>
7 5/8% due February 15, 2003...................... $56,000(1)
7 5/8% due February 15, 2003...................... 2,000
-------
$58,000
=======
</TABLE>
--------
(1)Optional Redemption
In response to a tender offer, ComEd reacquired $229 million of the
following first mortgage bonds in early February 1999.
<TABLE>
<CAPTION>
Principal Amount
Series ----------------------
------------------------------
(Thousands of Dollars)
<S> <C>
9 3/8% due February 15, 2000...................... $ 82,655
9 3/4% due February 15, 2020...................... 146,547
----------------
$ 229,202
================
</TABLE>
In the first quarter of 1999, ComEd expects to record losses and premiums
related to the early redemptions and the tender offer of the above-mentioned
first mortgage bonds, preference stock and sinking fund debentures, which will
reduce net income on common stock by approximately $38 million (after-tax), or
$0.17 per common share.
In addition to the debt and preference stock redemptions and the tender
offer discussed above, Unicom also has announced plans to repurchase
approximately $750 million of Unicom common stock using the proceeds it
receives from ComEd's repurchase of its common stock held by Unicom. The
remaining proceeds will be used for the payment of fees and additional debt
and equity redemptions. See Note 7 for additional information.
B-59
<PAGE>
SUBSEQUENT EVENTS
In March 1999, Commonwealth Edison Company ("ComEd") announced that it had
entered into an Asset Sale Agreement providing for the sale of substantially
all of the assets of its fossil generation business to Edison Mission Energy.
ComEd also announced that it had reached a settlement agreement with the City
of Chicago, Illinois ("City") regarding their pending arbitration proceeding
concerning ComEd's franchise agreement with the City.
Asset Sale Agreement
The Asset Sale Agreement provides for the sale of substantially all of the
assets of ComEd's fossil generation business for a cash purchase price of
$4.813 billion. The assets include ComEd's six coal-fired generating plants,
an oil and gas-fired plant, and nine peaking unit sites, which together
represent an aggregate generating capacity of approximately 9,772 megawatts.
Completion of the sale is subject to certain regulatory filings and approvals
and is expected to occur during the fourth quarter of 1999.
The sale is expected to produce a net after-tax gain of approximately $1.7
billion after recognizing the costs associated with ComEd's long-term coal
contract obligations and certain employee related costs. However, the net gain
will be utilized to recover the after-tax effect of the amortization of the
regulatory asset established in 1998 as a result of an impairment evaluation
of production plant costs. At December 31, 1998, the regulatory asset for
impaired production plant was approximately $3.0 billion; and it is expected
to be fully amortized by year end 1999 as a result of the expected gain on the
sale of the fossil plants. Net cash proceeds from the sale are expected to
exceed $3.0 billion and will be used to fund ComEd's program to reinforce and
enhance its transmission and distribution system, to support ComEd's
improvement of its nuclear generation operations and to provide a foundation
for growth in other business opportunities.
As part of the sale transaction, ComEd will enter into transitional power
purchase agreements with the buyer. The agreement regarding the coal-fired
units would cover a declining number of generating units over a five-year
term, subject to an option in favor of ComEd to restore some or all of the
units in later years of the agreement. The agreements regarding the oil and
gas-fired plant and the peaking units cover the entire capacity of such
generating units for a five-year term, subject to ComEd's option commencing in
year three to terminate the agreements as to some or all of the generating
units. Each of the agreements provides for a monthly capacity charge, based
upon the capacity of the generating units under contract and subject to
adjustment based upon the availability of those generating units, as well as
charges for delivered energy. Such charges will increase ComEd's purchased
power costs, although the disposition of the fossil generation business will
reduce ComEd's operation and maintenance expenditures.
Settlement Agreement
The settlement agreement with the City is intended to end the arbitration
proceeding regarding the January 1, 1992 franchise agreement and a
supplemental agreement between ComEd and the City. Under the terms of the
settlement agreement, the pending arbitration is to be dismissed with
prejudice and the City is to release ComEd from all claims the City may have
under the supplemental agreement. The settlement agreement is subject to the
approval of the City Council.
As part of the settlement agreement, ComEd and the City have agreed to a
revised combination of ongoing work under the franchise agreement and new
initiatives that will result in more than $1 billion in defined expenditures
by ComEd to improve electric service in the City, including approximately $547
million in expenditures to date. The additional expenditures include upgrades
to distribution substations, enhancements to transmission circuits, and
enhancements to the distribution
B-60
<PAGE>
system. These investments, which are estimated to total $341 million, must be
made through 2004. The settlement agreement provides that ComEd will be
subject to liquidated damages if the projects are not completed by various
dates, unless it is prevented from doing so by events beyond its reasonable
control. The settlement agreement contains provisions regarding both regular
reporting of the status of its implementation and dispute resolution.
The settlement agreement also contains several provisions regarding new
environmental initiatives. ComEd has agreed to spend $12 million by the end of
2004 to purchase and install within the City at least 750 kilowatts of solar
photovoltaic equipment. In addition, ComEd has agreed to implement new demand-
side initiatives with the goal of reducing its peak summer load in 1999 and
2000 by an estimated 75 megawatts.
ComEd and the City have also agreed as part of the settlement agreement to
establish an Energy Reliability and Capacity Account (the "Reliability
Account") to help ensure an adequate and reliable electric supply for the
City. ComEd must deposit $25 million into the Reliability Account within ten
business days after the effective date of the settlement agreement and up to
$25 million at the end of each of the years 2000, 2001 and 2002.
ComEd's current construction budget considers the expenditures discussed
above related to transmission and distribution projects, and therefore, no
changes to that budget are expected. However, ComEd does expect to record a
charge to earnings of approximately $15 million (after-tax), in the first
quarter of 1999, primarily related to its obligation to establish and
contribute to the Reliability Account.
In addition, as part of the aforementioned Asset Sale Agreement with Edison
Mission Energy, Edison Mission Energy has agreed to install 500 megawatts of
new gas-fired generating capacity within the City within four years of the
closing of the sale of the fossil generation business; otherwise, ComEd will
be required to install such capacity. The City has also agreed in the
settlement agreement to support ComEd's sale of its Fisk Generating Station,
Crawford Generating Station and Calumet peaking generating units.
B-61
<PAGE>
[X] Please mark your votes as in this example. 9500
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 LISTED ON THE REVERSE SIDE, 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):
________________________________________________________
FOR AGAINST ABSTAIN
B. Amendment of the Long-Term Incentive Plan [_] [_] [_]
C. Material Terms of Long-Term Performance Unit
Awards [_] [_] [_]
D. Appointment of Auditors [_] [_] [_]
E. Shareholder Proposal regarding a new energy policy [_] [_] [_]
________________________________________________________________________________
------------------------------------
Special Action
------------------------------------
Discontinue Annual Report
Mailing for This Account Only. [_]
Change of Address Noted
on Other Side. [_]
____________________________________
SIGNATURE(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 .
[LOGO OF UNICOM]
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 Tuesday, May 25,
1999 in the Grand and State Ballrooms of the Palmer House Hilton, 17 East Monroe
Street, Chicago, 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 sending
a written notice to John P. McGarrity, Secretary, Unicom, by signing and
delivering a more recently dated proxy or by attending the meeting and voting in
person.
Sincerely,
/s/John W. Rowe
John W. Rowe
Chairman, President
And Chief Executive Officer
<PAGE>
- - --------------------------------------------------------------------------------
Unicom Corporation PROXY
One First National Plaza
[LOGO OF UNICOM] P.O.Box A-3005
Chicago, Illinois 60690-3005
________________________________________________________________________________
This proxy is solicited on behalf of the Board of Directors of
Unicom Corporation for the
Annual Meeting of Shareholders to be held on May 25, 1999.
The undersigned appoints Pamela B. Strobel and John P. McGarrity, or
either of them, as Proxies, each with the power to appoint his or her
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 25, 1999, 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, Cantu, Compton, DeMars, Gin, Jacobs,
Jannotta, Moler, Rogers, Rowe and Thomas.
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 .
