- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneQuarterly Period Ended September 30, 19992001
OR
[_][ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Name of Registrant; State of Incorporation; Address of IRS Employer
Number Address;Principal Executive Offices; and Telephone Number Identification No.
---------- ----------------------------------- ------------------
Number
- --------------------- ---------------------------------------------------------- -------------------------
1-11375 UNICOM
1-16169 EXELON CORPORATION 36-3961038
(an Illinois23-2990190
(a Pennsylvania corporation)
37th Floor,
10 South Dearborn Street Post Office- 37th Floor
P.O. Box A-3005805379
Chicago, Illinois 60690-3005
312/394-739960680-5379
(312) 394-4321
1-1839 COMMONWEALTH EDISON COMPANY 36-0938600
(an Illinois corporation)
37th Floor, 10 South Dearborn Street Post Office- 37th Floor
P.O. Box 767805379
Chicago, Illinois 60690-0767
312/60680-5379
(312) 394-4321
1-1401 PECO ENERGY COMPANY 23-0970240
(a Pennsylvania corporation)
P.O. Box 8699
2301 Market Street
Philadelphia, Pennsylvania 19101-8699
(215) 841-4000
Indicate by check mark whether the registrantsregistrant (1) havehas filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) havehas been subject to such
filing requirements for the past 90 days.
Yes X[X] No [__]
The number of shares outstanding of each registrant's common stock as of
November 2, 2001 was as follows:
Exelon Corporation Common Stock, outstanding at July 31, 1999:
Unicom Corporation 217,349,702 shareswithout par value 320,884,595
Commonwealth Edison Company 213,972,307 shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------Common Stock,
$12.50 par value 128,031,647
PECO Energy Company Common Stock, without par value 170,478,507
1
Unicom Corporation
and
Commonwealth Edison Company
Amended Quarterly ReportsTABLE OF CONTENTS
Page No.
--------
Explanatory Note 3
Filing Format 3
Forward-Looking Statements 3
PART I. FINANCIAL INFORMATION 4
ITEM 1. FINANCIAL STATEMENTS 4
Exelon Corporation
Condensed Consolidated Statements of Income and Comprehensive Income 5
Condensed Consolidated Balance Sheets 6
Condensed Consolidated Statements of Cash Flows 8
Commonwealth Edison Company
Condensed Consolidated Statements of Income and Comprehensive Income 9
Condensed Consolidated Balance Sheets 10
Condensed Consolidated Statements of Cash Flows 12
PECO Energy Company
Condensed Consolidated Statements of Income and Comprehensive Income 13
Condensed Consolidated Balance Sheets 14
Condensed Consolidated Statements of Cash Flows 16
Notes to Condensed Consolidated Financial Statements 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 36
Exelon Corporation 36
Commonwealth Edison Company 47
PECO Energy Company 55
SIGNATURES 63
2
Explanatory Note
This amendment to Exelon Corporation's quarterly report on Form 10-Q/A
to the Securities and Exchange Commission
for the Quarterly Period Ended June 30, 1999
This document contains the amended Quarterly Reports on Form 10-Q/A10-Q
for the quarterly period ended JuneSeptember 30, 19992001 reflects the restatement for
eachadditional net realized and unrealized losses of UnicomExelon Generation Company, LLC
(Generation) nuclear decommissioning trust funds that were incurred prior to
September 30, 2001 but not recorded. See Note 2. No attempt has been made in
this Form 10-Q/A to modify or update other disclosures as presented in the
original Form 10-Q except as required to reflect the effects of the restatement.
Filing Format
This combined Form 10-Q/A is separately being filed by Exelon
Corporation, and
Commonwealth Edison Company and PECO Energy Company. Information
contained herein relating to anany individual registrant ishas been filed by such
registrant on its own behalf. Accordingly, except for its subsidiaries, Commonwealth Edison CompanyEach registrant makes no representation as to
information relating to Unicom Corporation or to anythe other companies affiliated with Unicom Corporation. In addition, several
portions of these Quarterly Reports contain forward-looking statements; and
reference is made to pages 58-59registrants.
Forward-Looking Statements
Except for the location and characterhistorical information contained herein, certain of such
statements.
INDEX
Page
-----
Definitions.............................................................. 3
PART I. FINANCIAL INFORMATION
Unicom Corporation and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 4
Statements of Consolidated Operations for the three months, six
months and twelve months ended June 30, 1999 and 1998............... 5
Consolidated Balance Sheets--June 30, 1999 and December 31, 1998..... 6-7
Statements of Consolidated Capitalization--June 30, 1999 and December
31, 1998............................................................ 8
Statements of Consolidated Retained Earnings/(Deficit) for the three
months, six months and twelve months ended June 30, 1999 and 1998... 9
Statements of Consolidated Cash Flows for the three months, six
months and twelve months ended June 30, 1999 and 1998............... 10
Notes to Financial Statements........................................ 11-38
Management's Discussion and Analysis of Financial Condition and Results
of
Operations............................................................ 39-59
Commonwealth Edison Company and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 60
Statements of Consolidated Operations for the three months, six
months and twelve months ended June 30, 1999 and 1998............... 61
Consolidated Balance Sheets--June 30, 1999 and December 31, 1998..... 62-63
Statements of Consolidated Capitalization--June 30, 1999 and December
31, 1998............................................................ 64
Statements of Consolidated Retained Earnings/(Deficit) for the three
months, six months and twelve months ended June 30, 1999 and 1998... 65
Statements of Consolidated Cash Flows for the three months, six
months and twelve months ended June 30, 1999 and 1998............... 66
Notes to Financial Statements........................................ 67-72
Management's Discussion and Analysis of Financial Condition and Results
of
Operations............................................................ 73
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 74
Item 4. Submission of Matters to a Vote of Security Holders............ 75-76
Item 6. Exhibits and Reports on Form 8-K............................... 76
SIGNATURES............................................................... 77
2
DEFINITIONS
The following terms are usedthe
matters discussed in this document with the following meanings:
Term Meaning
---------------------- -------------------------------------------------------
1997 Act Illinois Electric Service Customer Choice and Rate
Relief Law of 1997
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
APX Automated Power Exchange Inc., a California company
ARES Alternative Retail Electric Suppliers
CERCLA Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended
City City of Chicago
ComEd Commonwealth Edison Company, a Unicom subsidiary
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
Edison Development Edison Development Canada Inc., a ComEd subsidiary
EEI Edison Electric Institute
EME Edison Mission Energy, an Edison International
subsidiary
EMS Energy Management System
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
Fossil plant ComEd's six coal-fired generating plants, an oil and
gas-fired plant, and nine peaking unit sites
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 Energy Institute
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
Northwind Midway Northwind Midway, LLC, a UT Holdings subsidiary
NPL National Priorities List
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
SCADA Supervisory Control And Data Acquisition
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 Investment Unicom Investment 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
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unicom Corporation:
We have audited the accompanying consolidated balance sheetsReport are forward-looking statements that are subject
to risks and statements
of consolidated capitalization of Unicom Corporation (an Illinois corporation)
and subsidiary companies as of June 30, 1999 and December 31, 1998, and the
related statements of consolidated operations, retained earnings/(deficit) and
cash flows for the three-month, six-month and twelve-month periods ended June
30, 1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility isuncertainties. The factors that could cause actual results to
express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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,differ materially include those discussed herein 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 June 30, 1999 and December 31, 1998, and the
results of their operations and their cash flows for the three-month, six-
month and twelve-month periods ended June 30, 1999 and 1998, in conformity
with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
August 13, 1999
(except with respect
to Note 1 as to
which the date is
May 12, 2000)
4
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months,
six months and twelve months ended June 30, 1999 and 1998 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, asset
dispositions, 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.
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
---------------------- ---------------------- -----------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- -----------
(Thousands Except Per Share Data)
Operating Revenues...... $1,685,714 $1,779,146 $3,223,518 $3,444,043 $6,882,885 $ 7,137,887
---------- ---------- ---------- ---------- ---------- -----------
Operating Expenses and
Taxes:
Fuel................... $ 259,639 $ 241,873 $ 494,473 $ 464,166 $1,087,835 $ 1,067,845
Purchased power........ 98,301 279,359 169,983 452,751 465,249 636,316
Operation and
maintenance........... 650,096 565,598 1,205,498 1,134,594 2,355,938 2,362,127
Depreciation and
amortization.......... 266,947 232,581 498,279 481,483 960,083 981,956
Taxes (except income).. 130,135 185,062 262,495 392,488 569,841 803,258
Income taxes........... 60,347 60,945 123,611 116,091 360,265 343,534
Investment tax credits
deferred--net ........ (7,021) (6,888) (14,042) (14,048) (27,723) (29,270)
---------- ---------- ---------- ---------- ---------- -----------
$1,458,444 $1,558,530 $2,740,297 $3,027,525 $5,771,488 $ 6,165,766
---------- ---------- ---------- ---------- ---------- -----------
Operating Income........ $ 227,270 $ 220,616 $ 483,221 $ 416,518 $1,111,397 $ 972,121
---------- ---------- ---------- ---------- ---------- -----------
Other Income and
(Deductions):
Interest on long-term
debt, net of interest
capitalized........... $ (135,952) $ (110,640) $ (278,510) $ (223,394) $ (499,439) $ (462,863)
Interest on notes
payable............... (3,769) (3,207) (7,721) (9,016) (18,264) (12,900)
Allowance for funds
used during
construction.......... 5,190 4,698 9,401 7,858 18,006 30,394
Income taxes
applicable to
nonoperating
activities............ (1,833) 3,324 (3,249) 17,275 (17,827) 34,830
Provisions for
dividends and
redemption premiums--
Preferred and
preference stocks of
ComEd............... (3,043) (14,462) (18,340) (29,009) (46,215) (58,483)
ComEd-obligated
mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely
ComEd's subordinated
debt securities..... (7,427) (7,428) (14,855) (14,855) (29,710) (29,639)
Loss on nuclear plant
closure............... -- -- -- -- -- (885,611)
Income tax effects of
nuclear plant
closure............... -- -- -- -- -- 362,952
Miscellaneous--net..... 38,956 (12,443) 46,664 (31,204) 74,674 (127,058)
---------- ---------- ---------- ---------- ---------- -----------
$ (107,878) $ (140,158) $ (266,610) $ (282,345) $ (518,775) $(1,148,378)
---------- ---------- ---------- ---------- ---------- -----------
Net Income/(Loss) before
Extraordinary Items.... $ 119,392 $ 80,458 $ 216,611 $ 134,173 $ 592,622 $ (176,257)
Extraordinary Losses,
less Applicable Income
Taxes.................. -- -- (27,576) -- (27,576) (810,335)
---------- ---------- ---------- ---------- ---------- -----------
Net Income/(Loss)....... $ 119,392 $ 80,458 $ 189,035 $ 134,173 $ 565,046 $ (986,592)
========== ========== ========== ========== ========== ===========
Earnings/(loss) per
common share before
extraordinary items--
Basic.................. $ 0.55 $ 0.37 $ 1.00 $ 0.62 $ 2.73 $ (0.80)
Diluted................ $ 0.55 $ 0.37 $ 1.00 $ 0.62 $ 2.72 $ (0.80)
Extraordinary losses,
less applicable income
taxes (basic and
diluted)............... -- -- (0.13) -- (0.13) (3.75)
Earnings/(loss) per
common share--
Basic.................. $ 0.55 $ 0.37 $ 0.87 $ 0.62 $ 2.60 $ (4.55)
Diluted................ $ 0.55 $ 0.37 $ 0.87 $ 0.62 $ 2.59 $ (4.55)
Cash Dividends Declared
per Common Share....... $ 0.40 $ 0.40 $ 0.80 $ 0.80 $ 1.60 $ 1.60
The accompanying Notes to Financial Statements are an integral part of the
above statements.
5
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1999 1998
------ ----------- ------------
(Thousands of Dollars)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $872 million and
$858 million, respectively)....................... $28,245,096 $27,801,246
Less--Accumulated provision for depreciation....... 15,662,340 15,234,320
----------- -----------
$12,582,756 $12,566,926
Nuclear fuel, at amortized cost.................... 856,379 874,979
----------- -----------
$13,439,135 $13,441,905
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 2,450,974 $ 2,267,317
Subsidiary companies............................... 42,398 41,150
Other, at cost..................................... 269,575 275,794
----------- -----------
$ 2,762,947 $ 2,584,261
----------- -----------
Current Assets:
Cash............................................... $ 40,081 $ 28,893
Temporary cash investments......................... 27,811 26,935
Cash held for redemption of securities............. 671,233 3,062,816
Special deposits................................... 382 271
Receivables--
Customers........................................ 1,342,273 1,369,701
Forward share repurchase contract................ 695,530 --
Other............................................ 114,187 136,701
Provisions for uncollectible accounts............ (64,997) (48,645)
Coal and fuel oil, at average cost................. 146,025 135,415
Materials and supplies, at average cost............ 239,513 232,246
Deferred income taxes related to current assets and
liabilities....................................... 35,863 24,339
Prepayments and other.............................. 42,744 20,301
----------- -----------
$ 3,290,645 $ 4,988,973
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 4,432,593 $ 4,578,427
Other.............................................. 71,379 96,907
----------- -----------
$ 4,503,972 $ 4,675,334
----------- -----------
$23,996,699 $25,690,473
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
6
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
CAPITALIZATION AND LIABILITIES 1999 1998
------------------------------ ----------- ------------
(Thousands of Dollars)
Capitalization (see accompanying statements):
Common stock equity................................. $ 5,101,309 $ 5,099,444
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements......... 1,836 74,488
Subject to mandatory redemption requirements...... -- 69,475
ComEd-obligated mandatorily redeemable preferred se-
curities of subsidiary trusts holding solely
ComEd's subordinated debt securities*.............. 350,000 350,000
Long-term debt...................................... 7,374,057 7,792,502
----------- -----------
$12,827,202 $13,385,909
----------- -----------
Current Liabilities:
Notes payable....................................... $ 411,850 $ 292,963
Current portion of long-term debt, redeemable pref-
erence stock
and capitalized lease obligations of subsidiary
companies.......................................... 1,222,769 2,314,443
Accounts payable.................................... 491,135 604,936
Accrued interest.................................... 150,724 180,674
Accrued taxes....................................... 251,463 134,976
Dividends payable................................... 95,803 105,133
Customer deposits................................... 62,889 56,954
Accrued plant closing costs......................... 43,411 78,430
Other............................................... 136,138 155,262
----------- -----------
$ 2,866,182 $ 3,923,771
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,731,425 $ 3,805,460
Nuclear decommissioning liability for retired
plants............................................. 1,252,100 1,215,400
Accumulated deferred investment tax credits......... 544,262 562,285
Accrued spent nuclear fuel disposal fee and related
interest........................................... 745,066 728,413
Obligations under capital leases of subsidiary com-
panies............................................. 257,611 333,653
Regulatory liabilities.............................. 587,639 595,005
Other............................................... 1,185,212 1,140,577
----------- -----------
$ 8,303,315 $ 8,380,793
----------- -----------
Commitments and Contingent Liabilities (Note 21)
$23,996,699 $25,690,473
=========== ===========
*As describedthose listed in Note
108 of Notes to Condensed Consolidated Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
7
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
June 30, December 31,
1999 1998
----------- ------------
(Thousands of Dollars)
Common Stock Equity:
Common stock, without par value--
Outstanding--217,287,495 shares and 217,094,560
shares, respectively.............................. $ 4,955,090 $ 4,966,630
Preference stock expense of ComEd................... (429) (3,199)
Retained earnings................................... 156,743 142,813
Treasury stock--264,406 shares and 178,982,
respectively....................................... (10,095) (6,800)
----------- -----------
$ 5,101,309 $ 5,099,444
----------- -----------
Preferred and Preference Stocks of ComEd--
Without Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--3,000,000 shares and 13,499,549
shares, respectively............................ $ 72,638 $ 504,957
Current redemption requirements for preference
stock includedthose discussed in current liabilities............ (72,638) (432,320)
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--57,725 shares and 58,211 shares,
respectively.................................... 1,836 1,851
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding............................ -- --
----------- -----------
$ 1,836 $ 74,488
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--700,000 shares and 1,720,345 shares,
respectively ................................... $ 69,475 $ 171,348
Current redemption requirements for preference
stock included
in current liabilities........................... (69,475) (101,873)
----------- -----------
$ -- $ 69,475
----------- -----------
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 1999 through 2003--6 3/8% to 9 3/8%...... $ 672,242 $ 1,080,000
Maturing 2004 through 2013--4.40% to 8 3/8%....... 1,305,400 1,485,400
Maturing 2014 through 2023--5.85% to 9 7/8%....... 1,609,442 1,981,000
----------- -----------
$ 3,587,084 $ 4,546,400
Transitional trust notes, due 2000 through 2008--
5.29% to 5.74%..................................... 3,260,000 3,400,000
Sinking fund debentures, due 1999 through 2011--2
3/4% to 7 5/8%..................................... 32,418 94,159
Pollution control obligations, due 2007 through
2014--3.45% to 5 7/8%.............................. 139,200 140,700
Other long-term debt................................ 1,319,713 1,259,204
Deposit for retirement of long-term debt............ (1,021) --
Current maturities of long-term debt included in
current liabilities................................ (910,642) (1,585,281)
Unamortized net debt discount and premium........... (52,695) (62,680)
----------- -----------
$ 7,374,057 $ 7,792,502
----------- -----------
$12,827,202 $13,385,909
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
8
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS/(DEFICIT)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ----------------- --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- -------- ----------
(Thousands of Dollars)
Balance at Beginning of
Period................. $ 124,991 $ (54,207) $142,813 $(21,184) $(60,832) $1,272,858
Add--Net income/(loss).. 119,392 80,458 189,035 134,173 565,046 (986,592)
--------- --------- -------- -------- -------- ----------
$ 244,383 $ 26,251 $331,848 $112,989 $504,214 $ 286,266
--------- --------- -------- -------- -------- ----------
Deduct--
Cash dividends
declared on
common stock........ $ 86,916 $ 86,774 $173,781 $173,513 $347,429 $ 346,689
Other capital stock
transactions--net... 724 309 1,324 308 42 409
--------- --------- -------- -------- -------- ----------
$ 87,640 $ 87,083 $175,105 $173,821 $347,471 $ 347,098
--------- --------- -------- -------- -------- ----------
Balance at End of Period
(Includes $509 million
and $292 million of
appropriated retained
earnings at June 30,
1999 and 1998,
respectively).......... $ 156,743 $ (60,832) $156,743 $(60,832) $156,743 $ (60,832)
========= ========= ======== ======== ======== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
9
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ---------------------- ------------------------
1999 1998 1999 1998 1999 1998
--------- --------- ----------- --------- ----------- -----------
(Thousands of Dollars)
Cash Flow from Operating
Activities:
Net income/(loss)...... $ 119,392 $ 80,458 $ 189,035 $ 134,173 $ 565,046 $ (986,592)
Adjustments to
reconcile net
income/(loss) to net
cash provided by
operating activities:
Depreciation and
amortization........ 285,472 246,768 531,784 508,778 1,017,175 1,035,998
Deferred income taxes
and investment tax
credits--net........ (44,664) (20,555) (98,320) 6,126 (34,806) (342,806)
Extraordinary loss
related to write-off
of certain net
regulatory assets... -- -- -- -- -- 810,335
Loss on nuclear plant
closure............. -- -- -- -- -- 885,611
Provisions/(payments)
for revenue
refunds--net........ 2,635 (10,966) (19,858) (45,470) 2,745 --
Equity component of
allowance for funds
used during
construction........ (2,003) (1,960) (3,756) (3,544) (7,170) (16,529)
Provisions/(payments)
for liability for
separation costs--
net................. (1,018) (389) (9,798) 7,036 (7,076) 22,219
Net effect on cash
flows of changes in:
Receivables........ (147,694) (204,705) 32,877 (143,254) (293,303) (209,152)
Coal and fuel oil.. 7,533 (48,322) (10,610) (84,508) 59,147 (25,022)
Materials and
supplies.......... (3,128) (6,672) (7,267) (11,893) 24,431 29,225
Accounts payable
excluding nuclear
fuel lease
principal payments
and separation
costs--net........ 27,956 138,409 (102,923) 101,042 (108,081) 150,574
Accrued interest
and taxes......... (43,887) 81,293 104,587 83,027 (8,107) 42,144
Other changes in
certain current
assets and
liabilities....... 24,148 34,861 51,998 53,651 143,880 247,446
Other--net........... 41,668 (4,656) 122,307 44,839 82,042 86,635
--------- --------- ----------- --------- ----------- -----------
$ 266,410 $ 283,564 $ 780,056 $ 650,003 $ 1,435,923 $ 1,730,086
--------- --------- ----------- --------- ----------- -----------
Cash Flow from Investing
Activities:
Construction
expenditures.......... $(249,618) $(259,787) $ (480,693) $(432,738) $ (974,552) $(1,013,800)
Nuclear fuel
expenditures.......... (63,862) (34,418) (113,947) (94,967) (185,147) (189,625)
Sales of generating
plants................ -- -- -- 177,454 -- 238,245
Equity component of
allowance for funds
used during
construction.......... 2,003 1,960 3,756 3,544 7,170 16,529
Contributions to
nuclear
decommissioning
funds................. -- -- (39,426) (80,077) (96,120) (114,721)
Other investments and
special deposits...... (7,886) 12,657 (12,701) (4,862) (28,281) 16,772
--------- --------- ----------- --------- ----------- -----------
$(319,363) $(279,588) $ (643,011) $(431,646) $(1,276,930) $(1,046,600)
--------- --------- ----------- --------- ----------- -----------
Cash Flow from Financing
Activities:
Issuance of
securities--
Transitional trust
notes................ $ -- $ -- $ -- $ -- $ 3,382,629 $ --
Other long-term debt.. 28,130 10,000 63,130 35,000 410,400 80,000
Capital stock......... 3,588 2,544 4,412 6,767 14,290 13,232
Retirement and
redemption of
securities--
Transitional trust
notes................ (140,000) -- (140,000) -- (140,000) --
Other long-term debt.. (5,355) (8,139) (1,061,010) (374,648) (1,302,220) (534,934)
Capital stock......... (51) (6,092) (564,264) (6,225) (598,905) (47,096)
Deposits and
securities held for
retirement and
redemption of
securities............ -- 3,069 -- (995) -- (766)
Prepayment of forward
share repurchase
contract.............. -- -- (662,113) -- (662,113) --
Cash dividends paid on
common stock.......... (86,864) (86,738) (173,670) (173,348) (347,276) (346,480)
Proceeds from
sale/leaseback of
nuclear fuel.......... -- 44,861 -- 61,426 39,612 130,109
Nuclear fuel lease
principal payments.... (48,191) (128,823) (101,936) (161,009) (196,531) (241,566)
Increase/(decrease) in
short-term
borrowings............ 191,036 110,196 118,887 331,696 (77,996) 226,096
--------- --------- ----------- --------- ----------- -----------
$ (57,707) $ (59,122) $(2,516,564) $(281,336) $ 521,890 $ (721,405)
--------- --------- ----------- --------- ----------- -----------
Change in Net Cash
Balance................ $(110,660) $ (55,146) $(2,379,519) $ (62,979) $ 680,883 $ (37,919)
Cash, Temporary Cash
Investments and Cash
Held for Redemption of
Securities:
Balance at Beginning
of Period........... 849,785 113,388 3,118,644 121,221 58,242 96,161
--------- --------- ----------- --------- ----------- -----------
Balance at End of
Period.............. $ 739,125 $ 58,242 $ 739,125 $ 58,242 $ 739,125 $ 58,242
========= ========= =========== ========= =========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
10
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,
Indiana Company, Edison Development, 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 net receivables were based on estimates in the latter part of 1998 and in
the first half of 1999 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 as of June 30,
1999 and December 31, 1998. See "Regulatory Assets and Liabilities" below
regarding the plant impairment recorded by ComEd in the second quarter of
1998.
11
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 June 30, 1999 and December 31, 1998 were as
follows:
June 30, December 31,
1999 1998
---------- ------------
(Thousands of Dollars)
Regulatory assets:
Impaired production plant............................. $2,856,809 $2,955,154
Deferred income taxes (1)............................. 667,728 680,356
Nuclear decommissioning costs--Dresden Unit 1......... 202,888 255,031
Nuclear decommissioning costs--Zion Units 1 and 2..... 486,043 443,130
Coal reserves......................................... 178,038 197,975
Unamortized loss on reacquired debt (2)............... 41,087 46,781
---------- ----------
$4,432,593 $4,578,427
========== ==========
Regulatory liabilities:
Deferred income taxes (1)............................. $ 587,639 $ 595,005
========== ==========
- --------
(1) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for
non-generation related temporary differences.
(2) 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.
ComEd performed a SFAS No. 121 impairment analysis in 1998 which concluded
that future revenues, excluding the collection of the CTC expected to be
recovered from electric supply services, would be insufficient to cover the
costs of certain of its generating assets. Because future regulated cash
flows, which include the CTC, tariff revenues and gains from the disposition
of assets, are expected to provide recovery of the impaired plant assets, a
regulatory asset was recorded for the same amount. This regulatory asset is
currently being amortized as it is recovered through regulated cash flows and,
along with the coal reserves regulatory asset, is expected to be substantially
recovered at the completion of the fossil plant sale. See Note 4 for
additional information regarding the fossil plant sale.
Recovery of the regulatory asset for Dresden Unit 1 and Zion Units 1 and 2
represents unrecovered nuclear decommissioning costs, which are expected to be
recovered over the periods 1999-2011 and 1999-2013, respectively, through a
separate rate recovery rider provided for by the 1997 Act. See "Depreciation,
Amortization of Regulatory Assets and Decommissioning" 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 13 for additional information concerning the disposal of spent
nuclear fuel, one-time fee and interest accrual on the one-time fee. Nuclear
fuel expenses, including leased fuel costs and provisions for spent nuclear
fuel disposal costs, were $92 million and $65 million for the three months
ended June 30, 1999 and 1998, respectively, $180 million and $123 million for
the six months ended June 30, 1999 and 1998, respectively, and $347 million
and $261 million for the twelve months ended June 30, 1999 and 1998,
respectively.
12
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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 June
30, 1999. It includes the City, an area of about 225 square miles with an
estimated population of approximately three million from which ComEd derived
approximately 30 percent of its ultimate consumer revenues for the three
months, six months and twelve months ended June 30, 1999. ComEd had
approximately 3.5 million electric customers at June 30, 1999.
As a result of the implementation of a new customer billing and information
system in July 1998, billing and collection delays have temporarily increased
accounts receivables from customers. Accounts receivable from customers
include $267 million and $331 million as of June 30, 1999 and December 31,
1998, respectively, for estimated unbilled revenues for service that has been
provided to customers, but for which bill issuance was delayed beyond the
normal date of issuance. ComEd has recorded increased provisions for
uncollectible accounts to recognize the estimated portion of receivables that
are not expected to be recoverable, primarily based on an aging analysis of
outstanding accounts receivable. Such provisions increased O&M expense by $25
million for the three months and six months ended June 30, 1999 and $35
million for the twelve months ended June 30, 1999, compared to normally
expected levels. Receivables from customers as of June 30, 1999 and December
31, 1998 also include $352 million and $266 million, respectively, for
estimated unbilled revenues for electric service that has been provided to
customers subsequent to the normal billing date and prior to the end of the
reporting period.
See Notes 2, 3 and 18 for additional information.
Depreciation, Amortization of Regulatory Assets and Decommissioning.
Depreciation, amortization of regulatory assets and decommissioning for the
three months, six months and twelve months ended June 30, 1999 and 1998 were
as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- ----------------- -------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Depreciation expense.... $180,587 $ 211,626 $358,025 $433,373 $ 712,708 $ 871,899
Amortization of
regulatory assets...... 65,405 -- 98,344 -- 163,555 7,636
--------- --------- -------- -------- --------- ---------
$ 245,992 $ 211,626 $456,369 $433,373 $ 876,263 $ 879,535
Decommissioning expense. 20,955 20,955 41,910 48,110 83,820 102,421
--------- --------- -------- -------- --------- ---------
$ 266,947 $ 232,581 $498,279 $481,483 $ 960,083 $ 981,956
========= ========= ======== ======== ========= =========
The increases in the recent three-month and six-month periods are primarily
due to additional amortization of $33 million recorded in the second quarter
of 1999. The decrease in the recent twelve-month period is primarily due to
the retirement of Zion Station in December 1997 and the sales of State Line
and Kincaid Stations in December 1997 and February 1998, respectively, as well
as increased depreciation in 1998 related to the replacement of the steam
generators.
Provisions for depreciation, including nuclear plant, were at average annual
rates of average depreciable utility plant and equipment for the three months,
six months and twelve months ended June 30, 1999 and 1998 as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ------------------ --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
Average annual
depreciation rates..... 2.66% 3.23% 2.65% 3.32% 2.69% 3.34%
13
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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. The decrease in the average depreciation rates for the periods in 1999,
compared to 1998, 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 depreciation 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 "Regulatory
Assets and Liabilities" above for additional information on the partial
impairment of production plant.
Nuclear plant decommissioning costs generally are accrued over the current
NRC license lives of the related nuclear generating units. The accrual is
based on an annual levelized cost of the unrecovered portion of estimated
decommissioning costs, which are escalated for expected inflation to the
expected time of decommissioning and are net of expected earnings on the trust
funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "ResultsOperations--Outlook" in Exelon Corporation's 2000 Annual Report, and other
factors discussed in filings with the Securities and Exchange Commission by
Exelon Corporation, Commonwealth Edison Company and PECO Energy Company. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which apply only as of Operations--Depreciation,
Amortizationthe date of this Report. Exelon Corporation, Commonwealth
Edison Company and PECO Energy Company undertake no obligation to publicly
release any revision to these forward-looking statements to reflect events or
circumstances after the date of this Report.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
EXELON CORPORATION
- ------------------
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
(Restated) (Restated)
(See Note 2.) (See Note 2.)
OPERATING REVENUES $ 4,285 $ 1,629 $ 11,759 $ 4,366
OPERATING EXPENSES
Fuel and Purchased Power 1,731 576 4,271 1,515
Operating and Maintenance 1,101 457 3,293 1,304
Depreciation and Amortization 369 83 1,109 244
Taxes Other Than Income 172 67 493 197
-------- -------- -------- --------
Total Operating Expenses 3,373 1,183 9,166 3,260
-------- -------- -------- --------
OPERATING INCOME 912 446 2,593 1,106
-------- -------- -------- --------
OTHER INCOME AND DEDUCTIONS
Interest Expense (283) (113) (864) (333)
Distributions on Preferred Securities of Subsidiaries (12) (5) (37) (15)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net 52 23 77 26
Other, net (50) 23 51 52
-------- -------- -------- --------
Total Other Income and Deductions (293) (72) (773) (270)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 619 374 1,820 836
INCOME TAXES 243 141 742 316
-------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 376 233 1,078 520
EXTRAORDINARY ITEM (net of income taxes of $0 and $2 for the
three months and nine months ended September 30, 2000, respectively) -- (1) -- (4)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (net of income
taxes of $8 and $16 for the nine months ended September 30, 2001
and 2000, respectively) -- -- 12 24
-------- -------- -------- --------
NET INCOME 376 232 1,090 540
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS) (net of income taxes)
SFAS 133 Transition Adjustment -- -- 44 --
Cash Flow Hedge Fair Value Adjustment 13 -- (17) --
Unrealized Gain (Loss) on Marketable Securities (30) 26 (154) 22
-------- -------- -------- --------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (17) 26 (127) 22
-------- -------- -------- --------
TOTAL COMPREHENSIVE INCOME $ 359 $ 258 $ 963 $ 562
======== ======== ======== ========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Basic 321 170 320 175
======== ======== ======== ========
AVERAGE SHARES OF COMMON STOCK OUTSTANDING - Diluted 323 172 323 176
======== ======== ======== ========
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle $ 1.17 $ 1.37 $ 3.36 $ 2.97
Extraordinary Item -- -- -- (0.02)
Cumulative Effect of a Change in Accounting Principle -- -- 0.04 0.14
-------- -------- -------- --------
Net Income $ 1.17 $ 1.37 $ 3.40 $ 3.09
======== ======== ======== ========
DILUTED:
Income Before Extraordinary Item and Cumulative
Effect of a Change in Accounting Principle $ 1.16 $ 1.35 $ 3.33 $ 2.95
Extraordinary Item -- -- -- (0.02)
Cumulative Effect of a Change in Accounting Principle -- -- 0.04 0.14
-------- -------- -------- --------
Net Income $ 1.16 $ 1.35 $ 3.37 $ 3.07
======== ======== ======== ========
DIVIDENDS PER AVERAGE COMMON SHARE $ 0.42 $ 0.25 $ 1.40 $ 0.75
======== ======== ======== ========
See Notes to Condensed Consolidated Financial Statements
5
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30,
2001 December 31,
(Restated) 2000
(See Note 2.)
------------- -----------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 1,377 $ 526
Restricted Cash 221 314
Accounts Receivable, net 2,630 2,552
Inventories, at average cost 491 454
Other 494 338
------- -------
Total Current Assets 5,213 4,184
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 13,268 12,936
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 6,528 7,135
Nuclear Decommissioning Trust Funds 2,862 3,109
Investments 1,616 1,583
Goodwill, net 5,509 5,186
Other 544 464
------- -------
Total Deferred Debits and Other Assets 17,059 17,477
------- -------
TOTAL ASSETS $35,540 $34,597
======= =======
See Notes to Condensed Consolidated Financial Statements
6
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30,
2001 December 31,
(Restated) 2000
(See Note 2.)
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ 416 $ 1,373
Long-Term Debt Due within One Year 1,188 908
Accounts Payable 1,052 1,193
Accrued Expenses 1,614 720
Other 454 457
-------- --------
Total Current Liabilities 4,724 4,651
-------- --------
LONG-TERM DEBT 13,385 12,958
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 4,328 4,409
Unamortized Investment Tax Credits 316 330
Nuclear Decommissioning Liability for Retired Plants 1,314 1,301
Pension Obligation 537 567
Non-Pension Postretirement Benefits Obligation 882 819
Spent Nuclear Fuel Obligation 838 810
Other 843 907
-------- --------
Total Deferred Credits and Other Liabilities 9,058 9,143
-------- --------
PREFERRED SECURITIES OF SUBSIDIARIES 612 630
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 6,943 6,890
Deferred Compensation (3) (7)
Retained Earnings 995 332
Accumulated Other Comprehensive Income (Loss) (174) --
-------- --------
Total Shareholders' Equity 7,761 7,215
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 35,540 $ 34,597
======== ========
See Notes to Condensed Consolidated Financial Statements
7
EXELON CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Nine Months Ended September 30,
-------------------------------
2001
(Restated) 2000
---------- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,090 $ 540
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 1,481 335
Cumulative Effect of a Change in Accounting Principle (net of income taxes) (12) (24)
Extraordinary Item (net of income taxes) -- 4
Provision for Uncollectible Accounts 74 43
Deferred Income Taxes (101) 8
Deferred Energy Costs 21 6
Equity in (Earnings) Losses of Unconsolidated Affiliates, net (77) (26)
Net Investment Income and Realized Losses on Nuclear Decommissioning Trust Funds 34 --
Other Operating Activities (13) (29)
Changes in Working Capital:
Accounts Receivable (142) (20)
Repurchase of Accounts Receivable -- (50)
Inventories 41 (26)
Accounts Payable, Accrued Expenses and Other Current Liabilities 546 (61)
Other Current Assets 27 (103)
------- -------
Net Cash Flows provided by Operating Activities 2,969 597
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (1,380) (435)
Acquisitions - Enterprises, net of cash acquired (39) (91)
Other Investing Activities (146) (67)
------- -------
Net Cash Flows used in Investing Activities (1,565) (593)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 2,126 1,017
Retirement of Long-Term Debt (1,433) (545)
Change in Short-Term Debt (957) 118
Dividends on Common Stock (448) (131)
Change in Restricted Cash 93 62
Proceeds from Stock Option Exercises 52 17
Redemption of Preferred Securities of Subsidiaries (18) (19)
Other Financing Activities 32 (24)
Common Stock Repurchase -- (496)
------- -------
Net Cash Flows used in Financing Activities (553) (1)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 851 3
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 526 55
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,377 $ 58
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION Noncash Investing and Financing Activities:
Regulatory Asset Fair Value Adjustment $ 347 --
Purchase Accounting Estimate Adjustments $ 63 --
See Notes to Condensed Consolidated Financial Statements
8
COMMONWEALTH EDISON COMPANY
- ---------------------------
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
OPERATING REVENUES $ 1,919 | $ 2,093 $ 4,895 | $ 5,367
| |
OPERATING EXPENSES | |
Fuel and Purchased Power 954 | 789 2,149 | 1,585
Operating and Maintenance 265 | 573 731 | 1,559
Depreciation and Amortization 178 | 226 512 | 822
Taxes Other Than Income 82 | 139 223 | 401
------- | ------- ------- | -------
| |
Total Operating Expenses 1,479 | 1,727 3,615 | 4,367
------- | ------- ------- | -------
| |
OPERATING INCOME 440 | 366 1,280 | 1,000
------- | ------- ------- | -------
| |
OTHER INCOME AND DEDUCTIONS | |
Interest Expense (148) | (143) (432) | (421)
Distributions on Company-Obligated | |
Mandatorily Redeemable Preferred Securities of | |
Subsidiary Trusts Holding Solely the Company's | |
Subordinated Debt Securities (7) | (7) (22) | (22)
Other, net 34 | 67 93 | 248
------- | ------- ------- | -------
| |
Total Other Income and Deductions (121) | (83) (361) | (195)
------- | ------- ------- | -------
| |
INCOME BEFORE INCOME TAXES AND | |
EXTRAORDINARY ITEMS 319 | 283 919 | 805
INCOME TAXES 141 | 86 412 | 221
------- | ------- ------- | -------
INCOME BEFORE EXTRAORDINARY ITEMS 178 | 197 507 | 584
EXTRAORDINARY ITEMS (net of income taxes of | |
$2 for the nine months ended September 30, 2000) -- | -- -- | (4)
------- | ------- ------- | -------
| |
NET INCOME 178 | 197 507 | 580
Preferred and Preference Stock Dividends -- | (1) -- | (3)
------- | ------- ------- | -------
NET INCOME ON COMMON STOCK $ 178 | $ 196 $ 507 | $ 577
======= | ======= ======= | =======
| |
COMPREHENSIVE INCOME | |
Net Income $ 178 | $ 197 $ 507 | $ 580
Other Comprehensive Income (net of income taxes): | |
Unrealized Gain (Loss) on Marketable Securities (1) | (3) (5) | (2)
------- | ------- ------- | -------
TOTAL COMPREHENSIVE INCOME $ 177 | $ 194 $ 502 | $ 578
======= | ======= ======= | =======
See Notes to Condensed Consolidated Financial Statements
9
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 435 $ 141
Restricted Cash 65 60
Accounts Receivable, net 999 1,204
Receivables from Affiliates 119 468
Inventories, at average cost 47 186
Deferred Income Taxes 41 89
Other 192 202
------- -------
Total Current Assets 1,898 2,350
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 7,196 7,657
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 707 1,110
Nuclear Decommissioning Trust Funds -- 2,669
Investments 94 152
Goodwill, net 5,079 4,766
Receivable from Affiliate 1,316 1,316
Other 134 178
------- -------
Total Deferred Debits and Other Assets 7,330 10,191
------- -------
TOTAL ASSETS $16,424 $20,198
======= =======
See Notes to Condensed Consolidated Financial Statements
10
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30, December 31,
2001 2000
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Long-Term Debt Due within One Year $ 746 $ 348
Accounts Payable 186 597
Accrued Expenses 558 449
Payables to Affiliates 301 --
Other 143 329
-------- --------
Total Current Liabilities 1,934 1,723
-------- --------
LONG-TERM DEBT 6,246 6,882
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 1,827 1,837
Unamortized Investment Tax Credits 56 59
Nuclear Decommissioning Liability for Retired Plants -- 1,301
Pension Obligation 146 285
Non-Pension Postretirement Benefits Obligation 161 315
Payables to Affiliates 324 --
Spent Nuclear Fuel Obligation -- 810
Other 284 475
-------- --------
Total Deferred Credits and Other Liabilities 2,798 5,082
-------- --------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY THE COMPANY'S
SUBORDINATED DEBT SECURITIES 328 328
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 2,047 2,678
Preference Stock of Subsidiary 7 7
Other Paid-in Capital 5,052 5,388
Receivable from Parent (1,062) --
Retained Earnings 386 133
Treasury Stock, at cost (1,307) (2,023)
Accumulated Other Comprehensive Income (Loss) (5) --
-------- --------
Total Shareholders' Equity 5,118 6,183
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 16,424 $ 20,198
======== ========
See Notes to Condensed Consolidated Financial Statements
11
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 507 | $ 580
Adjustments to Reconcile Net Income to Net Cash Flows |
Provided by Operating Activities: |
Depreciation and Amortization 512 | 945
Extraordinary Items (net of income taxes) -- | 4
Gain on Forward Share Arrangement -- | (113)
Provision for Uncollectible Accounts 31 | 30
Reversal of Provision for Revenue Refund (15) | --
Deferred Income Taxes 26 | (200)
Midwest Independent System Operator Exit Fees (36) | --
Early Retirement and Separation Program -- | 10
Other Operating Activities 36 | 157
Changes in Working Capital: |
Accounts Receivable (80) | (32)
Inventories 25 | (18)
Accounts Payable, Accrued Expenses, and Other Current Liabilities 338 | (688)
Change in Receivables and Payables to Affiliates, net (303) | --
Other Current Assets 3 | 52
------- | -------
Net Cash Flows provided by Operating Activities 1,044 | 727
------- | -------
|
CASH FLOWS FROM INVESTING ACTIVITIES |
Investment in Plant (616) | (1,123)
Plant Removals, net (15) | (7)
Contributions to Nuclear Decommissioning Trust Funds -- | (40)
Change in Receivables from Affiliates 424 | --
Other Investments -- | 51
Other Investing Activities -- | 8
------- | -------
Net Cash Flows used in Investing Activities (207) | (1,111)
------- | -------
|
CASH FLOWS FROM FINANCING ACTIVITIES |
Change in Short-Term Debt -- | 273
Issuance of Long-Term Debt -- | 450
Retirement of Long-Term Debt (260) | (754)
Common Stock Repurchases -- | (153)
Retirement of Mandatorily Redeemable Preferred Stock -- | (70)
Preferred Stock Redemptions -- | (2)
Change in Restricted Cash (5) | 213
Dividends on Common and Preferred Stock (278) | (261)
Nuclear Fuel Principal Payments -- | (270)
Common Stock Repurchase Arrangement -- | (67)
------- | -------
Net Cash Flows used in Financing Activities (543) | (641)
------- | -------
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 294 | (1,025)
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 141 | 1,255
------- | -------
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 435 | $ 230
======= | =======
|
|
SUPPLEMENTAL CASH FLOW INFORMATION Noncash Investing and Financing Activities: |
Net Assets Transferred as a Result of Restructuring, net of Note Payable $ 1,307 | --
Contribution of Receivable from Parent $ 1,062 | --
Purchase Accounting Estimate Adjustments $ 63 | --
Regulatory Asset Fair Value Adjustment $ 347 | --
Retirement of Treasury Shares $ 2,023 | --
Deferred Tax on Fossil Plant Sale -- | $ 1,094
Settlement of Common Share Repurchase Arrangement -- | $ 993
See Notes to Condensed Consolidated Financial Statements
12
PECO ENERGY COMPANY
- -------------------
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
OPERATING REVENUES $ 1,051 $ 1,629 $ 3,008 $ 4,366
OPERATING EXPENSES
Fuel and Purchased Power 471 576 1,353 1,515
Operating and Maintenance 156 457 414 1,304
Depreciation and Amortization 115 83 315 244
Taxes Other Than Income 51 67 135 197
------- ------- ------- -------
Total Operating Expenses 793 1,183 2,217 3,260
------- ------- ------- -------
OPERATING INCOME 258 446 791 1,106
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (105) (113) (332) (333)
Distributions on Company-Obligated Mandatorily Redeemable Preferred
Securities of a Partnership, which holds Solely
Subordinated Debentures of the Company (2) (2) (7) (7)
Equity in Earnings (Losses) of Unconsolidated Affiliates, net -- 23 -- 26
Other, net 12 23 30 52
------- ------- ------- -------
Total Other Income and Deductions (95) (69) (309) (262)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 163 377 482 844
INCOME TAXES 59 141 171 316
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE 104 236 311 528
EXTRAORDINARY ITEM (net of income taxes of $0 and $2 for the three
months and nine months ended, respectively) -- (1) -- (4)
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING
PRINCIPLE (net of income taxes of $16) -- -- -- 24
------- ------- ------- -------
NET INCOME 104 235 311 548
Preferred Stock Dividends (2) (3) (7) (8)
------- ------- ------- -------
NET INCOME ON COMMON STOCK $ 102 $ 232 $ 304 $ 540
======= ======= ======= =======
COMPREHENSIVE INCOME
Net Income $ 104 $ 235 $ 311 $ 548
Other Comprehensive Income (net of income tax):
SFAS 133 Transition Adjustment -- -- 40 --
Cash Flow Hedge Fair Value Adjustment (10) -- (20) --
Unrealized Gain (Loss) on Marketable Securities -- 26 -- 22
------- ------- ------- -------
Total Other Comprehensive Income (Loss) (10) 26 20 22
------- ------- ------- -------
TOTAL COMPREHENSIVE INCOME $ 94 $ 261 $ 331 $ 570
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
13
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30, December 31,
2001 2000
------------- ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 100 $ 49
Restricted Cash 156 254
Accounts Receivable, net 348 1,024
Inventories, at average cost 87 257
Receivables from Affiliates 5 --
Other 114 195
------- -------
Total Current Assets 810 1,779
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 3,999 5,158
DEFERRED DEBITS AND OTHER ASSETS
Regulatory Assets 5,821 6,026
Nuclear Decommissioning" Trust Funds -- 440
Investments 25 847
Goodwill, net -- 326
Receivables from Affiliates 41 --
Other 95 200
------- -------
Total Deferred Debits and Other Assets 5,982 7,839
------- -------
TOTAL ASSETS $10,791 $14,776
======= =======
See Notes to Condensed Consolidated Financial Statements
14
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Millions)
September 30, December 31,
2001 2000
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable $ -- $ 163
Payables to Affiliates 200 1,096
Long-Term Debt Due within One Year 435 553
Accounts Payable 62 403
Accrued Expenses 421 481
Deferred Income Taxes 27 27
Other 20 95
-------- --------
Total Current Liabilities 1,165 2,818
-------- --------
LONG-TERM DEBT 5,551 6,002
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,951 2,532
Unamortized Investment Tax Credits 28 271
Pension Obligation 112 281
Non-Pension Postretirement Benefits Obligation 236 505
Payables to Affiliates 25 --
Other 103 427
-------- --------
Total Deferred Credits and Other Liabilities 3,455 4,016
-------- --------
COMPANY-OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP,
WHICH HOLDS SOLELY SUBORDINATED
DEBENTURES OF THE COMPANY 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 19 37
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common Stock 1,968 1,442
Receivable from Parent (1,983) --
Preferred Stock 137 137
Retained Earnings 332 197
Accumulated Other Comprehensive Income (Loss) 19 (1)
-------- --------
Total Shareholders' Equity 473 1,775
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,791 $ 14,776
======== ========
See Notes to Condensed Consolidated Financial Statements
15
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Nine Months Ended September 30,
-------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 311 $ 548
Adjustments to Reconcile Net Income to Net Cash Flows
Provided by Operating Activities:
Depreciation and Amortization 315 335
Cumulative Effect of a Change in Accounting Principle (net of income taxes) -- (24)
Extraordinary Item (net of income taxes) -- 4
Provision for Uncollectible Accounts 37 43
Deferred Income Taxes (49) 8
Deferred Energy Costs 14 6
Equity in (Earnings) Losses of Unconsolidated Affiliates, net -- (26)
Other Operating Activities 14 (29)
Changes in Working Capital:
Accounts Receivable (51) (20)
Repurchase of Accounts Receivable -- (50)
Inventories (21) (26)
Accounts Payable, Accrued Expenses and Other Current Liabilities 55 (61)
Change in Receivables and Payables to Affiliates, net 129 --
Other Current Assets (35) (103)
------- -------
Net Cash Flows provided by Operating Activities 719 605
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (180) (435)
Exelon Infrastructure Services Acquisitions, net of cash acquired -- (91)
Other Investing Activities 26 (67)
------- -------
Net Cash Flows used in Investing Activities (154) (593)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Short-Term Debt (161) 118
Change in Receivable and Payable to Affiliates, net (16) --
Issuance of Long-Term Debt 805 1,017
Retirement of Long-Term Debt (1,167) (545)
Common Stock Repurchase -- (496)
Contribution from Parent 121 --
Change in Restricted Cash 98 62
Dividends on Preferred and Common Stock (176) (139)
Retirement of Mandatorily Redeemable Preferred Stock (18) (19)
Proceeds from Exercise of Stock Options -- 17
Proceeds on Settlement of Interest Rate Swap Agreements 31 --
Other Financing Activities -- (24)
------- -------
Net Cash Flows used in Financing Activities (483) (9)
------- -------
INCREASE IN CASH AND CASH EQUIVALENTS 82 3
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 49 55
CASH TRANSFERRED IN RESTRUCTURING (31) --
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 100 $ 58
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION Noncash Investing and Financing Activities:
Net Assets Transferred as a Result of Restructuring, net of Receivables from Affiliates $ 1,577 --
Contribution of Receivable from Parent $ 1,983 --
See Notes to Condensed Consolidated Financial Statements
16
EXELON CORPORATION AND SUBSIDIARY COMPANIES
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
COMBINED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions, except per share data, unless otherwise noted)
1. BASIS OF PRESENTATION (Exelon, ComEd and PECO)
The accompanying condensed consolidated financial statements as of September 30,
2001 and for the three and nine months then ended are unaudited, but include all
adjustments that Exelon Corporation (Exelon), Commonwealth Edison Company
(ComEd) and PECO Energy Company (PECO) consider necessary for a discussionfair
presentation of questions raisedsuch financial statements. All adjustments are of a normal,
recurring nature, except as otherwise disclosed. The year-end condensed
consolidated balance sheet data were derived from audited financial statements
but do not include all disclosures required by generally accepted accounting
principles. Certain prior-year amounts have been reclassified for comparative
purposes. Dividends on preferred stock of PECO for the staffthree and nine months
ended September 30, 2000 have been reclassified on Exelon's Condensed
Consolidated Statements of Income and Comprehensive Income to distributions on
preferred securities of subsidiaries, resulting in a deduction before, rather
than after, net income. This reclassification reflects the current
organizational structure in which PECO is a subsidiary of Exelon. These notes
should be read in conjunction with the Notes to Consolidated Financial
Statements of Exelon, ComEd and PECO included in or incorporated by reference in
Item 8 of their Annual Report on Form 10-K for the year ended December 31, 2000.
ComEd
ComEd was the principal subsidiary of Unicom Corporation (Unicom) prior
to the merger with Exelon. See Note 3- Merger. The merger was accounted for
using the purchase method of accounting. The effects of the SECpurchase method are
reflected on the financial statements of ComEd as of the merger date.
Accordingly, the financial statements presented for the period after the merger
reflect a new basis of accounting. ComEd's Condensed Consolidated Statements of
Income and Comprehensive Income and Condensed Consolidated Statements of Cash
Flows are separated by a FASB review regardingbold black line to indicate the electric utility industry'sdifferent basis of
accounting existing in each of the periods presented.
2. RESTATEMENT (Exelon)
In January 2002, Exelon discovered that its September 30, 2001 financial
statements required a restatement for additional net realized and unrealized
losses on investments of Generation's nuclear decommissioning trust funds that
were incurred prior to September 30, 2001 but not recorded.
The following tables show the items that have been restated on the Condensed
Consolidated Statements of Income and Comprehensive Income for the three and
nine months ended September 30, 2001 and the Condensed Consolidated Balance
Sheets as of September 30, 2001:
17
Condensed Consolidated Statements of Income and Comprehensive Income
Three Months Ended September 30, 2001
As Previously
Reported Restatements As Restated
-------- ------------ -----------
Other, net $2 ($52) ($50)
Income Taxes $268 ($25) $243
Net Income $403 ($27) $376
Unrealized Gain (Loss) on Marketable Securities $14 ($44) ($30)
Total Comprehensive Income $430 ($71) $359
Basic Earnings Per Common Share $1.26 ($0.09) $1.17
Diluted Earnings Per Common Share $1.25 ($0.09) $1.16
Condensed Consolidated Statements of Income and Comprehensive Income
Nine Months Ended September 30, 2001
As Previously
Reported Restatements As Restated
-------- ------------ -----------
Other, net $103 ($52) $51
Income Taxes $767 ($25) $742
Net Income $1,117 ($27) $1,090
Unrealized Gain (Loss) on Marketable Securities ($110) ($44) ($154)
Total Comprehensive Income $1,034 ($71) $963
Basic Earnings Per Common Share Before
Extraordinary Item and Cumulative Effect of
Change in Accounting Principle $3.45 ($0.09) $3.36
Basic Earnings Per Common Share $3.49 ($0.09) $3.40
Diluted Earnings Per Common Share Before
Extraordinary Item and Cumulative Effect of
Change in Accounting Principle $3.42 ($0.09) $3.33
Diluted Earnings Per Common Share $3.46 ($0.09) $3.37
Condensed Consolidated Balance Sheets at September 30, 2001
As Previously
Reported Restatements As Restated
-------- ------------ -----------
Nuclear Decommissioning Trust Funds $3,002 ($140) $2,862
Total Assets $35,680 ($140) $35,540
Accrued Expenses $1,607 $7 $1,614
Deferred Income Taxes $4,404 ($76) $4,328
Retained Earnings $1,022 ($27) $995
Accumulated Other Comprehensive Income ($130) ($44) ($174)
18
3. MERGER (Exelon)
On October 20, 2000, Exelon became the parent corporation of ComEd and PECO as a
result of the completion of the transactions contemplated by an Agreement and
Plan of Exchange and Merger, as amended, among PECO, Unicom and Exelon. Pursuant
to the merger, Exelon became the owner of all of the common stock of PECO,
Unicom ceased to exist and Unicom's subsidiaries, including ComEd, became
subsidiaries of Exelon. The merger was accounted for using the purchase method
of accountingaccounting. Exelon's results of operations include Unicom's results of
operations since October 20, 2000.
Selected unaudited pro forma combined results of operations of Exelon
for decommissioning costs. Dismantling is expected to
occur relatively soon after the endthree and nine months ended September 30, 2000, assuming the merger
occurred on January 1, 2000, are as follows:
Three Months Nine Months
Ended Ended
September 30, September 30,
2000 2000
------------- -------------
Operating revenue $3,845 $10,033
Net income $412 $1,035
Net income per common share (basic) $1.29 $3.24
Net income per common share (diluted) $1.27 $3.20
Pro forma net income for the three months ended September 30, 2000
excludes extraordinary items of $7 million ($4 million, net of income taxes) and
merger-related costs of $45 million ($27 million, net of income taxes). These
non-recurring items total $31 million, net of income taxes, or $0.10 per share
on a basic and diluted basis.
Pro forma net income for the nine months ended September 30, 2000
excludes merger-related costs of $90 million ($54 million, net of income taxes),
extraordinary charges of $18 million ($11 million, net of income taxes) and the
benefit of the current NRC license lifecumulative effect of each
generating station currently operating.a change in accounting principle of $40
million ($24 million, net of income taxes). These non-recurring items total $41
million, net of income taxes, or $0.13 per share on a basic and diluted basis.
The accrualpro forma financial information presented above is not necessarily
indicative of the operating results of Exelon that would have occurred had the
merger been consummated as of the date indicated, nor is it necessarily
indicative of future operating results.
Merger-Related Costs (Exelon, ComEd and PECO)
Exelon recorded certain costs in 2000 associated with the merger. The
costs associated with PECO were charged to expense. The costs associated with
Unicom were recorded as part of the application of purchase accounting and did
not affect results of operations. During the third quarter of 2001, Exelon
finalized its plans for decommissioning is
based onconsolidation of certain functions and recorded
adjustments to its estimated merger costs for the prompt removal method authorized by NRC guidelines. ComEd's ten
operating unitsfollowing: 1) an increase in
severance payments of $55 million as a result of the identification of
additional Unicom positions to be eliminated, 2) a $10 million reduction in the
estimated pension and post retirement welfare benefits reflecting revised
actuarial estimates related to Unicom employees, and 3) an increase in expected
severance payments of $31 million related to additional PECO employee positions
identified to be eliminated as a result of the merger. The
19
adjustments related to Unicom employees were recorded as an adjustment to the
purchase price allocation and did not affect results of operations. The
additional costs related to the PECO employees were charged to expense in the
third quarter of 2001. Including the effects of the third quarter 2001
adjustments, Exelon anticipates that a total of $297 million of employee costs
will be funded from its pension and postretirement benefit plans and $204
million of employee severance costs associated with Unicom will be funded from
general corporate funds.
The following table provides a reconciliation of the reserve for employee
severance associated with the merger:
Employee severance reserve as of October 20, 2000 $ 149
Additional employee severance reserve 55
-----
Adjusted employee severance reserve 204
Payments to employees (October 2000-September 2001) (51)
-----
Employee severance reserve as of September 30, 2001 $ 153
=====
Approximately 3,500 Unicom and PECO positions have been identified to
be eliminated as a result of the merger. Exelon has terminated 1,081 employees
as of September 30, 2001, of which 271 were terminated during the three months
ended September 30, 2001. The remaining current NRC license lives ranging from 7 to 28
years. ComEd's Zion Station and its first nuclear unit, Dresden Unit 1, are
retired and2,419 positions are expected to be
dismantled beginning in the years 2014 and
2012, respectively, which is consistent with the regulatory treatment for the
related decommissioning costs.
Based on ComEd's most recent study, decommissioning costs are estimated to
be $5.4 billion in current-year (1999) dollars, including a contingency
allowance. This estimate includes $515 million of non-radiological costs,
which are included in ComEd's proposed rider for recovery, as discussed below.
ComEd's decommissioning cost expenditures ateliminated by the end of 2002.
4. CORPORATE RESTRUCTURING (Exelon, ComEd and PECO)
During January 2001, Exelon undertook a corporate restructuring to separate its
generation and other competitive businesses from its regulated energy delivery
businesses at ComEd and PECO. As part of the units' operating
lives are estimatedrestructuring, the
generation-related operations and assets and liabilities of ComEd were
transferred to total approximately $13.8 billion. These expenditures
will occur primarily duringExelon Generation Company, LLC (Generation). Also as part of the
period from 2007 through 2034. All such costs
are expectedrestructuring, the non-regulated operations and related assets and liabilities
of PECO, representing PECO's Generation and Enterprises business segments, were
transferred to be funded byGeneration and Exelon Enterprises Company, LLC (Enterprises),
respectively. Additionally, certain operations and assets and liabilities of
ComEd and PECO were transferred to Exelon Business Services Company (BSC). As a
result, effective January 1, 2001, the external decommissioning trusts, whichoperations of ComEd establishedconsist of its retail
electricity distribution and transmission business in compliance withnorthern Illinois law and into which ComEd has been
making annual contributions. Future decommissioning cost estimates may be
significantly affected by the
adoptionoperations of or changes to NRC regulations, as
well as changesPECO consist of its retail electricity distribution and
transmission business in southeastern Pennsylvania, and its natural gas
distribution business in the assumptions used in making such estimates, including
changes in technology, available alternatives forPennsylvania counties surrounding the disposalCity of
nuclear
waste and inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider to its tariffs.Philadelphia.
The rider allows annual adjustments
to decommissioning cost collections outsidecorporate restructuring had 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 lives 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
14
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
million. The reduction primarily reflected stronger than expected after-tax
returnsfollowing effect on the external trust funds and lower than expected escalation in low-
level waste disposal costs, partially offset by the higher current-year cost
estimates, including a contingency allowance.
Under its most recent annual rider, filed with the ICC on February 26, 1999,
ComEd has proposed to increase its estimated annual decommissioning cost
accrual from $84 million to $130 million. The proposed increase primarily
reflects an increase in low-level waste disposal cost escalation, the
inclusion of $209 million in current-year (1999) dollars for safety-related
costs of maintaining Zion Station in a mothballed condition until
dismantlement begins, and the inclusion of non-radiological costs in the
decommissioning cost estimates for recovery under the rider.
The proposed annual decommissioning cost accrual of $130 million was
determined using the following assumptions: the decommissioning cost estimate
of $5.4 billion in current-year (1999) dollars, after-tax earnings on the tax-
qualified and nontax-qualified decommissioning funds of 7.49% and 6.83%,
respectively, and an escalation rate for future decommissioning costs of
4.84%. The annual accrual 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 $13.8 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 theCondensed
Consolidated Balance Sheets respectively, as such costs are recovered through rates. As of June 30, 1999,ComEd and PECO:
ComEd PECO
----- ----
Decrease in Assets:
-------------------
Current Assets ($376) ($1,085)
Property, Plant and Equipment, net (782) (1,212)
Investments (104) (1,262)
Other Noncurrent Assets (2,623) (431)
20
(Increase) Decrease in Liabilities:
-----------------------------------
Current Liabilities 794 1,581
Long-Term Debt -- 205
Deferred Income Taxes 8 (451)
Other Noncurrent Liabilities 2,226 1,003
------ -------
Net Assets Transferred ($857) ($1,652)
====== =======
Consideration, based on the total decommissioning costs included in the accumulated
provision for depreciation were $2,010 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 portionnet book value of the liability is recorded as a regulatory asset. The
nuclear decommissioning liability for retired plants as of June 30, 1999net assets
transferred, was as follows:
Zion
Dresden Units
Unit 1 1 and 2 Total
-------- -------- ----------
(ThousandsComEd PECO
----- ----
Treasury Stock Received $1,307 $ --
Return of Dollars)Capital -- 1,577
Note (Payable)/Receivable - Affiliates (450) 75
------ -------
$ 857 $ 1,652
====== =======
Selected unaudited pro forma results of operations of ComEd and PECO
for the three and nine months ended September 30, 2000, assuming the merger and
corporate restructuring occurred as of January 1, 2000, are presented as
follows:
Three months ended Nine months ended
September 30, 2000 September 30, 2000
------------------ ------------------
ComEd PECO ComEd PECO
----- ---- ----- ----
Operating revenues $1,931 $877 $4,855 $2,496
Operating income $407 $264 $1,013 $866
Net income $207 $113 $550 $363
The three months ended September 30, 2000 pro forma financial
information presented above for ComEd excludes merger-related costs of $32
million ($19 million, net of income taxes). PECO pro forma financial information
for the same period excludes merger-related costs of $7 million ($4 million, net
of income taxes) and an extraordinary charge of $2 million ($1 million, net of
income taxes).
The nine months ended September 30, 2000 pro forma financial
information presented above for ComEd excludes merger-related costs of $49
million ($29 million, net of income taxes) and extraordinary charges of $6
million ($4 million, net of income taxes). PECO pro forma financial information
for the same period excludes merger-related costs of $17 million ($10 million,
net of income taxes) and extraordinary charges of $6 million ($4 million, net of
income taxes).
In connection with the restructuring, ComEd and PECO assigned their
respective rights and obligations under various power purchase and fuel supply
agreements to Generation. Additionally, ComEd and PECO entered into power
purchase agreements (PPAs) with Generation.
Under the PPA between ComEd and Generation, Generation has agreed to
supply all of ComEd's load requirements through 2004. Prices for this energy
vary depending upon the time of day and month of delivery. During 2005 and 2006,
ComEd's PPA is a partial requirements agreement under which ComEd will purchase
all of its required energy and capacity from Generation, up to the available
capacity
21
of the nuclear generating plants formerly owned by ComEd and transferred to
Generation. Under the terms of ComEd's PPA, Generation is responsible for
obtaining any required transmission service. The PPA also specifies that prior
to 2005, ComEd and Generation will jointly determine and agree on a market-based
price for energy delivered under the PPA for 2005 and 2006. In the event that
the parties cannot agree to market-based prices for 2005 and 2006 prior to July
1, 2004, ComEd has the option of terminating the PPA effective December 31,
2004. ComEd will obtain any additional supply required from market sources in
2005 and 2006, and subsequent to 2006, will obtain all of its supply from market
sources, which could include Generation.
Under the PPA between PECO and Generation, Generation has agreed to
supply all of PECO's load requirements through 2010. Prices for this energy will
be a function of the amount PECO is able to charge its Provider of Last Resort
customers. Under the terms of PECO's PPA, PECO is responsible for obtaining any
required transmission service. Subsequent to 2010, PECO will obtain all of its
supply from market sources, which could include Generation.
5. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE (Exelon and PECO)
On January 1, 2001, Exelon recognized a non-cash gain of $12 million, net of
income taxes, in earnings and deferred a non-cash gain of $44 million, net of
income taxes, in accumulated other comprehensive income, a component of
shareholders' equity, to reflect the initial adoption of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133), as amended. SFAS No. 133 must be applied to all
derivative instruments and requires that such instruments be recorded in the
balance sheet either as an asset or a liability measured at their fair value
through earnings, with special accounting permitted for certain qualifying
hedges.
During the three and nine months ended September 30, 2001, Exelon
recognized net gains of $5 million ($3 million, net of income taxes) and $27
million ($16 million, net of income taxes), respectively, relating to
mark-to-market (MTM) adjustments of certain power purchase and sale contracts
pursuant to SFAS No. 133. MTM adjustments on power purchase contracts are
reported in fuel and purchased power and MTM adjustments on power sale contracts
are reported as operating revenues in the Condensed Consolidated Statements of
Income and Comprehensive Income. During the three and nine months ended
September 30, 2001, Exelon recognized net gains aggregating $4 million ($2
million, net of income taxes) and net losses aggregating $2 million ($1 million,
net of income taxes) on derivative instruments entered into for trading
purposes. Exelon commenced financial trading in the second quarter of 2001.
Gains and losses associated with financial trading are reported as other income
and deductions in the Condensed Consolidated Statements of Income and
Comprehensive Income. During the three and nine months ended September 30, 2001,
no amounts were reclassified from accumulated other comprehensive income into
earnings as a result of forecasted energy commodity transactions no longer being
probable. For the nine months ended September 30, 2001, $6 million ($4 million,
net of income taxes) was reclassified from accumulated other comprehensive
income into earnings as a result of forecasted financing transactions no longer
being probable.
22
As of September 30, 2001, $48 million of deferred net gains on
derivative instruments accumulated in other comprehensive income are expected to
be reclassified to earnings during the next twelve months. Amounts in
accumulated other comprehensive income related to interest rate cash flows are
reclassified into earnings when the forecasted interest payment occurs. Amounts
in accumulated other comprehensive income related to energy commodity cash flows
are reclassified into earnings when the forecasted purchase or sale of the
energy commodity occurs.
6. EARNINGS PER SHARE (Exelon)
Diluted earnings per share are calculated by dividing net income by the weighted
average shares of common stock outstanding, including shares issuable upon
exercise of stock options outstanding under Exelon's stock option plans
considered to be common stock equivalents. The following table shows the effect
of these stock options on the weighted average number of shares outstanding used
in calculating diluted earnings per share (in millions):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Amounts recovered through rates and investment
fund earnings.................................... $118,612 $444,557 $ 563,169
Unrecovered portion
Average common shares outstanding 321 170 320 175
Assumed exercise of the liability.............. 202,888 486,043 688,931
-------- -------- ----------
Nuclear decommissioning liability for retired
plants.......................................... $321,500 $930,600 $1,252,100
======== ======== ==========stock options 2 2 3 1
--- --- --- ---
Average diluted common shares outstanding 323 172 323 176
=== === === ===
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
accruals7. SEGMENT INFORMATION (Exelon)
Exelon operates in three business segments: Energy Delivery, Generation and
ratable contributions of past accruals over the remaining current
NRC license livesEnterprises. Energy Delivery consists of the nuclear plants. The fair valueoperations of funds accumulated
in the external trusts at June 30, 1999 was $2,451 million, which includes
pre-tax unrealized appreciation of $708 million. The earnings on the external
trusts for operating plants accumulate in the fund balanceComEd and accumulated
provision for depreciation. Nuclear decommissioning fundingPECO.
Exelon's segment information as of JuneSeptember 30, 1999 was as follows:
(Thousands of Dollars)
Amounts recovered through rates2001 and December 31, 2000 and investment fund
earnings for operating plants (included in the accumu-
lated provision for depreciation)...................... $2,010,423
Amounts recovered through rates and investment fund
earnings for retired plants............................ 563,169
Less past accruals not yet contributed to the trusts.... 122,618
----------
Fair value of external trust funds..................... $2,450,974
==========
15
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Income Taxes. Deferred income taxes are provided for income and expense
items recognized for financial accounting purposes in periods that differ from
those for income tax purposes. Income taxes deferred in prior years are
charged or credited to income as the book/tax 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 7.65% and 8.09%
for the three and nine months ended JuneSeptember 30, 1999 and 1998, respectively, 7.83% and 8.53% for the six months
ended June 30, 1999 and 1998, respectively, and 8.00% and 9.02% for the twelve
months ended June 30, 1999 and 1998, respectively. ComEd discontinued SFAS No.
71 regulatory accounting practices in December 1997 for the generation portion
of its business, and2001 as a result began capitalizing interest in 1998. ComEd
capitalized $6 million for each of the three-month periods ended June 30, 1999
and 1998, $12 million and $8 million for the six months ended June 30, 1999
and 1998, respectively, and $32 million and $8 million for the twelve months
ended June 30, 1999 and 1998, respectively, in interest costs on its
generation-related construction work in progress and nuclear fuel in process.
AFUDC and interest capitalized do not contributecompared to the current cash flow of
Unicom or ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations were $157 million and $137 million for the three months ended June
30, 1999 and 1998, respectively, $324 million and $277 million for the six
months ended June 30, 1999 and 1998, respectively, and $579 million and $572
million for the twelve months ended June 30, 1999 and 1998, 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,same
periods in connection with the refinancing of first
mortgage bonds, sinking fund debentures and pollution control obligations
prior to their scheduled maturity dates,2000 is deferred and amortized over the
lives of the long-term debt issued to finance the reacquisition for non-
generation related financings. See "Regulatory Assets and Liabilities" above
and Note 2 for additional information.
Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to
adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure
purposes only. Unicom accounts for its stock option awards and ESPP under APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 for
additional information.
16
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Average Common Shares Outstanding. Under the provisions of SFAS No. 128,
Earnings per Share, Unicom has presented basic and diluted EPS on the
Statements of Consolidated Operations for the three months, six months and
twelve months ended June 30, 1999 and 1998. The number of average outstanding
common shares used to compute basic and diluted EPS for the three months, six
months and twelve months ended June 30, 1999 and 1998 were as follows:
Three Months Ended Six Months TwelveSeptember 30, 2001 as compared to
----------------------------------------------------
Three Months Ended JuneSeptember 30, Ended June 30 June 30
------------------- --------------- -------------------
1999 1998 1999 1998 1999 1998
--------- --------- ------- ------- --------- ---------
(Thousands of Shares)2000
-------------------------------------
Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
-------- ---------- ----------- ------------ ------------
Average Number of Common
Shares Outstanding:
Average Number of Com-
mon Shares--Basic..... 217,235 216,897 217,158 216,802 217,120 216,625
Potentially Dilutive
Common Shares--Trea-
sury Method:
Stock Options........ 1,006 655 813 611 780 433
Other Convertible
Securities.......... 89 91 89 91 89 91
--------- --------- ------- ------- --------- ---------
Average Number of Com-
mon Shares--Diluted... 218,330 217,643 218,060 217,504 217,989 217,149
========= ========= ======= ======= ========= =========Revenues:
2001 $ 2,970 $ 2,291 $ 529 $(1,505) $ 4,285
2000 $ 877 $ 927 $ 283 $ (458) $ 1,629
EBIT (a):
2001 $ 704 $ 278 $ (44) $ (7) $ 931
2000 $ 260 $ 292 $ (55) $ (15) $ 482
Energy Risk Management Contracts. In the normal course of business ComEd
utilizes contracts for the forward sale and purchase of energy to manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap arrangements to limit
the market price risk associated with the forward commodity contracts. As
ComEd does not currently utilize financial or commodity instruments for
trading or speculative purposes, any gains or losses on forward commodity
contracts are recognized when the underlying transactions affect earnings.
Revenues and expenses associated with market price risk management contracts
are amortized over the terms of such contracts.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which 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.
The effective date of SFAS No. 133 has been delayed for one year, to fiscal
years beginning after June 15, 2000. SFAS No. 133 may be implemented prior to
June 15, 2000, 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 January 1, 1998 or January 1, 1999
at the Company's election.
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 their adoption of SFAS No. 133. However, adoption of SFAS No. 133
could increase volatility in earnings and other comprehensive income.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on operating results.
1723
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Cash Held for Redemption of Securities. As of June 30, 1999, the cash held
for redemption of securities reported on the Consolidated Balance Sheets
includes $607 million in unused cash proceeds from the issuance of the
transitional trust notes and $64 million of escrowed cash and pending
instrument funding charges collected from ComEd customers to be applied to the
principal and interest payment on the transitional trust notes. See Note 2 for
additional information.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months, six
months and twelve months ended June 30, 1999 and 1998 was as follows:
ThreeNine Months Ended SixSeptember 30, 2001 as compared to
---------------------------------------------------
Nine Months Ended Twelve Months Ended
JuneSeptember 30, June 30 June 302000
------------------------------------
-------------------
1999 1998 1999 1998 1999 1998
--------- -----------------Corporate and
Energy Intersegment
Delivery Generation Enterprises Eliminations Consolidated
-------- --------- ---------
(Thousands of Dollars)---------- ----------- ------------ ------------
Supplemental Cash Flow
Information:
Cash paid duringRevenues:
2001 $ 7,903 $ 5,537 $ 1,742 $(3,423) $11,759
2000 $ 2,496 $ 2,087 $ 801 $(1,018) $ 4,366
EBIT (a):
2001 $ 2,091 $ 697 $ (80) $ (19) $ 2,689
2000 $ 856 $ 401 $ (86) $ (23) $ 1,148
Total Assets:
September 30, 2001
(Restated) $27,726 $ 7,197 $ 1,634 $(1,017) $35,540
December 31, 2000 $27,424 $ 5,734 $ 2,277 $ (838) $34,597
(a) EBIT - consists of operating income, equity in earnings (losses) of
unconsolidated affiliates, and other income and expenses recorded in other,
net, with the period for:exception of interest income. Net interest income and
investment losses for the three months ended September 30, 2001 was a loss
of $17 million, resulting from investment losses, as compared to income of
$10 million in the same 2000 period. Interest (net of
amount capitalized). $165,867 $98,454 $327,518 $253,335 $548,390 $505,792
Income taxes (net of
refunds)............ $110,028 $ 506 $ 84,107 $ 506 $ 356,077 $ 210,806
Supplemental Schedule of
Non-Cash Investingincome remained flat at $32
million for the nine months ended September 30, 2001 and Financing Activities:
Capital lease
obligations incurred
by subsidiary
companies............. $ 274 $45,983 $ 1,436 $ 63,979 $ 43,828 $ 136,6182000.
(2) Accounting Effects RelatedThe operations of Exelon Energy Company (Exelon Energy), Exelon's
competitive retail generation supplier, for 2000 have been reclassified from
Generation to Enterprises to reflect the 1997 Act. In December 1997,corporate restructuring. See Note 4-
Corporate Restructuring.
8. COMMITMENTS AND CONTINGENCIES (Exelon, ComEd and PECO)
For information regarding capital commitments and nuclear decommissioning and
spent fuel storage see the GovernorCommitments and Contingencies Note in the
Consolidated Financial Statements of Illinois signed into law the 1997 Act, which established a phased
process to introduce competition into the electric industry in Illinois under
a less regulated structure. The 1997 Act was amended in June 1999. The 1997
Act, as amended, provides for, among other things, a 15% residential base rate
reduction which became effective August 1, 1998, an additional 5% residential
base rate reduction in October 2001Exelon, ComEd and gradual customer access to other
electric suppliers. Access for commercial and industrial customers will occur
over a period from October 1999 to October 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 15% residential base
rate reduction. ComEd expects that the 15% rate reduction will reduce ComEd's
operating revenues by approximately $210 million in 1999, compared to 1998
rate levels. The 1997 Act, as amended, also committed ComEd to spend at least
$2 billion through 2004 on transmission and distribution facilities outside of
the City and $250 million in environmental funding initiatives, pending the
close of the fossil plant sale.
As a result of the 1997 Act, as amended, and FERC rules, pricesPECO for the supplyyear ended
December 31, 2000.
Nuclear Insurance
Exelon carries property damage, decontamination and premature
decommissioning insurance for each station loss resulting from damage to its
nuclear plants. In the event of electric energy are expectedan accident, insurance proceeds must first be
used for reactor stabilization and site decontamination. If the decision is made
to transition from cost-based,
regulated rates to rates determined by competitive market forces. Accordingly,decommission the 1997 Act, as amended, provides for the collection of a CTC from customers
who choose another electric service provider during a transition period that
extends through 2006. 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. 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 asset dispositions. See Note 4 for additional information.
18
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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, as amended, 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 and 1999, and plus 8.5% 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. On March 1, 1999, ComEd filed with the ICC its Non-
Residential Delivery Services Implementation Plan and associated tariffs for
the provision of delivery and other services related to ComEd's implementation
for retail open access, as called for by the 1997 Act. The ICC is required to
issue a final order in the third quarter of 1999.
The 1997 Act also allowsfacility, a portion of ComEd's future revenuesthe insurance proceeds will be
allocated to be
segregateda fund, which Exelon is required by the Nuclear Regulatory
Commission (NRC) to maintain, to provide for decommissioning the facility.
Exelon is unable to predict the timing of the availability of insurance proceeds
to Exelon and used to support the issuance of securities by ComEd or a SPE.
The proceeds, net of transaction costs, from such security issuances must be
used to refinance outstanding debt or equity or for certain other limited
purposes. The total amount of such securitiesproceeds that maywould be issued is
approximately $6.8 billion; approximately one-halfavailable. Under the
terms of that amount canthe various insurance agreements, Exelon could be issued inassessed up to $65
million for losses incurred at any plant insured by the twelve-month period which commenced on August 1, 1998. In
December 1998, ComEd initiated the issuance of $3.4 billion of transitional
trust notesinsurance companies.
24
Additionally, through its SPEs, ComEd Funding and ComEd Funding Trust. The
proceeds from the transitional trust notes, netsubsidiaries, Exelon is a member of transaction costs, must be
used to redeem or repurchase debt and equity to lower ComEd's overallan
industry mutual insurance company that provides replacement power 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 long-term debt through a tender offer. In addition, $500 million
of the proceeds was used to reduce ComEd's outstanding short-term debt. In the
first half of 1999, ComEd recorded an extraordinary loss related to the early
redemptions and the tender offer of the above-mentioned first mortgage bonds
and sinking fund debentures, which reduced net income on common stock by
approximately $28 million (after-tax), or $0.13 per common share (diluted).
ComEd also recorded $10 million (after-tax), or $0.04 per common share
(diluted), for premiums paid in connection with the redemption of the above-
mentioned preference stock. The preference stock premiums were included in the
provision for dividends for preference stocks of ComEd on the Statements of
Consolidated Operations. 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. See Note 6 for additional information
regarding Unicom's share repurchase plans.
19
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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
(diluted). The fourth quarter of 1997 also reflected charges totaling $44
million (after-tax), or $0.20 per common share (diluted), as a result of
ComEd's elimination of its FAC pursuant to an option in the 1997 Act, and a
charge of $60 million (after-tax), or $0.28 per common share (diluted), for a
write down of ComEd's investment in uranium-related properties to realizable
value. Projections of the market price for uranium indicated that the expected
incremental costs of mining and milling uranium at the properties would exceed
the expected market price for uranium and such costs are not expected to be
recoverable in a competitive market.
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 ComEdinsurance
in the event of a major outage.
(3) Rate Matters.accidental outage at a nuclear station. The premium for
this coverage is subject to assessment for adverse loss experience. Exelon's
maximum share of any assessment is $18 million per year.
The insurer has proposed to increase the maximum amount that Exelon
could be assessed for property damage insurance from up to $65 million to up to
$130 million and for replacement power cost insurance from $18 million to $36
million. In addition, the insurer proposes, in the event that one or more acts
of terrorism cause accidental property damage within a twelve month period from
the first accidental property damage under one or more policies for all
insureds, the maximum recovery for all such losses by all insureds be an
aggregate of $3.24 billion plus such additional amounts as the insurer may
recover for such losses from reinsurance, indemnity, and any other source,
applicable to such losses.
Exelon is self-insured to the extent that any losses may exceed the
amount of insurance maintained. Such losses could have a material adverse effect
on Exelon's financial condition and results of operations.
Environmental Liabilities
Exelon has identified 72 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
September 30, 2001, Exelon had accrued $164 million for environmental
investigation and remediation costs, including $134 million for MGP
investigation and remediation that currently can be reasonably estimated.
Exelon, ComEd and PECO cannot predict whether they will incur other significant
liabilities for additional investigation and remediation costs at these or
additional sites identified by environmental agencies or others, or whether such
costs may be recoverable from third parties.
ComEd
As of September 30, 2001, ComEd had accrued $111 million (discounted)
for environmental investigation and remediation costs. This reserve included
$105 million for MGP investigation and remediation, which currently can be
reasonably estimated.
PECO
As of September 30, 2001, PECO had accrued $38 million (undiscounted)
for environmental investigation and remediation costs, including $29 million for
MGP investigation and remediation, which currently can be reasonably estimated.
25
Energy Commitments
As of September 30, 2001, Exelon had long-term commitments relating to
the net purchase and sale of energy, capacity and transmission rights from
unaffiliated utilities and others as expressed in the following tables:
Net Net Transmission
Energy Purchased Rights
Sales Capacity Purchases
----- -------- ---------
2001 $ 267 $ 137 $ 36
2002 460 871 35
2003 371 917 32
2004 228 923 25
2005 128 437 25
Thereafter (90) 4,710 80
------- ------- -------
Total $ 1,364 $ 7,995 $ 233
======= ======= =======
See Note 4 - Corporate Restructuring, for information about ComEd's and
PECO's PPAs with Generation.
Litigation
Midwest Generation, LLC Litigation. On August 21, 2001, Midwest
Generation, LLC (Midwest) filed a complaint with the Illinois Commerce
Commission (ICC) alleging that certain retail agreements under which ComEd
supplies power to loads at Midwest's generating facilities are unjust,
unreasonable and anti-competitive. Midwest is seeking an ICC order that ComEd
pay refunds of approximately $25 million paid under the agreements since 1999,
with interest. ComEd is contesting the complaint.
FERC Municipal Request for Refund. Three of ComEd's wholesale municipal
customers filed a complaint and request for refund with the FERCFederal Energy
Regulatory Commission (FERC) alleging that ComEd failed to properly adjust theirits
rates, as provided for under the terms of theirthe electric service contracts with
the municipal customers and 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. On April 30, 2001, FERC issued an order granting
rehearing in which it determined that its 1998 order had been erroneous and that
no refunds were due from ComEd to the municipal customers. On June 29, 2001,
FERC denied the customers' requests for purposesrehearing of reconsideration with
the FERC. If the order is upheld, ComEd must make refunds within 15 days of
the resolution forgranting
rehearing. ComEd's management believes an adequate reserve
has been established in connection with this case.
(4) 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 in the fourth quarter
of 1997 of $523 million (after-tax), or $2.42 per common share (diluted).
The write-off included a liability for future closing costs associated with
the retirement of Zion Station, excluding severance costs, resulting in a
charge of $117 million (after-tax). ComEd has recorded reductions to the
liability for future closing costs of $7 million (after-tax), or $0.03 per
common share (diluted), and $15 million (after-tax), or $0.07 per common share
(diluted), in the years 1999 and 1998, respectively, to reflect lower than
expected closing costs due to employees being reassigned or removed from the
payroll sooner than expected, and lower than anticipated support costs and use
of contractors. See Note 16 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
20
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
costs, were approximately $190 million. The proceeds were used to retire or
redeem existing debt in the first quarter of 1998.
On March 22, 1999, ComEd entered into an Asset Sale Agreement providing for
the sale of substantially all of the assets of its fossil plant to EME for a
cash purchase price of $4.813 billion. The fossil plant assets 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 ICC approved the
fossil plant sale on August 3, 1999. The ICC's approval is subject to
potential appeal.
Just prior to the consummation of the fossil plant sale, ComEd expects to
transfer these assets to Unicom Investment. In consideration for the
transferred assets, Unicom Investment will pay ComEd consideration totaling
$4.813 billion in the form of a Demand Note in the amount of approximately
$2.350 billion and an interest-bearing Note with a maturity of twelve years.
Unicom Investment will immediately sell the fossil plant assets to EME, in
consideration of which Unicom Investment will receive $4.813 billion in cash
from EME. Immediately after its receipt of the cash payment from EME, Unicom
Investment will pay the $2.350 billion aggregate principal due to ComEd under
the Demand Note. Unicom Investment will use the remainder of the cash received
from EME to fund other business opportunities. Of the cash received by ComEd,
$1.680 billion is expected to be used to pay the costs and taxes associated
with the fossil plant sale. The remainder of the Demand Note proceeds will be
available to ComEd to fund, among other things, transmission and distribution
projects, nuclear generation station projects, and environmental and other
initiatives.
The sale is expected to produce an after-tax gain of approximately $1.6
billion, after settling commitments associated with certain coal contracts,
recognizing employee-related costs and funding certain environmental
initiatives. The gain on the sale will be utilized to recover certain
regulatory assets and as a result, the sale is not expected to have a
significant impact on net income in 1999. See Notes 1, under "Regulatory
Assets and Liabilities," and 21 for additional information.
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. The options will provide some flexibility to ComEd to adjust its power
purchase needs to match its obligations to its customers during the transition
period to open access for customers. 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.
(5) Authorized Shares, Voting Rights and Stock Rights of Capital Stock. At
June 30, 1999, Unicom's authorized shares consisted of 400,000,000 shares of
common stock. The authorized shares of ComEd preferred and preference stocks
at June 30, 1999 were: preference stock--10,510,451 shares; $1.425 convertible
preferred stock--57,725 shares; and prior preferred stock--850,000 shares. The
preference and prior preferred stocks are issuable in series and may be issued
with or
21
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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 $0.01 per
Right, subject to certain limitations, and will expire on February 2, 2008. If
a person or group becomes an Acquiring Person, each holder of a Right will
thereafter have the right to receive, upon exercise, Unicom common stock at a
50% discount from the then current market price. If Unicom is acquired in a
merger or other business combination transaction in which Unicom is not the
survivor, or 50% or more of Unicom's assets or earning power is sold or
transferred, each holder of a Right shall then have the right to receive, upon
exercise, common stock of the acquiring company at a 50% discount from the
then current market price of such common stock. Rights held by an Acquiring
Person become void upon the occurrence of such events.
(6) Common Equity. In the fourth quarter of 1998, Unicom entered into a
forward purchase arrangement for the repurchase of $200 million of its common
stock. This contract, which was accounted for as an equity instrument as of
December 31, 1998, was settled on a net cash basis in February 1999, resulting
in a $16 million reduction to common stock equity on the Consolidated Balance
Sheets.
In February 1999, Unicom also entered into a prepaid forward purchase
agreement with a financial institution for the repurchase of approximately 15
million shares of Unicom common stock. This forward purchase arrangement was
amended to also include the repurchase of approximately 5.1 million shares for
a total of 20.1 million shares, subsequent to the net cash settlement of the
$200 million repurchase program, as described above. The repurchase
arrangement, as amended, provides for final settlement no later than February
2000, on either a physical (share) basis, or a net cash basis. 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 does not currently anticipate that settlement will
occur in 1999. The repurchase arrangement has been recorded as a receivable on
the 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. Unrealized gains of $20 million (after-
tax), or $0.09 per common share (diluted), for the three months ended and $33
million (after-tax), or $0.15 per common share (diluted), for the six and
twelve months ended June 30, 1999 have been recorded related to the
arrangement.
22
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
At June 30, 1999, shares of Unicom common stock were reserved for the
following purposes:
Long-Term Incentive Plan........................................ 2,450,049
Employee Stock Purchase Plan.................................... 368,171
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 88,526
1996 Directors' Fee Plan........................................ 164,632
---------
3,471,378
=========
Common stock issued for the three months, six months and twelve months ended
June 30, 1999 and 1998 was as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ----------------- --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- ------- --------- ---------
Shares of Common Stock
Issued:
Long-Term Incentive
Plan.................. 84,402 29,504 233,215 203,791 523,726 366,751
Employee Stock Purchase
Plan.................. 45,126 52,512 45,126 52,512 86,884 133,551
Exchange for ComEd com-
mon stock not held by
Unicom................ 419 3,063 (3,330) 6,540 2,887 8,225
1996 Directors' Fee
Plan.................. 1,104 2,603 3,348 6,677 9,404 13,272
--------- -------- -------- ------- --------- ---------
131,051 87,682 278,359 269,520 622,901 521,799
========= ======== ======== ======= ========= =========
(Thousands of Dollars)
Changes in Common Stock
Accounts:
Total shares issued.... $4,096 $ 2,558 $ 4,777 $ 6,756 $ 14,869 $ 13,212
Net cash settlement of
forward share repur-
chase contract........ -- -- (16,454) -- (16,454) --
Shares held by trustee
for Unicom Stock Bonus
Deferral Plan......... -- 50 -- (1,947) 8,722 (2,036)
Other.................. (8) (13) 137 12 (79) 20
--------- -------- -------- ------- --------- ---------
$4,088 $ 2,595 $(11,540) $ 4,821 $ 7,058 $ 11,196
========= ======== ======== ======= ========= =========
As of June 30, 1999 and December 31, 1998, 264,406 and 178,982 shares,
respectively, of Unicom common stock were reacquired and held as treasury
stock at a cost of $10 million and $7 million, respectively.
At June 30, 1999 and December 31, 1998, 75,839 and 76,079, 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.
As of June 30, 1999 and December 31, 1998, $509 million and $494 million,
respectively, of retained earnings had been appropriated for future dividend
payments.
(7) 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 on2001, each of the first three anniversaries ofwholesale municipal customers
appealed the option grant
date. In addition,April 30, 2001 FERC order to the stock options will become fully vested immediately ifFederal circuit court, which
consolidated the holder dies, retires, is terminated by the Company, other than for cause,
or qualifies for long-term disability and will also vest in full upon a change
in control.
23
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Stock option transactions through June 30, 1999 are summarized as follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Outstanding as of January 1, 1997.................. 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 the year.................. (123,928) 25.715
---------
Outstanding as of December 31, 1998................ 3,142,893 28.694
Granted during the six months ended June 30, 1999.. 1,711,050 35.750
Exercised during the six months ended June 30,
1999.............................................. (110,403) 24.272
Expired/cancelled during the six months ended June
30, 1999.......................................... (56,828) 32.024
---------
Outstanding as of June 30, 1999.................... 4,686,712 31.334
=========
Of the stock options outstanding at June 30, 1999, 968,444 had vested with a
weighted average exercise price of $25.220.
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:
Stock Option Grant Date
-----------------------
1999 1998 1997
------- ------- -------
Expected option life.................................. 7 years 7 years 7 years
Dividend yield........................................ 4.50% 4.54% 7.20%
Expected volatility................................... 23.02% 21.95% 22.29%
Risk-free interest rate............................... 4.83% 5.58% 6.25%
The estimated weighted average fair value for each stock option granted in
the first half of 1999 and in the years 1998 and 1997 was $6.48, $6.62 and
$2.79, respectively.
The ESPP allows employees to purchase Unicom common stock at a ten percent
discount from market value. Substantially all of the employees of Unicom,
ComEd and certain subsidiaries are eligible to participate in the ESPP. Unicom
issued 86,884 and 133,551 shares of common stock during the twelve months
ended June 30, 1999 and 1998, respectively, under the ESPP at a weighted
average annual purchase price of $34.34 and $25.55, 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 recognizedappeals for the stock option awards program or
ESPP. If Unicom had recorded compensation expense for the stock options
grantedpurposes of briefing and the shares of common stock issued under the ESPP in accordance
with SFAS No. 123 using the fair value based method of accounting, the
additional charge to operations would have been $3 million (after-tax), or
$0.02 per common share (diluted), and $2 million (after-tax), or $0.01 per
common share (diluted), for the twelve months ended June 30, 1999 and 1998,
respectively.
(8) ComEd Preferred and Preference Stocks Without Mandatory Redemption
Requirements. During the twelve months ended June 30, 1999, 10,499,549 shares
of preferred or preference stock without mandatory redemption requirements
were redeemed and no shares were issued. No shares of
24
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
ComEd preferred or preference stocks without mandatory redemption requirements
were issued or redeemed during the twelve months ended June 30, 1998. There
were 3,000,000 shares of Series $2.425 preference stock outstanding at June
30, 1999, at an aggregate stated value of $73 million with a redemption price
and involuntary liquidation price of $25 per share, plus accrued and unpaid
dividends, if any. ComEd plans to redeem the 3,000,000 shares outstanding on
August 1, 1999. The $73 million is included in current liabilities.
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.
(9) ComEd Preference Stock Subject to Mandatory Redemption Requirements.
During the twelve months ended June 30, 1999 and 1998, no shares of ComEd
preference stock subject to mandatory redemption requirements were issued.
During the twelve months ended June 30, 1999 and 1998, 1,298,560 and 468,215
shares, respectively, of ComEd preference stock subject to mandatory
redemption requirements were reacquired to meet sinking fund requirements or
were part of the early redemption in January 1999. There were 700,000 shares
of Series $6.875 preference stock outstanding at June 30, 1999, at an
aggregate stated value of $69 million. This series is non-callable and is
required to be redeemed on May 1, 2000. The sinking fund price is $100 and the
involuntary liquidation price is $99.25 per share, plus accrued and unpaid
dividends, if any. The $69 million is included in current liabilities.
(10) ComEd-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities. In
September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd,
issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred
securities. The sole asset of ComEd Financing I is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust
of ComEd, issued 150,000 of its 8.50% ComEd-obligated mandatorily redeemable
capital securities. The sole asset of ComEd Financing II is $154.6 million
principal amount of ComEd's 8.50% subordinated deferrable interest debentures
due January 15, 2027. There is a full and unconditional guarantee by ComEd of
the Trusts' obligations under the securities issued by the Trusts. However,
ComEd's obligations are subordinate and junior in right of payment to certain
other indebtedness of ComEd. ComEd has the right to defer payments of interest
on the subordinated deferrable interest notes by extending the interest
payment period, at any time, for up to 20 consecutive quarters. Similarly,
ComEd has the right to defer payments of interest on the subordinated
deferrable interest debentures by extending the interest payment period, at
any time, for up to ten consecutive semi-annual periods. If interest payments
on the subordinated deferrable interest notes or debentures are so deferred,
distributions on the preferred securities will also be deferred. During any
deferral, distributions will continue to accrue with interest thereon. In
addition, during any such deferral, ComEd may not declare or pay any dividend
or other distribution on, or redeem or purchase, any of its capital stock.
The subordinated deferrable interest notes are redeemable by ComEd, in whole
or in part, from time to time, on or after September 30, 2000, and with
respect to the subordinated deferrable interest debentures, on or after
January 15, 2007, or at any time in the event of certain income tax
25
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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.
(11) 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. The current amount outstanding is as
follows:
Series Principal Amount
------------------------ ----------------------
(Thousands of Dollars)
5.38% due March 25, 2000........................... $ 284,967
5.29% due June 25, 2001............................ 425,033
5.34% due March 25, 2002........................... 258,861
5.39% due June 25, 2003............................ 421,139
5.44% due March 25, 2005........................... 598,511
5.63% due June 25, 2007............................ 761,489
5.74% due December 25, 2008........................ 510,000
----------
$3,260,000
==========
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.
The proceeds, net of transaction costs, from the transitional trust notes
must be used to redeem debt and equity. During the first quarter of 1999,
ComEd redeemed or reacquired $959 million of first mortgage bonds and $58
million of sinking fund debentures.
Sinking fund requirements and scheduled maturities remaining through 2003
for ComEd's first mortgage bonds, transitional trust notes, sinking fund
debentures and other long-term debt outstanding at June 30, 1999, after
deducting deposits made for the retirement of sinking fund debentures, are
summarized as follows: 1999--$334 million; 2000--$727 million; 2001--$346
million; 2002--$645 million; and 2003--$445 million. Unicom Enterprises' note
payable to bank of $120 million will mature in 1999.
At June 30, 1999, ComEd's outstanding first mortgage bonds maturing through
2003 were as follows:
Principal Amount
Series ----------------------
(Thousands of Dollars)
9 3/8% due February 15, 2000....................... $ 42,242
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
--------
$672,242
========
26
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Other long-term debt outstanding at June 30, 1999 is summarized as follows:
Principal
Debt Security Amount Interest Rate
- ----------------------------------------- ---------- --------------------------------------------------
(Thousands
of
Dollars)
Unicom--
Loans Payable:
Loan due January 1, 2003 $ 5,519 Interest rate of 8.31%
Loan due January 1, 2004 6,371 Interest rate of 8.44%
----------
$ 11,890
----------
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 $ 301 Interest rate of 3.00%
----------
Total ComEd $1,056,301
----------
Unicom Enterprises--
Notes:
Long-Term Note Payable to Bank
due November 15, 1999 $ 120,000 Prevailing interest rate of 5.87% at June 30, 1999
Unicom Thermal Guaranteed Senior Note
due May 30, 2012 120,000 Interest rate of 7.38%
Northwind Midway Guaranteed Senior Notes
due June 30, 2023 11,522 Interest rate of 7.68%
----------
Total Unicom Enterprises $ 251,522
----------
Total Unicom $1,319,713
==========
Long-term debt maturing within one year has been included in current
liabilities.
ComEd's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by ComEd.
In July 1998, Unicom Thermal issued a $120 million 7.38% unsecured
guaranteed senior Note due May 2012, the proceeds of which were used to
refinance existing debt. The Note is guaranteed by Unicom and includes certain
covenants with respect to Unicom and Unicom Thermal's operations. Such
covenants include, among other things, (i) a requirement that Unicom and its
consolidated subsidiaries maintain a tangible net worth at least $10 million
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.
27
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
In June 1999, Northwind Midway issued $12 million of 7.68% guaranteed senior
Notes due June 2023, the proceeds of which will be used primarily to finance
certain project construction costs. The Notes are guaranteed by Unicom and
include certain covenants with respect to Unicom and Northwind Midway's
operations. Such covenants include, among other things, a requirement that
Unicom and its consolidated subsidiaries own no less than 65% of the voting
membership interest of Northwind Midway.
(12) Lines of Credit. ComEd had total bank lines of credit of $1 billion,
all of which were unused at June 30, 1999. 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 $80 million was unused as of June 30, 1999. 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.
(13) 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. The contract with the DOE requires ComEd
to pay the DOE a one-time fee applicable to nuclear generation through April
6, 1983 of $277 million, with interest to date of payment, and a fee payable
quarterly equal to one mill per kilowatthour of nuclear-generated and sold
electricity after April 6, 1983. Pursuant to the contract, ComEd has elected
to pay the one-time fee, with interest, just prior to the first delivery of
spent nuclear fuel to the DOE. The liability for the one-time fee and the
related interest is reflected on the Consolidated Balance Sheets. That
contract also 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.
28
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(14) 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 June 30, 1999 and
December 31, 1998 was as follows:
June 30, 1999 December 31, 1998
-------------------------------- --------------------------------
Unrealized
Gains/ Unrealized
Cost Basis (Losses) Fair Value Cost Basis Gains Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Short-term investments.. $ 63,385 $ 28 $ 63,413 $ 40,907 $ 42 $ 40,949
U.S. Government and
Agency issues.......... 211,793 5,695 217,488 197,240 20,213 217,453
Municipal bonds......... 402,171 6,680 408,851 416,121 24,124 440,245
Corporate bonds......... 203,075 (3,032) 200,043 241,111 8,790 249,901
Common stock............ 754,373 691,776 1,446,149 740,956 565,630 1,306,586
Other................... 107,802 7,228 115,030 11,345 838 12,183
---------- -------- ---------- ---------- -------- ----------
$1,742,599 $708,375 $2,450,974 $1,647,680 $619,637 $2,267,317
========== ======== ========== ========== ======== ==========
At June 30, 1999, the debt securities held by the nuclear decommissioning
funds had the following maturities:
Cost Basis Fair Value
---------- ----------
(Thousands of
Dollars)
Within 1 year....................................... $ 66,946 $ 67,263
1 through 5 years................................... 245,205 248,675
5 through 10 years.................................. 253,774 257,150
Over 10 years....................................... 406,731 408,039
The net earnings of the nuclear decommissioning funds, which are recorded as
increases to the accumulated provision for depreciation, for the three months,
six months and twelve months ended June 30, 1999 and 1998 were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- ----------------- ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- ---------- ----------
(Thousands of Dollars)
Gross proceeds from
sales of securities.... $ 457,175 $ 520,460 $842,863 $948,463 $1,689,884 $1,989,510
Less cost based on spe-
cific identification... 436,159 499,050 818,185 893,384 1,652,894 1,881,911
--------- --------- -------- -------- ---------- ----------
Realized gains on sales
of securities.......... $ 21,016 $ 21,410 $ 24,678 $ 55,079 $ 36,990 $ 107,599
Other realized fund
earnings, net of
expenses............... 20,242 9,237 30,816 12,848 58,342 29,189
--------- --------- -------- -------- ---------- ----------
Total realized net earn-
ings of the funds...... $ 41,258 $ 30,647 $ 55,494 $ 67,927 $ 95,332 $ 136,788
Unrealized gains........ 38,460 524 88,738 114,562 164,679 182,864
--------- --------- -------- -------- ---------- ----------
Total net earnings of
the funds............. $ 79,718 $ 31,171 $144,232 $182,489 $ 260,011 $ 319,652
========= ========= ======== ======== ========== ==========
29
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 June 30, 1999 and December 31, 1998 were as follows:
June 30, 1999 December 31, 1998
-------------------------------- --------------------------------
Unrealized
Carrying Losses/ Carrying Unrealized Fair
Value (Gains) Fair Value Value Losses Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
ComEd preferred and
preference stocks...... $ 143,949 $ 3,127 $ 147,076 $ 678,156 $ 11,500 $ 689,656
ComEd-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely ComEd's
subordinated debt
securities............. $ 350,000 $ 10,975 $ 360,975 $ 350,000 $ 20,678 $ 370,678
Transitional trust
notes.................. $3,245,118 $(84,814) $3,160,304 $3,382,821 $ 67,168 $3,449,989
Long-term debt.......... $4,896,889 $215,301 $5,112,190 $5,911,757 $451,240 $6,362,997
Long-term notes payable, which are not included in the above table, amounted
to $143 million and $100 million as of June 30, 1999 and December 31, 1998,
respectively. Such notes, for which interest is paid at fixed and prevailing
rates, are included in the consolidated financial statements at cost, which
approximates their fair value.
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
portion of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of accrued spent nuclear
fuel disposal fee and related interest represents the settlement value as of
June 30, 1999 and December 31, 1998; therefore, the carrying value is equal to
the fair value.
(15) Pension and Postretirement Benefits. As of June 30, 1999, 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 June 30, 1999 and December 31, 1998 pension
liabilities and related data were determined using the January 1, 1998
actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental
retirement plan which covers any excess pension benefits that would be payable
to management employees under the
30
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
qualified plan but which are limited by the Internal Revenue Code. In 1998,
Indiana Company's qualified defined benefit pension plan was merged into
ComEd's 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, 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 June 30, 1999 and December
31, 1998 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 six months ended June
30, 1999 and the twelve months ended December 31, 1998 were as follows:
Six Months Ended Twelve Months Ended
June 30, 1999 December 31, 1998
-------------------------- --------------------------
Other Other
Pension Postretirement Pension Postretirement
Benefits Benefits Benefits Benefits
-------- -------------- ---------- --------------
(Thousands of Dollars)
Change in benefit
obligation
- -----------------
Benefit obligation at
beginning of period.... $4,327,000 $1,249,000 $4,010,000 $1,139,000
Service cost............ 63,000 21,000 115,000 38,000
Interest cost........... 142,000 41,000 273,000 78,000
Plan participants' con-
tributions............. -- 2,000 -- 3,000
Actuarial loss.......... 4,000 2,000 166,000 38,000
Benefits paid........... (118,000) (26,000) (237,000) (47,000)
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,418,000 $1,289,000 $4,327,000 $1,249,000
---------- ---------- ---------- ----------
Change in plan assets
- ---------------------
Fair value of plan as-
sets at beginning of
period................. $4,015,000 $ 865,000 $3,706,000 $ 767,000
Actual return on plan
assets................. 228,000 50,000 535,000 122,000
Employer contribution... -- -- 11,000 20,000
Plan participants' con-
tributions............. -- 2,000 -- 3,000
Benefits paid........... (118,000) (26,000) (237,000) (47,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $4,125,000 $ 891,000 $4,015,000 $ 865,000
---------- ---------- ---------- ----------
Plan assets less than
benefit obligation..... $ (293,000) $ (398,000) $ (312,000) $ (384,000)
Unrecognized net actuar-
ial loss/(gain)........ (7,000) (363,000) 37,000 (358,000)
Unrecognized prior serv-
ice cost/(asset)....... (58,000) 46,000 (60,000) 48,000
Unrecognized transition
obligation/(asset)..... (95,000) 312,000 (101,000) 323,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (453,000) $ (403,000) $ (436,000) $ (371,000)
========== ========== ========== ==========
The assumed discount rate used to determine the benefit obligation as of
June 30, 1999 and December 31, 1998 was 6.75%. The fair value of pension plan
assets excludes $23 million and $21 million held in grantor trust as of June
30, 1999 and December 31, 1998, respectively, for the payment of benefits
under the supplemental plan.
31
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of pension and other postretirement benefit costs, portions
of which were recorded as components of construction costs, for the three
months, six months and twelve months ended June 30, 1999 and 1998 were as
follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- -------------------- --------------------
1999 1998 1999 1998 1999 1998
Pension Benefit Costs --------- --------- --------- --------- --------- ---------
- --------------------- (Thousands of Dollars)
Service cost............ $ 32,000 $ 31,000 $ 63,000 $ 62,000 $ 116,000 $ 113,000
Interest cost on pro-
jected benefit obliga-
tion................... 71,000 69,000 142,000 139,000 276,000 271,000
Expected return on plan
assets................. (91,000) (85,000) (181,000) (171,000) (352,000) (326,000)
Amortization of transi-
tion asset............. (3,000) (3,000) (6,000) (6,000) (12,000) (13,000)
Amortization of prior
service asset.......... (1,000) (1,000) (2,000) (2,000) (4,000) (4,000)
Recognized loss......... 1,000 -- 2,000 -- 4,000 2,000
Curtailment gain........ -- -- -- -- -- (5,000)
--------- --------- --------- --------- --------- ---------
Net periodic benefit
cost.................. $ 9,000 $ 11,000 $ 18,000 $ 22,000 $ 28,000 $ 38,000
========= ========= ========= ========= ========= =========
Other Postretirement
Benefit Costs
- --------------------
Service cost............ $ 11,000 $ 9,000 $ 21,000 $ 18,000 $ 41,000 $ 35,000
Interest cost on accumu-
lated benefit
obligation............. 20,000 18,000 41,000 37,000 82,000 73,000
Expected return on plan
assets................. (18,000) (17,000) (37,000) (34,000) (72,000) (64,000)
Amortization of transi-
tion obligation........ 5,000 6,000 11,000 11,000 22,000 22,000
Amortization of prior
service cost........... 1,000 1,000 2,000 2,000 4,000 4,000
Recognized gain......... (3,000) (4,000) (6,000) (9,000) (11,000) (18,000)
Severance plan cost..... 1,000 1,000 1,000 2,000 5,000 8,000
--------- --------- --------- --------- --------- ---------
Net periodic benefit
cost.................. $ 17,000 $ 14,000 $ 33,000 $ 27,000 $ 71,000 $ 60,000
========= ========= ========= ========= ========= =========
In accounting for the pension costs and other postretirement benefit costs
under the plans, the following weighted average actuarial assumptions were
used for the periods during 1999, 1998 and 1997:
Other
Pension Benefits Postretirement Benefits
----------------- -----------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ------- ------- -------
Annual discount rate................. 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Annual long-term rate of return on
plan assets......................... 9.25% 9.50% 9.75% 8.97% 9.20% 9.40%
Annual rate of increase in future
compensation levels................. 4.00% 4.00% 4.00% -- -- --
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
Indiana Company's sale of State Line Station.
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 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:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(Thousands of Dollars)
Effect on total annual service and interest cost
components...................................... $ 27,000 $ (21,000)
Effect on postretirement benefit obligation...... 232,000 (182,000)
32
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay and the participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $8 million and $7
million for the three months ended June 30, 1999 and 1998, respectively, $15
million for each of the six months ended June 30, 1999 and 1998 and $32
million for each of the twelve months ended June 30, 1999 and 1998.
(16) Separation Plan Costs. O&M expenses included $5 million and $8 million
for the three months ended June 30, 1999 and 1998, respectively, $5 million
and $24 million for the six months ended June 30, 1999 and 1998, respectively,
and $30 million and $56 million for the twelve months ended June 30, 1999 and
1998, respectively, for costs related to voluntary separation offers to
certain employees of ComEd and Indiana Company, as well as certain other
employee-related costs. Such costs resulted in charges of $3 million (after-
tax), or $0.01 per common share (diluted), and $5 million (after-tax), or
$0.02 per common share (diluted), for the three months ended June 30, 1999 and
1998, respectively, $3 million (after-tax), or $0.01 per common share
(diluted), and $14 million (after-tax), or $0.07 per common share (diluted),
for the six months ended June 30, 1999 and 1998, respectively, and $18 million
(after-tax), or $0.08 per common share (diluted), and $34 million (after-tax),
or $0.16 per common share (diluted), for the twelve months ended June 30, 1999
and 1998, respectively.
(17) Income Taxes. The components of the net deferred income tax liability
at June 30, 1999 and December 31, 1998 were as follows:
June 30, December 31,
1999 1998
---------- ------------
(Thousands of Dollars)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs.......................... $3,989,225 $4,028,351
Overheads capitalized................................ 137,850 140,922
Repair allowance..................................... 228,020 233,861
Regulatory assets recoverable through future rates... 667,728 680,356
Deferred income tax assets:
Postretirement benefits.............................. (351,370) (331,651)
Unamortized investment tax credits................... (184,732) (191,135)
Regulatory liabilities to be settled through future
rates............................................... (587,639) (595,005)
Nuclear plant closure................................ (24,400) (38,354)
Other--net........................................... (179,120) (146,224)
---------- ----------
Net deferred income tax liability..................... $3,695,562 $3,781,121
========== ==========
The $86 million decrease in the net deferred income tax liability from
December 31, 1998 to June 30, 1999 is comprised of an $81 million credit to
net deferred income tax expense and a $5 million decrease in regulatory assets
net of regulatory liabilities pertaining to income taxes for the period. The
amount of accelerated cost recovery and liberalized depreciation included in
deferred income tax liabilities for both periods 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.
33
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of net income tax expense charged/(credited) to continuing
operations for the three months, six months and twelve months ended June 30,
1999 and 1998 were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ------------------ ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ----------
(Thousands of Dollars)
Operating income:
Current income taxes... $ 103,501 $ 75,369 $212,379 $135,912 $ 379,078 $ 315,431
Deferred income taxes.. (43,154) (14,424) (88,768) (19,821) (18,813) 28,103
Investment tax credits
deferred--net......... (7,021) (6,888) (14,042) (14,048) (27,723) (29,270)
Other (income) and
deductions:
Current income taxes... (899) (4,166) 1,769 (57,232) 9,147 (62,134)
Deferred income taxes.. 5,243 796 6,080 47,543 17,993 (337,473)
Investment tax credits. (2,153) -- (3,981) (7,472) (8,616) (29,997)
--------- --------- -------- -------- --------- ----------
Net income taxes
charged/(credited) to
continuing operations.. $ 55,517 $ 50,687 $113,437 $ 84,882 $ 351,066 $ (115,340)
========= ========= ======== ======== ========= ==========
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted in the following effective
income tax rates for the three months, six months and twelve months ended June
30, 1999 and 1998:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ------------------ ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ----------
(Thousands of Dollars)
Net income/(loss) before extraordi-
nary items........................ $ 119,462 $ 80,458 $216,611 $134,173 $ 592,622 $ (176,257)
Net income taxes charged/(credited)
to continuing operations.......... 55,517 50,687 113,437 84,882 351,066 (115,340)
Provision for dividends on ComEd
preferred and preference stocks... 3,043 14,462 18,340 29,009 46,215 58,483
--------- --------- -------- -------- --------- ----------
Pre-tax income/(loss) before
extraordinary items and provision
for dividends..................... $ 178,022 $ 145,607 $348,388 $248,064 $ 989,903 $ (233,114)
========= ========= ======== ======== ========= ==========
Effective income tax rate.......... 31.2% 34.8% 32.6% 34.2% 35.5% 49.5%
========= ========= ======== ======== ========= ==========
34
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The principal differences between net income taxes charged/(credited) to
continuing operations and the amounts computed at the federal statutory rate
of 35% for the three months, six months and twelve months ended June 30, 1999
and 1998 were as follows:
Twelve
Three Months Ended Six Months Ended Months Ended
June 30 June 30 June 30
-------------------- ----------------- -------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- ------- -------- ---------
(Thousands of Dollars)
Federal income taxes
computed at statutory
rate................... $ 62,308 $ 50,962 $121,936 $86,822 $346,466 $ (81,590)
Equity component of
AFUDC which was ex-
cluded from taxable
income................. (112) (110) (210) (198) (401) (4,743)
Amortization of
investment tax credits,
net of deferred income
taxes.................. (5,907) (4,517) (11,618) (13,728) (23,395) (43,274)
State income taxes, net
of federal income tax-
es..................... 7,527 6,817 15,436 12,655 43,641 (1,343)
Unrealized gain on for-
ward share repurchase
contract............... (6,891) -- (11,696) -- (11,696) --
Earnings on nontax-
qualified
decommissioning fund... (2,768) -- (2,768) -- (2,768) --
Differences between book
and tax accounting,
primarily property-
related deductions..... 1,360 (2,465) 2,357 (669) (781) 15,610
--------- --------- -------- ------- -------- ---------
Net income taxes
charged/(credited) to
continuing operations.. $ 55,517 $ 50,687 $113,437 $84,882 $351,066 $(115,340)
========= ========= ======== ======= ======== =========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes,
for the three months, six months and twelve months ended June 30, 1999 and
1998 were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- ----------------- -------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Illinois public utility
revenue................ $ 402 $ 44,247 $ 1,897 $101,928 $ 26,449 $ 222,869
Illinois invested capi-
tal.................... -- -- -- -- -- 47,486
Illinois electricity
distribution tax....... 26,336 24,911 54,672 51,629 113,069 51,629
Municipal utility gross
receipts............... 26,164 38,556 50,587 81,107 121,981 170,131
Real estate............. 29,839 29,589 63,233 65,080 124,172 143,308
Municipal compensation.. 18,494 24,214 36,801 44,085 70,426 85,446
Energy assistance and
renewable energy
charge................. 8,776 8,709 17,445 16,273 33,909 16,273
Other--net.............. 20,124 14,836 37,860 32,386 79,835 66,116
--------- --------- -------- -------- --------- ---------
$ 130,135 $ 185,062 $262,495 $392,488 $ 569,841 $ 803,258
========= ========= ======== ======== ========= =========
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, replacing the Illinois public utility revenue tax, and
certain municipal utility taxes are recorded as liabilities. Previously,
similar taxes were presented on the Statements of Consolidated Operations as
revenue and expense. The reduction in operating revenues and taxes, except
income taxes, due to the change in presentation for such taxes was
approximately $50 million, $118 million and $213 million for the three months,
six months and twelve months ended June 30, 1999, respectively. This change in
the presentation for such taxes did not have an effect on results of
operations.
See Note 21 for additional information regarding Illinois invested capital
taxes.
35
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(19) 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 $627 million, consisting of $300 million of commercial
paper/bank borrowings and $327 million of intermediate term notes, to finance
the transactions. The commercial paper/bank borrowing portion 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 June 30, 1999, ComEd's obligation to
the lessor for leased nuclear fuel amounted to approximately $428 million.
ComEd has agreed to make lease payments which cover the amortization of the
nuclear fuel used in ComEd's reactors plus the lessor's related financing
costs. ComEd has an obligation for spent nuclear fuel disposal costs of leased
nuclear fuel.
As of June 30, 1999, future minimum rental payments, net of executory costs,
for capital leases are estimated to aggregate to $471 million, including $106
million in 1999, $161 million in 2000, $102 million in 2001, $53 million in
2002, $28 million in 2003 and $21 million in 2004-2006. The estimated interest
component of such rental payments aggregates $48 million. The estimated
portions of obligations due within one year under capital leases of $170
million and $195 million at June 30, 1999 and December 31, 1998, respectively,
were included in current liabilities on the Consolidated Balance Sheets.
Future minimum rental payments at June 30, 1999 for operating leases are
estimated to aggregate to $302 million, including $21 million in 1999, $40
million in 2000, $32 million in 2001, $27 million in 2002, $23 million in 2003
and $159 million in 2004-2043.
(20) 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 $12 million at June 30, 1999, after reflecting the
accounting impairment recorded in the second quarter of 1998. See Note 1,
under "Regulatory Assets and Liabilities," for additional information.
(21) Commitments and Contingent Liabilities. Purchase commitments,
principally related to construction and nuclear fuel, approximated $459
million at June 30, 1999, comprised of $403 million for ComEd, $50 million for
UT Holdings and $6 million for Unicom Energy Services. In addition, ComEd has
substantial commitments for the purchase of coal. Upon completion of the Asset
Sale Agreement, ComEd expects to enter into arrangements to assign or settle a
substantial portion of the coal purchase commitments. 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.
36
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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
assessment of up to $36 million in the event losses incurred under the small
number of policies in the old program exceed accumulated reserves.decision.
Cotter Corporation Litigation. During 1989 and 1991, actions were
brought in federal and state courts in Colorado against ComEd and its
subsidiary, Cotter Corporation (Cotter), seeking unspecified damages and
injunctive relief based on allegations that Cotter has permitted radioactive and
other hazardous material to be released from its mill into areas owned or
occupied by the plaintiffs, resulting in property damage and potential adverse
health effects. With respect to Cotter, inIn 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 beenwere settled andor dismissed.
On July 15,In 1998, a jury verdict was rendered against Cotter in Dodge v. Cotter (United States District Court for the Districtfavor of Colorado, Civil Action No. 91-Z-1861), a case relating to 14 of the
plaintiffs in the 1991 cases. The verdict against Cotter and in favor of the
plaintiff, after an amended judgement was issued March 11, 1999, totaledcases, totaling approximately $6 million includingin
26
compensatory and punitive damages, interest and medical monitoring. On appeal,
the Tenth Circuit Court of Appeals reversed the jury verdict, and remanded the
case for new trial. These plaintiffs' cases were consolidated with the remaining
26 plaintiffs' cases, which had not been tried. The matter is currentlyconsolidated trial was
completed on appeal. AlthoughJune 28, 2001. The jury returned a verdict against Cotter and
awarded $16 million in various damages. Cotter will appeal the verdict.
In November 2000, another trial involving a separate sub-group of 13
plaintiffs, seeking $19 million in damages plus interest was completed in
federal district court in Denver. The jury awarded nominal damages of $42,500 to
11 of 13 plaintiffs, but awarded no damages for any personal injury or health
claims, other 1991 cases will necessarily involvethan requiring Cotter to perform periodic medical monitoring at
minimal cost. The plaintiffs appealed the resolutionverdict to the Tenth Circuit Court 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.Appeals.
On February 18, 2000, 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
likelysold Cotter 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 asan unaffiliated third party.
As part of the absorption of smaller utilities.
Approximately halfsale, ComEd agreed to indemnify Cotter for any liability incurred
by Cotter as a result of these sites wereactions, as well as any liability arising in
connection with the West Lake Landfill discussed in the next paragraph. In
connection with the corporate restructuring, the responsibility to indemnify
Cotter for any liability related to these matters was 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 facilitiesGeneration.
Exelon's management believes adequate reserves have been constructed. To date, ComEdestablished in
connection with these proceedings.
The United States Environmental Protection Agency (EPA) has advised
Cotter that it is potentially liable in connection with radiological
contamination at a site known as the West Lake Landfill in Missouri. Cotter is
alleged to have disposed of approximately 39,000 tons of soils mixed with 8,700
tons of leached barium sulfate at the site. Cotter, along with three other
companies identified 44 former MGP sites for which it
may be liable for remediation. ComEd presently estimatesby the EPA as potentially responsible parties (PRPs), is
reviewing a draft feasibility study that itsrecommends capping the site. The PRPs
are also engaged in discussions with the State of Missouri and the EPA. The
estimated costs of former MGPremediation for the site investigationare $10 to 15 million. Once a final
feasibility study is complete and remediation will aggregate from $25 million
to $150 million in current-year (1999) dollars. Ita remedy selected, it is expected that the
costs
associatedPRPs will agree on an allocation of responsibility for the costs. Until an
agreement is reached, Exelon cannot predict its share of the costs.
Godley Park District Litigation. On April 18, 2001, the Godley Park
District filed suit in Will County Circuit Court against ComEd and Exelon
alleging that oil spills at Braidwood Station have contaminated the Park
District's water supply. The complaint seeks actual damages, punitive damages of
$100 million and statutory penalties. The complaint was served on ComEd and
Exelon on July 12, 2001. ComEd and Exelon are contesting the liability and
damages sought by the plaintiff.
Cajun Electric Power Cooperative, Inc. On May 27, 1998, the United
States Department of Justice, on behalf of the Rural Utilities Service and the
Chapter 11 Trustee for the Cajun Electric Power Cooperative, Inc. (Cajun), filed
an action claiming breach of contract against PECO in the United States District
Court for the Middle District of Louisiana arising out of PECO's termination of
the contract to purchase Cajun's interest in the River Bend nuclear power plant.
This action seeks the full purchase price of the 30% interest in the River Bend
nuclear power plant, $50 million, plus interest and consequential damages. In
connection with the corporate restructuring, the responsibility for any
liability related to this matter was transferred to Generation. The parties have
reached a tentative settlement of the dispute, subject to court approval, which
calls for Exelon to make a $14 million payment.
Service Interruptions. In August 1999, three class action lawsuits were
filed against ComEd, and subsequently consolidated, in the Circuit Court of Cook
County, Illinois seeking damages for personal
27
injuries, property damage and economic losses related to a series of service
interruptions that occurred in the summer of 1999. The combined effect of these
interruptions resulted in over 168,000 customers losing service for more than
four hours. Conditional class certification was approved by the court for the
sole purpose of exploring settlement talks. ComEd filed a motion to dismiss the
complaints. On April 24, 2001, the court dismissed four of the five counts of
the consolidated complaint without prejudice and the sole remaining count was
dismissed in part. On June 1, 2001, the plaintiffs filed a second amended
consolidated complaint. A portion of any settlement or verdict may be covered by
insurance; discussions with the carrier are ongoing. Exelon's management
believes adequate reserves have been established in connection with these cases.
Reliability Investigation. In 1999, the ICC opened an investigation
regarding the design and remediationreliability of former MGP sites will be
incurred overComEd's transmission and distribution
system. The investigation was expanded during 2000 to include a periodcircuit breaker
fire that occurred in October 2000 at a ComEd substation. The ICC has issued
several reports in the investigation covering the summer of 1999 outages as well
as the transmission and distribution system. These reports include
recommendations and an implementation timetable. The recommendations are not
legally binding on ComEd; however, the ICC may enforce them through litigation.
Since the summer of 1999, ComEd has devoted significant resources to exceed 30 years. Becauseimproving
the reliability of its transmission and distribution system. Exelon's management
believes that the likelihood of a successful material claim resulting from the
investigation is remote.
Retail Rate Law. In 1996, several developers of non-utility generating
facilities filed litigation against various Illinois officials claiming that the
enforcement against those facilities of an amendment to Illinois law removing
the entitlement of those facilities to state-subsidized payments for electricity
sold to ComEd after March 15, 1996 violated their rights under the Federal and
state constitutions. The developers also filed suit against ComEd for a
declaratory judgement that their rights under their contracts with ComEd were
not affected by the amendment. On August 4, 1999, the Illinois Appellate Court
held that the developers' claims against the state were premature, and the
Illinois Supreme Court denied leave to appeal that ruling. Developers of both
facilities have since filed amended complaints repeating their allegations that
ComEd breached the contracts in question and requesting damages for such breach,
in the amount of the difference between the state-subsidized rate and the amount
ComEd was willing to pay for the electricity. ComEd is not able to
determine the most probable liability for such MGP costs,contesting this matter.
Pennsylvania Real Estate Tax Appeals. Exelon is involved in accordance with
accounting standards, a reservetax appeals
regarding two of $25 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets as of June 30, 1999its nuclear facilities, Limerick Generating Station (Montgomery
County) and December 31, 1998, which reflects the low end of the range of ComEd's
estimate of the liability associated with former MGP sites.
37
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Concluded
In addition, as of June 30, 1999 and December 31, 1998, 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.
These cost estimates are based on currently available information regarding
the responsible parties likely to sharePeach Bottom Atomic Power Station (York County). Exelon is also
involved in the coststax appeal for Unit No. 1 at Three Mile Island Nuclear Station
(Dauphin County) through AmerGen Energy Company, LLC (AmerGen). Exelon does not
believe the outcome 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 tothese matters will have to be remediated. ComEd is currently re-evaluating its
environmental remediation strategies. The finala material adverse effect on
Exelon's results of this re-evaluation
cannot be determined at this time, but could result in an increase to the
estimated liability.operations or financial condition.
Other Tax Issues. The IDR hasIllinois Department of Revenue had 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 and penalties, totaled approximately
$47 million as of June 30, 1999.1997. ComEd has protestedreceived an order dated
October 9, 2001 from the notices,Administrative Law Judge of the Illinois Department of
Revenue Administrative Hearings Division that each and all of the matter is currently pending beforeNotices of Tax
Liability for the IDR's Officeyears 1988 through 1997 are withdrawn and dismissed, that the
protests of Administrative
Hearings. Interest will continue to accrue on the alleged tax deficiencies.
Ontaxpayer are granted, and that the Notices of Tax Liability are
cancelled.
28
Chicago Franchise. In March 22, 1999, ComEd reached a settlement agreement
with the City of Chicago to end the arbitration proceeding between ComEd and
the CityChicago regarding the January 1, 1992 franchise agreement and a supplemental agreement between them. 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 was approved
by the City Council on May 12, 1999. As part of the
settlement agreement, ComEd and the City haveChicago agreed to a revised combination of
ongoing work under the franchise agreement and new initiatives that will result
in defined transmission and distribution expenditures by ComEd to improve
electric serviceservices in the City.Chicago. The settlement agreement provides that ComEd willwould
be subject to liquidated damages if the projects are not completed by various
dates, unless it iswas prevented from doing so by events beyond its reasonable
control. ComEd's current construction
budget considers these projects, and therefore, no changes to that budget are
expected. In addition, ComEd and the City have agreed to establishChicago established an Energy Reliability and
Capacity Account, into which ComEd would depositdeposited $25 million following the effectivenessduring each of the settlement agreement1999 and
up2000 and has conditionally agreed to deposit $25 million at the end of each of the years 2000,
2001 and 2002, to help ensure an adequate and reliable electric supply for
Chicago.
Power Team FERC Allegations. On October 3, 2001, FERC issued an order
to show cause alleging that both PECO and the City.Power Team, a division of
Generation, violated FERC standards of conduct and regulations claiming that
PECO had inappropriately provided Power Team information on planned maintenance
outages and deratings, enabling Power Team to profit by purchasing Firm
Transmission Rights (FTRs) that would be affected by such outages and deratings.
FERC also suggested that PECO may have operated its transmission system and
taken outages and deratings to benefit Power Team. The 1997 Act, as amended, also committed ComEdpotential remedies FERC
could seek include re-evaluating Power Team's market-based authority, requiring
Power Team to spend at least $2 billion
through 2004 on transmissiondisgorge the profits (alleged by FERC to be $2.4 million) from the
FTRs purchased, or requiring PECO to receive permission from the PJM
Interconnection LLC prior to initiating any outages or deratings. PECO and distribution facilities outside of the
City
and $250 million in environmental funding initiatives, pending the close of
the fossil plant sale.
(22) Subsequent Events. At the end of July 1999, during a period of
unusually high temperatures,Power Team maintain that there were power outagesno inappropriate communications and are
contesting FERC's allegations. On October 26, 2001 Exelon, PECO, and Power Team
filed a response with FERC, denying that PECO manipulated its transmission
system to benefit Power Team or that PECO shared non-public information with
Power Team.
General. Exelon, ComEd and PECO are involved in various other
litigation matters. The ultimate outcome of varying durations
affectingsuch matters, while uncertain, is
not expected to have a material adverse effect on their respective financial
condition or results of operations.
29
9. PENSION AND POSTRETIREMENT BENEFIT OBLIGATIONS (ComEd and PECO)
ComEd
As part of Exelon's corporate restructuring, approximately 107,000 of ComEd's customers.5,500 ComEd
announced shortly
after the restoration of service that it would reimburse customers whose power
had been off for four or more hours for actual losses that they suffered asemployees were transferred to Generation, BSC and Enterprises. As a result of
the extended outages. Suchtransfer, ComEd's pension and non-pension postretirement benefits
obligations were reduced by $143 million and $172 million, respectively, as of
January 1, 2001.
PECO
As part of Exelon's corporate restructuring, approximately 3,200 PECO
employees were transferred to Generation, BSC and Enterprises. As a result of
the transfer, PECO's pension and non-pension postretirement benefits obligations
were reduced by $96 million and $284 million, respectively, as of January 1,
2001.
ComEd's and PECO's plan assets and funded status of the plans as of December 31,
2000, after reflecting the effect of these transfers, are as follows:
ComEd PECO
-------------------------- --------------------------
Other Other
Pension Postretirement Pension Postretirement
Benefits Benefits Benefits Benefits
-------- -------- -------- --------
Net Benefit Obligation at December 31, 2000 $ 2,220 $ 539 $ 998 $ 410
======= ======= ======= =======
Fair Value of Plan Assets at December 31, 2000 $ 1,987 $ 352 $ 1,380 $ 121
======= ======= ======= =======
Funded Status at December 31, 2000 $ (233) $ (187) $ 382 $ (289)
Unrecognized net actuarial (gain) loss 91 42 (441) 16
Unrecognized prior service cost -- -- 35 --
Unrecognized net transition obligation (asset)
-- -- (9) 56
Miscellaneous adjustments -- 2 -- --
------- ------- ------- -------
Net amount recognized at December 31, 2000 $ (142) $ (143) $ (33) $ (217)
======= ======= ======= =======
Amounts recognized in the consolidated balance
sheets consist of:
Prepaid benefit cost $ 70 $ 2
Accrued benefit cost (103) (219)
------- -------
Net amount recognized at December 31, 2000 $ (33) $ (217)
======= =======
30
10. DECOMMISSIONING AND SPENT FUEL STORAGE (Exelon, ComEd and PECO)
The obligation for decommissioning Exelon's nuclear facilities and the related
trust fund assets were transferred from ComEd and PECO to Generation
concurrently with the transfer of the generating plants and the related NRC
operating licenses as of January 1, 2001. Additionally, obligations for spent
nuclear fuel disposal, and provisions for nuclear insurance were assumed by
Generation under terms and conditions commensurate with those previously borne
by ComEd and PECO.
ComEd
ComEd has historically accounted for the current period's cost of
decommissioning by recording a charge to depreciation expense and a
corresponding liability in accumulated depreciation for its operating units and
a reduction to regulatory assets for retired units (in current year dollars) on
a straight-line basis over the NRC operating license life of the plants. As of
December 31, 2000, ComEd's cumulative liability of $2.1 billion was recorded as
a component of accumulated depreciation. Additionally, a $1.3 billion liability
representing the present value of the estimated cost of decommissioning nuclear
units previously retired was recorded as a long-term liability. These
liabilities, as well as investments in trust fund assets of $2.6 billion to fund
the costs of decommissioning, were transferred to Generation.
In December 2000, the ICC issued an order, effective upon the transfer
of the nuclear plants to Generation, authorizing ComEd to recover $73 million
annually from customers during the first four years of the six-year term of the
PPA between ComEd and Generation. See Note 4- Corporate Restructuring. Up to $73
million annually can also be collected in 2005 and 2006, depending on the
portion of the output of the former ComEd nuclear stations that ComEd purchases
from Generation. Under the ICC order, subsequent to 2006, there would be no
further collection for decommissioning costs from customers. All amounts
collected from customers must be remitted to Generation for deposit into the
related trust funds. The ICC order also provides that any surplus trust funds
after ComEd's former nuclear stations are decommissioned must be refunded to
ComEd's customers. The ICC order has been appealed to the Illinois Appellate
Court by ComEd and other parties.
The $73 million annual recovery of decommissioning costs authorized by
the ICC order represents a reduction from the $84 million annual recovery in
2000. Accordingly, in the first quarter of 2001, ComEd reduced its nuclear
decommissioning regulatory asset to $372 million, reflecting the expected
probable future recoveries from customers. The reduction in the regulatory asset
in the amount of $347 million was recorded as an adjustment to the merger
purchase price allocation and resulted in a corresponding increase in goodwill.
Effective January 1, 2001, ComEd recorded an obligation to Generation of
approximately $440 million representing ComEd's legal requirement to remit funds
to Generation for the remaining regulatory asset amount of $372 million upon
collection from customers, and for collections from customers prior to the
establishment of external decommissioning trust funds in 1989 to be remitted to
Generation for deposit into the decommissioning trusts through 2006. Unrealized
gains and losses on decommissioning trust funds (based on the market value of
the assets on the merger date, in accordance with purchase accounting) had
previously been recorded in accumulated depreciation or regulatory assets. As a
result of the transfer of the nuclear plants to Generation and the ICC order
limiting the regulated recoveries of decommissioning costs, net unrealized
losses of $47 million (net of income taxes) were reclassified to accumulated
other comprehensive income. Realized gains and losses on decommissioning trust
funds' assets are based on the adjusted cost basis of the trust fund assets and
are reflected in other income and deductions in Exelon's Condensed Consolidated
Statements of Income and Comprehensive Income.
31
Additionally, as part of the corporate restructuring, ComEd's liability
to the U.S. Department of Energy (DOE) for payment of its one-time fee for spent
nuclear fuel disposal has been transferred to Generation. As of December 31,
2000, this liability, including accrued interest, was $810 million.
PECO
As of December 31, 2000, PECO's Condensed Consolidated Balance Sheet
included an estimated liability for decommissioning its nuclear plants of $412
million as a component of accumulated depreciation. Investments in nuclear
decommissioning trust fund assets were $440 million. Both the liability and the
trust fund investments were transferred to Generation as of January 1, 2001.
Annual decommissioning cost recovery of $29 million, collected through regulated
rates, will continue, and all amounts collected will be remitted to Generation
to be deposited into the decommissioning trust funds.
11. LONG-TERM DEBT (Exelon and PECO)
On March 1, 2001, PECO Energy Transition Trust (PETT), a Delaware business trust
and a wholly owned subsidiary of PECO, refinanced $805 million of floating rate
Series 1999-A Transition Bonds through the issuance by PETT of fixed-rate
transition bonds (Series 2001-A Transition Bonds). Approximately 72% of the
Class A-3 and 70% of the Class A-5 Series 1999-A Transition Bonds were redeemed.
The Series 2001-A Transition Bonds are non-callable, fixed-rate securities with
an interest rate of 6.52%. The Series 2001-A Transition Bonds have an expected
final payment date of September 1, 2010 and a termination date of December 31,
2010. The transition bonds are solely obligations of PETT, secured by intangible
transition property sold by PECO to PETT concurrently with the issuance of
transition bonds and certain other related collateral.
In 1999, PECO entered into interest rate swaps relating to the Class
A-3 and Class A-5 Series 1999-A Transition Bonds in the aggregate notional
amount of $1.1 billion with an average interest rate of 6.65%. PECO also entered
into forward starting interest rate swaps relating to these two classes of
floating rate transition bonds in the aggregate notional amount of $1.1 billion
with an average interest rate of 6.01%. In connection with the refinancing of a
portion of the two floating rate series of transition bonds in the first quarter
of 2001, PECO settled $318 million of a forward starting interest rate swap
resulting in a $6 million gain which is reflected in other income and deductions
due to the transaction no longer being probable. See Note 5 - Cumulative Effect
of a Change in Accounting Principle. Also, in connection with the refinancing,
PECO settled a portion of the interest rate swaps and the remaining portion of
the forward starting interest rate swaps resulting in gains of $25 million,
which were deferred and are being amortized over the expected remaining lives of
the related debt.
On May 8, 2001, Exelon issued $500 million of senior unsecured notes
with a maturity date of May 1, 2011 and an interest rate of 6.75%. On June 11,
2001, Generation issued $700 million of senior unsecured notes with a maturity
date of June 15, 2011 and an interest rate of 6.95%. The proceeds from these
financings were used to repay a $1.2 billion term loan.
During 2001, Generation issued $121 million of Pollution Control
Revenue Refunding Bonds at an average variable commercial paper interest rate of
2.685% with maturities of 20 to 33 years. The proceeds from these offerings were
used to retire, through a capital contribution from Exelon to PECO, $121 million
of PECO pollution control notes with an average interest rate of 7.01%.
32
12. SALE OF ACCOUNTS RECEIVABLE (Exelon and PECO)
PECO is party to an agreement with a financial institution under which it can
sell or finance with limited recourse an undivided interest, adjusted daily, in
up to $225 million of designated accounts receivable until November 2005. As of
September 30, 2001, PECO had sold a $225 million interest in accounts
receivable, consisting of a $169 million interest in accounts receivable which
PECO accounted for as a sale under SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a Replacement
of FASB Statement No. 125" and a $56 million interest in special-agreement
accounts receivable which were accounted for as a long-term note payable. PECO
retains the servicing responsibility for these receivables. The agreement
requires PECO to maintain the $225 million interest, which, if not met, requires
PECO to deposit cash in order to satisfy such requirements. At September 30,
2001, PECO met this requirement and was not required to make any cash deposits.
13. RELATED-PARTY TRANSACTIONS (Exelon, ComEd and PECO)
Exelon
In August 2001, Exelon recorded a $150 million note receivable from
Sithe Energies, Inc. (Sithe), an equity method investment of Generation. Sithe
used the proceeds from the note to repay subordinated debt. The note has a
maturity date of August 20, 2004 and an interest rate of the eurodollar rate,
plus 2.25%. For the three and nine month periods ended September 30, 2001,
Exelon recorded $1 million of interest income on the note.
ComEd
At December 31, 2000, ComEd had a $400 million receivable from PECO,
which was repaid in the second quarter of 2001. The average interest rate on
this receivable for the period outstanding was 6.5%. Interest income on the
receivable from PECO was $8 million for the nine months ended September 30,
2001.
ComEd had a note receivable from an affiliate of $1.3 billion at
September 30, 2001 and December 31, 2000, relating to the December 1999 fossil
plant sale, which is included in deferred debits and other assets in ComEd's
Condensed Consolidated Balance Sheets. Interest income earned on this note
receivable was $14 million and $49 million for the three months ended September
30, 2001 and 2000, respectively. Interest income earned on this note receivable
was $51 million and $138 million for the nine months ended September 30, 2001
and 2000, respectively.
Effective January 1, 2001, Exelon contributed to ComEd a $1.0 billion
non-interest bearing receivable related to Exelon's agreement to fund future
income tax payments resulting from the collection by ComEd of instrument funding
charges. This receivable is reflected as a reduction of shareholders' equity in
ComEd's Condensed Consolidated Balance Sheets and is expected to primarily include
costs associated with replacing spoiled food, medicinebe settled over
the years 2001 through 2008.
At September 30, 2001, ComEd had a short-term payable of $60 million
and a long-term payable of $317 million to Generation resulting from the
restructuring, which were included in current liabilities and deferred credits
and other heat
sensitive perishables.liabilities, respectively, on ComEd's Condensed Consolidated Balance
Sheets.
33
ComEd does not intendpaid common stock dividends to pay claimsExelon of $105 million and $253
million for consequential
damagesthe three and nine months ended September 30, 2001, respectively.
In connection with the transfer of the generation assets in the
corporate restructuring, ComEd entered into a PPA with Generation. See Note 4 -
Corporate Restructuring. Intercompany power purchases pursuant to the PPA for
the three and nine months ended September 30, 2001 were $948 million and $2,141
million, respectively.
Effective January 1, 2001, upon the corporate restructuring, ComEd
receives a variety of corporate support services from BSC, including legal,
human resources, financial and information technology services. Such services,
provided at cost including applicable overhead, were $33 million and $96
million, for the three and nine months ended September 30, 2001, respectively.
PECO
At December 31, 2000, PECO had a $400 million payable to ComEd, which
was repaid in the second quarter of 2001. The average annual interest rate on
this payable for the period outstanding was 6.5%. Interest expense related to
this payable for the nine months ended September 30, 2001 was $8 million.
Effective January 1, 2001, Exelon contributed to PECO a $2.0 billion
non-interest bearing receivable related to Exelon's agreement to fund future
income tax payments resulting from the collection of competitive transition
charges. This receivable is reflected as a reduction of shareholders' equity in
PECO's Condensed Consolidated Balance Sheets and is expected to be settled over
the years 2001 through 2010.
PECO paid common stock dividends to Exelon of $69 million and $169
million for the three and nine months ended September 30, 2001, respectively.
In connection with the transfer of the generation assets in the
corporate restructuring, PECO entered into a PPA with Generation. See Note 4 -
Corporate Restructuring. Intercompany power purchases pursuant to the PPA for
the three and nine months ended September 30, 2001 were $364 million and $872
million, respectively.
Effective January 1, 2001, upon the corporate restructuring, PECO
receives a variety of corporate support services from BSC, including legal,
human resources, financial and information technology services. Such services,
provided at cost including applicable overhead, were $18 million and $56
million, for the three and nine months ended September 30, 2001, respectively.
14. NEW ACCOUNTING PRONOUNCEMENTS (Exelon, ComEd and PECO)
During the third quarter of 2001, the Financial Accounting Standards Board
(FASB) issued Statements of Financial Accounting Standards (SFAS) No. 141,
"Business Combinations" (SFAS No. 141), No. 142, "Goodwill and Other Intangible
Assets" (SFAS No. 142) and No. 143, "Asset Retirement Obligations" (SFAS No.
143).
34
SFAS No. 141 requires that all business combinations be accounted for
under the purchase method of accounting and establishes criteria for the
separate recognition of intangible assets acquired in business combinations.
SFAS No. 141 is effective for business combinations initiated after June 30,
2001.
SFAS No. 142 establishes new accounting and reporting standards for
goodwill and intangible assets. Exelon expects to adopt SFAS No. 142 as of
January 1, 2002. Under SFAS No. 142, effective January 1, 2002, goodwill
recorded by Exelon will no longer be subject to amortization. After January 1,
2002, goodwill will be subject to an assessment for impairment using a fair
value based test at least annually, or more frequently if events or
circumstances indicate that goodwill might be impaired. An impairment loss would
be reported as a reduction to goodwill and a charge to operating expense, except
at the transition date, when the loss would be reflected as a cumulative effect
of a change in accounting principle. As of September 30, 2001, Exelon's
Condensed Consolidated Balance Sheet reflected approximately $5.5 billion in
goodwill net of accumulated amortization, including $5.1 billion of net goodwill
related to the outages. ComEdmerger of Unicom and PECO recorded on ComEd's Condensed
Consolidated Balance Sheets, with the remainder related to Enterprises. Annual
amortization of goodwill related to the merger and to Enterprises of $128
million and $23 million, respectively, is currentlyexpected to be discontinued upon
adoption of SFAS No. 142. Exelon is in the process of evaluating submitted claims. A preliminary estimatethe overall
impact of such lossesSFAS No. 142 on its financial statements and other
restorationis unable to determine
the overall impact, but the effect could be material.
SFAS No. 143 provides accounting requirements for retirement
obligations associated with tangible long-lived assets. Exelon expects to adopt
SFAS No. 143 on January 1, 2003. Retirement obligations associated with
long-lived assets included within the scope of SFAS No. 143 are those for which
there is a legal obligation to settle under existing or enacted law, statute,
written or oral contract or by legal construction under the doctrine of
promissory estoppel. Upon adoption of SFAS No. 143, Exelon will use a
cumulative-effect approach to recognize transition amounts for any existing
liabilities, asset retirement costs including labor and repair costs, totals $15-$20 million.
On August 12, 1999, there were power outagesaccumulated depreciation. Exelon is in
the downtown business areaprocess of evaluating the impact of SFAS No. 143 on its financial
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144
establishes accounting and reporting standards for both the impairment and
disposal of long-lived assets. This statement is effective for fiscal years
beginning after December 15, 2001 and provisions of this statement are generally
applied prospectively. Exelon is in the City affecting approximately 3,000 customers, which resulted from
failed equipment at a ComEd substation. All service was restored by that
evening. These outages were unrelated to those discussed above. ComEd is
currentlyprocess of evaluating the costs associatedimpact of SFAS
No. 144 on its financial statements.
15. CHANGE IN ACCOUNTING ESTIMATE (Exelon)
Effective April 1, 2001, Exelon changed its accounting estimates related to the
depreciation and decommissioning of certain generating stations. The estimated
service lives were extended by 20 years for three nuclear stations, by periods
of up to 20 years for certain fossil stations and by 50 years for a pumped
storage station. Effective July 1, 2001, the estimated service lives were
extended by 20 years for the remainder of Exelon's operating nuclear stations.
These changes were based on engineering and economic feasibility studies
performed by Exelon considering, among other things, future capital and
maintenance expenditures at these plants. As a result of the change, net income
for the three and nine months ended September 30, 2001 increased $36 million
($21 million, net of income taxes) and $57 million ($34 million, net of income
taxes), respectively.
35
16. SUBSEQUENT EVENT (Exelon, ComEd and PECO)
On October 30, 2001, PECO issued, through a private placement, $250 million of
its First and Refunding Mortgage Bonds with these outages.
38
UNICOM CORPORATION AND SUBSIDIARY COMPANIESan interest rate of 5.95% and
maturity date of November 11, 2011. Proceeds from the first mortgage bonds were
used to repay $250 million aggregate principal amount of PECO's First and
Refunding Mortgage Bonds having an interest rate of 5.625% and a maturity date
of November 1, 2001.
On November 5, 2001, ComEd offered to purchase for cash $250 million of its
First Mortgage Bonds, with an interest rate of 9.875% and a maturity date of
June 15, 2020. The tender price is based on a fixed spread of 80 basis points
over the yield to maturity of the 6.5% U.S. Treasury Note due May 15, 2005. The
offer will expire on November 16, 2001, unless extended or earlier terminated.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Changes inEXELON CORPORATION
- ------------------
GENERAL
On October 20, 2000, Exelon Corporation (Exelon) became the Electric Utility Industry
Unicomparent corporation
of Commonwealth Edison Company (ComEd) 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 FederalPECO Energy Policy Act of 1992, among other
things, empowered the FERC to introduce a greater level of competition into
the wholesale marketplace for electric energy. Under FERC Order No. 888,
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. A companion FERC rule, Order No. 889, 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 FERC Order No. 888 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. The 1997 Act
was amended in June 1999. The 1997 Act, as amended, provides for, among other
things, a 15% residential base rate reduction which became effective August 1,
1998, an additional 5% residential base rate reduction in October 2001 and
gradual customer access to other electric suppliers. Access for commercial and
industrial customers will occur over a period from October 1999 to October
2000, and access for residential customers will occur after May 1, 2002.
39
ComEd's operating revenues were reduced by approximately $170 million in 1998
due to the 15% residential base rate reduction. ComEd expects that the 15%
rate reduction will reduce ComEd's operating revenues by approximately $210
million in 1999, compared to 1998 rate levels. The 1997 Act, as amended, also
committed ComEd to spend at least $2 billion through 2004 on transmission and
distribution facilities outside of the City and $250 million in environmental
funding initiatives, pending the close of the fossil plant sale.
As a result of the 1997 Act, as amended, and FERC rules, prices for the
supply of electric energy are expected to change from cost-based, regulated
rates to rates determined by competitive market forces. Accordingly, the 1997
Act, as amended, provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006. 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. 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 asset dispositions. See "Response to Regulatory Changes" and "
Fossil Plant Sale" below for additional information.
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, as amended, 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 and 1999, and plus 8.5% 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. On March 1, 1999, ComEd filed with the ICC its Non-
Residential Delivery Services Implementation Plan and associated tariffs for
the provision of delivery and other services related to ComEd's implementation
for retail open access, as called for by the 1997 Act. The ICC is required to
issue a final order in the third quarter of 1999.
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, net of transaction costs, from such security issuances must be
used to refinance outstanding debt or equity or for certain other limited
purposes. The total amount of such securities that may be issued is
approximately $6.8 billion; approximately one-half of that amount can be
issued in the twelve-month period which commenced on August 1, 1998. In
December 1998, ComEd initiated the issuance of $3.4 billion of transitional
trust
40
notes through its SPEs, ComEd Funding and ComEd Funding Trust. See "Liquidity
and Capital Resources," subcaption "UTILITY OPERATIONS--Capital Resources"
below, and Notes 2 and 6 of Notes to Financial Statements, for additional
information regarding the redemptions and repurchases of debt and equity.
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.
See Notes 1, under "Regulatory Assets and Liabilities," and 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. Among other
things, these strategic objectives call for a focus on operations to: (i)
provide a reliable supply of electricity as the competitive marketplace
evolves, (ii) become a top quartile operator of competitive nuclear plants,
(iii) consummate the fossil plant sale by the end of 1999, (iv) deliver
competitive earnings while restructuring the balance sheet to reflect the
realities of the marketplace, (v) expand the offering of energy-related
products and services, and (vi) transform the corporate culture of Unicom. See
Unicom and ComEd's Current Report on Form 8-K dated July 1, 1999 for more
information regarding the objectives announced by Unicom.
Under the 1997 Act, the role of electric utilities in the supply and
delivery of energy is expected to change. Utilities, such as ComEd,
traditionally have been responsible for providing both adequate supply and
reliable delivery of electricity to customers within their service areas. In
the future, ComEd will continue to be obligated to provide a reliable delivery
system. However, ComEd will be obligated to supply electricity only to those
customers that it continues to serve under tariffs for electricity, but not
for those customers who choose to rely on the marketplace. Nonetheless, during
the transition period to a competitive supply marketplace, ComEd must provide
both an adequate supply and reliable delivery of electricity. Given the tight
capacity situation in ComEd's market, ComEd will be 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 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
in 1998Company (PECO) as a
result of the 1997 Act. See Note 1 of Notes to Financial
Statements, under "Regulatory Assets and Liabilities," for additional
information. Notwithstanding these efforts, there continues to be an ongoing
analysiscompletion of the abilitymerger. The merger was accounted for using the
purchase method of ComEd's various nuclear plantsaccounting.
During January 2001, Exelon undertook a corporate restructuring 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
41
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 carrying value
further during the next several years. However, closure of a plant could
involve additional charges associated with the write-off ofseparate 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 (diluted), 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 4 of Notes to Financial
Statements for additional information.
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, including ComEd, 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 direct the control of 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 lines. The formation of the
Midwest ISO was approved by the FERC in September 1998, subject to certain
conditions. In December 1998, the Midwest ISO members elected a Board of
Directors, which announced the appointment of the Midwest ISO's first
President and Chief Executive Officer in July 1999.
ComEd has also agreed to cooperate with APX in the creation of the first
electronic power exchange in Illinois. Initial products may include hourly,
daily and weekly electricity delivered to and from interconnection points on
ComEd's transmission system, and a standard system of credit and trading
interfaces. Unicom plans to make a $3 million venture capital investment in
APX, but it will not receive any voting rights. The power exchange will be
independently owned and managed by APX and will allow wholesale and retail
market participants to trade electricity anonymously through an internet-based
computerized system. ComEd will be treated like any other market participant
and plans to be an active participant when the power exchange opens in
Illinois early in the fourth quarter of 1999.
Fossil Plant Sale. On March 22, 1999, ComEd entered into an Asset Sale
Agreement providing for the sale of substantially all of the assets of its
fossil plant to EME for a cash purchase price of $4.813 billion. The fossil
plant assets 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 ICC
approved the fossil plant sale on August 3, 1999. The ICC's approval is
subject to potential appeal.
Just prior to the consummation of the fossil plant sale, ComEd expects to
transfer these assets to Unicom Investment. In consideration for the
transferred assets, Unicom Investment will pay ComEd consideration totaling
$4.813 billion in the form of a Demand Note in the amount of approximately
$2.350 billion and an interest-bearing Note with a maturity of twelve years.
Unicom Investment will immediately sell the fossil plant assets to EME, in
consideration of which Unicom Investment will receive $4.813 billion in cash
from EME. Immediately after its receipt of the cash payment from EME,
42
Unicom Investment will pay the $2.350 billion aggregate principal due to ComEd
under the Demand Note. Unicom Investment will use the remainder of the cash
received from EME to fund other business opportunities. Of the cash received
by ComEd, $1.680 billion is expected to be used to pay the costs and taxes
associated with the fossil plant sale. The remainder of the Demand Note
proceeds will be available to ComEd to fund, among other things, transmission
and distribution projects, nuclear generation station projects, and
environmental and other initiatives.
The sale is expected to produce an after-tax gain of approximately $1.6
billion, after settling commitments associated with certain coal contracts,
recognizing employee-related costscompetitive businesses from its regulated
energy delivery businesses at ComEd and funding certain environmental
initiatives. The gain on the sale will be utilized to recover certain
regulatory assets and as a result, the sale is not expected to have a
significant impact on net income in 1999. See Notes 1, under "Regulatory
Assets and Liabilities," and 21 of Notes to Financial Statements for
additional information.PECO. As part of the sale transaction, ComEd will enter into transitional power
purchase agreements withrestructuring, the
buyer. The agreement regarding the coal-fired
units will cover a declining number of generating units over a five-year term,
subject to an option in favorgeneration-related operations and assets and liabilities of ComEd were
transferred to restore some or allExelon Generation Company, LLC (Generation). Also, as part of the
unitsrestructuring, the non-regulated operations and related assets and liabilities
of PECO, representing PECO's Generation and Enterprises business segments, were
transferred to Generation and Exelon Enterprises Company, LLC (Enterprises),
respectively. Additionally, certain operations and assets and liabilities of
ComEd and PECO were transferred to Exelon Business Services Company (BSC).
Exelon, through subsidiaries, including PECO and ComEd, operates in
later yearsthree business segments:
o Energy Delivery, consisting of the agreement. The agreements regarding the oilretail electricity distribution and
gas-fired
planttransmission businesses of ComEd in northern Illinois and PECO in
southeastern Pennsylvania, and the peaking units covernatural gas distribution business
of PECO in the entire capacityPennsylvania counties surrounding the City of
suchPhiladelphia.
o Generation, consisting of electric generating unitsfacilities, power
marketing operations and equity interests in Sithe Energies, Inc.
(Sithe) and AmerGen Energy Company, LLC (AmerGen).
o Enterprises, consisting of competitive retail energy sales, energy and
infrastructure services, communications and related investments. The
operations of Exelon Energy for a five-year term, subject2000 have been reclassified from
Generation to ComEd's option commencing in year threeEnterprises to terminatereflect the agreements as to some or alleffects of the generating units.corporate
restructuring.
36
RESULTS OF OPERATIONS
The options will provide some flexibility to ComEd to adjust its power purchase
needs to match its obligations to its customers duringthree and nine months ended September 30, 2000 represents the transition period
to open access for customers. Eachresults of
PECO only and does not include the effects of the agreements provides for a monthly
capacity charge, based upon the capacityOctober 20, 2000 merger of
the generating units under
contractUnicom 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. However, the disposition of the fossil
generation business will reduce ComEd's O&M and fuel expenditures, and its
depreciation charges.
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
fossil 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).PECO.
Significant Operating Trends
1999Expense Items as a Percentage of
Total Operating Revenues
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 Total
------2000
---- ---- ------
(Millions of Dollars)---- ----
Nuclear............................................. $ 265 $158 $167 $ 590
Fossil.............................................. 155 106 66 327
TransmissionFuel and Distribution....................... 515 527 529 1,571
General............................................. 109 83 80 272
------ ---- ---- ------
$1,044 $874 $842 $2,760
====== ==== ==== ======Purchased Power 40% 36% 36% 35%
Operating and Maintenance 26% 28% 28% 30%
Depreciation and Amortization 9% 5% 10% 6%
Taxes Other Than Income 4% 4% 4% 4%
--- --- --- ---
Total Operating Expenses 79% 73% 78% 75%
--- --- --- ---
Operating Income 21% 27% 22% 25%
=== === === ===
The above fossil construction expenditures will not be required afterThree Months Ended September 30, 2001 (As Restated) Compared To Three Months
Ended September 30, 2000
Net Income and Earnings Per Share
Exelon's net income increased $143 million, or 61%, for the fossil plant sale is completed.
This program includesthree months ended
September 30, 2001, excluding the effect of an extraordinary item. Diluted
earnings per share on the same basis decreased $0.19 per share, or 14%. Net
income inclusive of the extraordinary item increased $144 million, or 62%, for
the three months ended September 30, 2001. Diluted earnings per share on the
same basis decreased $0.19 per share, or 14%. Earnings per share decreased while
net income increased as a result of the relative increase in capital expenditures on ComEd's
transmission and distribution systemsthe weighted
average shares 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 portioncommon stock outstanding as a result 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 restore power to
customers more quickly.
43
ComEd's forecasts of peak load for our traditional service territory
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, other-utility power purchases and generation resources
from ARES, could be obtained in sufficient quantities to meet such forecasted
needs.
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $403 million at June 30, 1999. In addition, ComEd's
estimated commitments for the purchase of coal were as follows:
Contract Period Commitment(1)
-------- --------- -------------
Black Butte Coal Co. ............................. 1999-2000 $334
Decker Coal Co. .................................. 1999-2012 446
Other commitments................................. 1999 11
----
$791
====
--------
(1) In millions of dollars, excluding transportation costs. No
estimate of future cost escalation has been made.
Upon completion of the Asset Sale Agreement, ComEd expects to enter into
arrangements to assign or settle a substantial portion of the coal purchase
commitments. See "Changes in the Electric Utility Industry," subcaptions "The
1997 Act" and "Fossil Plant Sale" 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 long-term debt through a tender
offer. In addition, $500 million of the proceeds was used to reduce ComEd's
outstanding short-term debt. In the first half of 1999, ComEd recorded an
extraordinary loss related to the early redemptions and the tender offer of
the above-mentioned first mortgage bonds and sinking fund debentures, which
reduced net income on common
stock by approximately $28 million (after-tax),
or $0.13 per common share (diluted). ComEd also recorded $10 million (after-
tax), or $0.04 per common share (diluted), for premiums paid in connection with the redemption of the above-mentioned preference stock. 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 heldmerger, partially offset by Unicom. The remaining proceeds will be
used for the payment of fees and additional debt and equity redemptions and
repurchases.
In the fourth quarter of 1998, Unicom entered into a forward purchase
arrangement for the repurchase of
$200 million of its common stock. This
contract, which was accounted forstock with the proceeds from PECO's May 2000 stranded cost recovery
securitization as an equity instrument as of December 31,
1998, was settled on a net cash basis in February 1999.
In February 1999, Unicom also entered into a prepaid forward purchase
agreement with a financial institution for the repurchase of approximately 15
million shares of Unicom common stock. This forward purchase arrangement was
amended to also include the repurchase of approximately 5.1 million shares for
a total of 20.1 million shares, subsequent to the net cash settlement of the
$200 million repurchase program, as described above. The repurchase
arrangement, as amended, provides for final settlement no later than February
2000, on either a physical (share) basis, or a net cash basis. 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 purposesincrease in net income.
Earnings Before Interest and Income Taxes
Exelon evaluates the performance of EPS calculations or reduce common stock
equity,its business segments based on earnings
before interest and resulting return on common equity calculations, until the dateincome taxes (EBIT). In addition to components of physical
44
settlement. Unicom does not currently anticipate that settlement will occur in
1999. The repurchase arrangement has been recordedoperating
income as a receivableshown on the Consolidated Balance Sheetsconsolidated statements of income, EBIT includes equity
in earnings (losses) of unconsolidated affiliates, and will be adjusted atother income and expense
recorded in other, net, with the endexception of interest income. Operating
revenues, operating expenses, depreciation and amortization and other income and
expenses for each reporting
period to reflectbusiness segment in the aggregate market valuefollowing analyses include
intercompany transactions, which are eliminated in the consolidated Exelon
financial statements. To provide a more meaningful analysis of results of
operations, the EBIT analyses by business segment below identify the portion of
the shares deliverable underEBIT variance that is attributable to the arrangement. Consequently,addition of Unicom results of
operations and the arrangement could increase earnings
volatility in 1999.
See Notes 2 and 6 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-
fourthsportion of the funds required for ComEd's 1999-2001 construction program and
other capital requirements, including nuclear fuel expenditures, contributionsvariance that results from normal operations
37
attributable to nuclear decommissioning funds, sinking fund obligations and scheduled debt
maturities, and excluding the effectschanges in components of the fossil plant sale. See Notes 9
and 11underlying operations of Notes to Financial StatementsExelon.
The merger variance represents Unicom results for the summaries of the annual
sinking fund requirementsthree 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.
See "Changes in the Electric Utility Industry," subcaption "Fossil Plant
Sale" above, for a description of ComEd's planned uses of the fossil plant
sale proceeds.
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 the first half of 1999, ComEd did not sell or
leaseback any nuclear fuel through its existing nuclear fuel lease facility.
See Note 19 of Notes to Financial Statements for additional information
concerning ComEd's nuclear fuel lease facility. ComEd had $1 billion of unused
bank lines of credit at Junenine months
ended September 30, 1999, which may be borrowed at various
interest rates. The interest rate is set at the time of a borrowing and is
based on several floating rate bank indices plus a spread, which is dependent
upon the credit ratings of ComEd's outstanding first mortgage bonds or2000 on a prime interest rate. See Note 12pro forma basis as if the merger and corporate
restructuring occurred on January 1, 2000 as well as the effect of Notesexcluding
PECO merger-related costs from Exelon's 2000 operations.
The demand for electricity and gas services is impacted by weather
conditions. Very warm weather in summer months and very cold weather in other
months is referred to Financial Statements for
additional information concerning linesas "favorable weather conditions" because those weather
conditions result in increased sales of credit. See the Statements of
Consolidated Cash Flows for the construction expenditureselectricity and cash flow from
operating activitiesgas, particularly to
residential customers. Alternatively, mild weather generally reduces demand.
EBIT Contribution by Business Segment
Three Months Components of Variance
Ended September 30, -----------------------------
------------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Energy Delivery $ 704 $ 260 $ 444 $ 425 $ 19
Generation 278 292 (14) 8 (22)
Enterprises (44) (55) 11 (12) 23
Corporate (7) (15) 8 17 (9)
----- ----- ----- ----- -----
Total $ 931 $ 482 $ 449 $ 438 $ 11
===== ===== ===== ===== =====
Energy Delivery
Three Months Components of Variance
Ended September 30, ----------------------------
-------------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $2,970 $ 877 $2,093 $1,931 $ 162
Operating Expense and Other 1,973 571 1,402 1,328 74
Depreciation & Amortization 293 46 247 178 69
------ ------ ------ ------ ------
EBIT $ 704 $ 260 $ 444 $ 425 $ 19
====== ====== ====== ====== ======
Energy Delivery's EBIT increased $444 million for the three months
six months and twelve months ended JuneSeptember 30, 1999. Cash flows from operating activities decreased temporarily for
the twelve months ended June 30, 1999,2001, as compared to the same period in 2000. The merger
accounted for $425 million of the variance and normal operations added $19
million. The increase in EBIT from normal operations was primarily attributable
to higher margins on electric sales to retail customers and lower operating and
maintenance expenses, offset by increased regulatory asset amortization expense.
Operations and maintenance expense for the three months ended JuneSeptember 30, 1998,2001
includes employee severance charges of $18 million.
The $162 million growth in operating revenues was attributable to
increased electric revenues of $150 million and additional gas revenues of $12
million. Total kilowatthour (kWh) deliveries to retail customers increased 2.8%,
however, retail revenues increased 10.3% primarily due to a 7.9% increase in the
38
average rate per kWh. The average rate per kWh increased due to an increase in
customers selecting or returning to PECO as their electric suppliers and an
increase in deliveries to the residential sector, which has a higher than
average rate per kWh.
Generation
Three Months Components of Variance
Ended September 30, ----------------------------
---------------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $ 2,291 $ 927 $ 1,364 $ 1,140 $ 224
Operating Expense and Other 1,956 608 1,348 1,105 243
Depreciation & Amortization 57 27 30 27 3
------- ------- ------- ------- -------
EBIT $ 278 $ 292 $ (14) $ 8 $ (22)
======= ======= ======= ======= =======
Generation's EBIT decreased $14 million for the three months ended
September 30, 2001 compared to the same period in 2000. The decrease in EBIT
reflects lower margins on energy sales offset by lower operation and maintenance
expenses. Volumes increased 7% reflecting increased sales to retail affiliates,
however, margins on sales decreased as a result of anhigher purchased power costs.
During the second and third quarters of 2001, Generation extended the estimated
service lives of its nuclear generating stations, which reduced depreciation and
decommissioning expense by $37 million in the three months ended September 30,
2001 compared to the prior year period. However, this reduction was offset by
increased decommissioning expense of $35 million in the three months ended
September 30, 2001 compared to the prior year period as a result of the
discontinuance of regulatory accounting practices for decommissioning related to
certain of the nuclear stations. In addition, EBIT reflects a $14 million
increase in net customer receivables duereserves related to the transition tosettlement of litigation regarding the
proposed purchase of a new customer information and billing systemminority interest in a generating facility. These
decreases in EBIT were partially offset by increased equity in the latter partearnings of
1998.
AsAmerGen and Sithe of August 13, 1999,$20 million.
For the three months ended September 30, 2001, Generation's sales were
54,342 gigawatthours (GWhs), of which:
o 50% was supplied by Generation's nuclear units,
o 41% from purchases,
o 3% from fossil and hydro units and
o 6% from Generation investments.
Approximately 60% of Generation's sales were to ComEd hasand PECO and the remaining
40% were in the wholesale market.
During the twelve months ended September 30, 2001, Generation added
3,384 megawatts (MWs) of new capacity as follows:
o 243 MWs through nuclear power plant uprates,
o 84 MWs through the acquisition of an effective "shelf" registration statement
with the SECadditional 3.75% of Peach
Bottom Atomic Power Station (Peach Bottom),
o 15 MWs through fossil power station uprates and
39
o 3,042 MWs through additional power purchase agreements (PPAs).
Generation's nuclear fleet, including AmerGen, performed at a capacity factor of
93.2% for the future sale of upthree months ended September 30, 2001 compared to an additional $280 million of debt
securities and cumulative preference stock94.0% in the
same 2000 period. Generation's nuclear units' production costs for general corporate purposes of
ComEd, including the discharge or refund of other outstanding securities.
ComEd's securities and other securities guaranteed by ComEd are currently
rated by three
principal securities rating agencies as follows:months ended September 30, 2001 were $12.52 per MWh compared to $13.91 per MWh
for the same period in 2000.
Enterprises
Standard Duff &
Moody's & Poor's Phelps
-------Three Months Components of Variance
Ended September 30, --------------------------
-------------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------------- ----------
(In millions)
First mortgage
Operating Revenue $ 529 $ 283 $ 246 $ 185 $ 61
Operating Expense and secured pollution control bonds..... Baa2 BBB+ BBB+
Publicly-held debentures and unsecured pollution con-
trol obligations...................................... Baa3 BBB BBB
Convertible preferred stock............................ baa3 BBB- BBB-
Preference stock....................................... baa3 BBB- BBB-
Trust Securities....................................... baa3 BBB- BBB-
Commercial paper....................................... P-2 A-2 D-2Other 557 328 229 193 36
Depreciation & Amortization 16 10 6 4 2
----- ----- ----- ----- -----
EBIT $ (44) $ (55) $ 11 $ (12) $ 23
===== ===== ===== ===== =====
45Enterprises' EBIT increased $11 million for the three months ended
September 30, 2001 compared to the same period in 2000. Normal operations
contributed $23 million of the variance, which was partially offset by a $12
million reduction attributable to the merger. The increase in EBIT from normal
operations primarily reflects $56 million of improved margins and reduced
operating expenses at Exelon Energy in Pennsylvania and lower net losses by
Exelon Communications' joint ventures of $4 million, partially offset by a $36
million writedown of an investment in a communications company and an $8 million
gain on the sale of a communications investment in 2000.
Enterprises' revenues increased $246 million for the three months ended
September 30, 2001 compared to the same period in 2000. Normal operations
contributed $61 million and the merger added $185 million. Operating revenues
attributable to normal operations increased $95 million as a result of
acquisitions by Exelon Infrastructure Services, Exelon Energy and Exelon
Services. This increase was partially offset by lower revenues attributable to
reduced operations at Exelon Energy in Pennsylvania.
Enterprises' operating expenses and other increased $229 million for
the three months ended September 30, 2001 compared to the same period in 2000.
Normal operations contributed $36 million and the merger added $193 million.
Operating expenses from normal operations included $93 million as a result of
acquisitions made by Exelon Infrastructure Services, Exelon Energy and Exelon
Services. Additionally, operating expenses and other increased by $36 million
from a write-down of an investment in a communications company and by $8 million
related to a gain on the sale of a communications investment in 2000, partially
offset by lower operating expenses attributable to reduced operations at Exelon
Energy in Pennsylvania.
Enterprises' depreciation and amortization expense increased primarily
as a result of goodwill amortization related to acquisitions by Exelon
Infrastructure Services.
40
ComEd Funding Trust'sOther Components of Net Income
Interest Charges
Interest charges consist of interest expense and distributions on preferred
securities are currently ratedof subsidiaries. Interest charges increased $177 million, or 150%,
for the three months ended September 30, 2001. The increase was primarily
attributable to $157 million from the effects of the merger and $9 million
related to additional borrowings by Exelon.
Interest Income
Interest income is recorded in other, net on the Condensed Consolidated
Statements of Income and Comprehensive Income but is excluded from the
calculation of EBIT. Interest income decreased by $27 million from income of $10
million to a loss of $17 million due to net realized losses of $43 million on
the nuclear decommissioning trust funds, offset by increased income of $16
million, primarily from the investments of Unicom Investment, Inc. (Unicom
Investment).
Income Taxes
The effective income tax rate was 39.9% for the three principal
securities rating agenciesmonths ended September 30,
2001 as follows:compared to 37.7% in the same period in 2000. The increase in the
effective income tax rate was primarily attributable to goodwill amortization
associated with the merger, which is not deductible for tax purposes and a
higher effective state income tax rate due to operations in Illinois subsequent
to the merger.
Nine Months Ended September 30, 2001 As Restated Compared To Nine Months Ended
September 30, 2000
Net Income and Earnings Per Share
Exelon's net income increased $558 million, or 107%, for the nine months ended
September 30, 2001, excluding the effect of an extraordinary item and the
cumulative effect of a change in accounting principle. Diluted earnings per
share on the same basis increased $0.38 per share, or 13%. Net income, inclusive
of an extraordinary item and the cumulative effect of a change in accounting
principle, increased $550 million, or 102%, for the nine months ended September
30, 2001. Diluted earnings per share on the same basis increased $0.30 per
share, or 10%. Earnings per share increased less than net income because of an
increase in the weighted average shares of common stock outstanding as a result
of the issuance of common stock in connection with the merger, partially offset
by the repurchase of common stock with the proceeds from PECO's May 2000
stranded cost recovery securitization.
41
Earnings Before Interest and Income Taxes
EBIT Contribution by Business Segment
Standard Duff &
Moody's & Poor's Phelps
-------Nine Months Components of Variance
Ended September 30, ---------------------------
----------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------------- ----------
(In millions)
Transitional trust notes.......................... Aaa AAA AAA
Energy Delivery $ 2,091 $ 856 $ 1,235 $ 1,101 $ 134
Generation 697 401 296 87 209
Enterprises (80) (86) 6 (24) 30
Corporate (19) (23) 4 16 (12)
------- ------- ------- ------- -------
Total $ 2,689 $ 1,148 $ 1,541 $ 1,180 $ 361
======= ======= ======= ======= =======
AsEnergy Delivery
Nine Months Components of Variance
Ended September 30, ---------------------------
---------------------- Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $7,903 $2,496 $5,407 $4,855 $ 552
Operating Expense and Other 4,985 1,513 3,472 3,072 400
Depreciation & Amortization 827 127 700 682 18
------ ------ ------ ------ ------
EBIT $2,091 $ 856 $1,235 $1,101 $ 134
====== ====== ====== ====== ======
Energy Delivery's EBIT increased $1,235 million in the nine months
ended September 30, 2001, as compared to the same period in 2000. The merger
accounted for $1,101 million of August 1999, Moody's rating outlookthe variance and normal operations added $134
million. The increase in EBIT from normal operations reflects higher margins on
retail sales, lower operating and maintenance expenses, and lower regulatory
asset amortization, partially offset by higher depreciation expense.
The $552 million growth in operating revenues was attributable to
increased electric revenues of $418 million and additional gas revenues of $134
million. Although total kWh deliveries to retail customers increased 1%, retail
revenues increased 6.8% primarily due to a 5.6% increase in the average rate per
kWh. The average rate per kWh increased due to an increase in customers
selecting or returning to PECO as their electric suppliers and an increase in
deliveries to the residential sector, which has a higher than average rate per
kWh. Revenues for the nine months ended September 30, 2001 include the favorable
effect of the reversal of a $15 million reserve for revenue refunds to ComEd's
securities is
"Positive"municipal customers as the result of a Federal Energy Regulatory Commission
(FERC) ruling. The increase in gas revenues primarily relates to higher natural
gas prices.
42
Generation
Nine Months Components of Variance
Ended September 30, ----------------------------
------------------------ Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $5,537 $2,087 $3,450 $2,616 $ 834
Operating Expense and Other 4,616 1,596 3,020 2,452 568
Depreciation & Amortization 224 90 134 77 57
------ ------ ------ ------ ------
EBIT $ 697 $ 401 $ 296 $ 87 $ 209
====== ====== ====== ====== ======
Generation's EBIT increased $296 million for the nine months ended
September 30, 2001 compared to the same period in 2000. The merger accounted for
$87 million of the variance. The remaining $209 million increase resulted
primarily from higher margins on market and S&P's current rating outlook on ComEd's securities is "Stable."
S&P raised its ratingsaffiliate wholesale energy sales,
coupled with decreased operating costs at the nuclear plants, partially offset
by additional depreciation and amortization. During the first five months of
2001, Generation benefited from increases in wholesale market prices,
particularly in the Pennsylvania-New Jersey-Maryland control area (PJM) and
Mid-America Interconnected Network (MAIN) regions. The increase in wholesale
market prices was primarily driven by significant increases in fossil fuel
prices. The large concentration of nuclear generation in the Generation
portfolio allowed Exelon to capture the higher prices in the wholesale market
for sales to non-affiliates with minimal increase in fuel prices. Generation
also benefited from higher nuclear plant output due to increased capacity
factors during the nine months ended September 30, 2001. Lower operating costs
are attributable to reductions in the number of employees and fewer nuclear
outages in 2001 than in 2000, which offset the effect of increases in legal
reserves of $30 million. In addition, Generation's EBIT benefited from an
increase in equity in earnings of AmerGen and Sithe of $44 million in the nine
months ended September 30, 2001 compared to the prior year period. The increase
in depreciation and amortization expense primarily reflects an increase in
decommissioning expense of $105 million reflecting the discontinuance of
regulatory accounting practices for certain nuclear generating stations,
partially offset by a $57 million reduction in depreciation and decommissioning
expense attributable to the extension of estimated service lives of Generation's
generating plants.
For the nine months ended September 30, 2001, Generation's sales were
151,118 GWhs, of which:
o 55% was supplied by Generation's nuclear units,
o 36% from purchases,
o 3% from fossil and hydro units and
o 6% from Generation investments.
Approximately 60% of Generation's sales were to ComEd and PECO and the remaining
40% were in the wholesale market. Less than 2% of Generation's volume
represented transactions entered into for trading purposes.
Generation's nuclear fleet, including AmerGen, performed at a capacity
factor of 94.9% for the nine months ended September 30, 2001 compared to 94.7%
in the same 2000 period. Generation's nuclear units' production costs for the
nine months ended September 30, 2001 were $12.40 per MWh, compared to $13.82 per
MWh for the same period in 2000.
43
Enterprises
Nine Months Components of Variance
Ended September 30, ----------------------------
------------------------ Merger Normal
2001 2000 Variance Variance Operations
---- ---- -------- -------- ----------
(In millions)
Operating Revenue $ 1,742 $ 801 $ 941 $ 424 $ 517
Operating Expense and Other 1,775 860 915 438 477
Depreciation & Amortization 47 27 20 10 10
------- ------- ------- ------- -------
EBIT $ (80) $ (86) $ 6 $ (24) $ 30
======= ======= ======= ======= =======
Enterprises' EBIT increased $6 million for the nine months ended
September 30, 2001 compared to the same period in 2000. Normal operations
contributed $30 million of the variance, which was partially offset by a $24
million reduction attributable to the merger. The increase in EBIT from normal
operations is primarily attributable to $24 million due to improved margins and
reduced operating expenses at Exelon Energy in Pennsylvania and an $8 million
increase from lower net losses by Exelon Communications' joint ventures. These
increases were partially offset by an $8 million net writedown of investments
and an $8 million gain on the sale of a communications investment in 2000.
Enterprises' revenues increased $941 million for the nine months ended
September 30, 2001 compared to the same period in 2000. Normal operations
contributed $517 million and the merger added $424 million. Operating revenues
attributable to normal operations increased $540 million as a result of
acquisitions by Exelon Infrastructure Services, Exelon Energy and Exelon
Services. This increase was partially offset by lower revenues attributable to
reduced operations at Exelon Energy in Pennsylvania.
Enterprises' operating expense and other increased $915 million for the
nine months ended September 30, 2001 compared to the same period in 2000. Normal
operations contributed $477 million and the merger added $438 million. Operating
expenses from normal operations included $515 million as a result of
acquisitions made by Exelon Infrastructure Services, Exelon Energy and Exelon
Services. Additionally, operating and other expenses increased by an $8 million
net writedown of investments and an $8 million gain on the sale of a
communications investment in 2000. These increases were partially offset by $28
million in gains on investments, $8 million from lower net losses by Exelon
Communications' joint ventures, and by reduced operations at Exelon Energy in
Pennsylvania.
Enterprises' depreciation and amortization expense increased primarily
as a result of goodwill amortization related to acquisitions by Exelon
Infrastructure Services, Exelon Services, and Exelon Energy.
Other Components of Net Income
Interest Charges
Interest charges increased $553 million, or 159%, for the nine months ended
September 30, 2001. The increase was primarily attributable to $471 million from
the effects of the merger, $50 million related to
44
borrowings by Exelon and additional interest of $25 million as a result of the
issuance of transition bonds in May 2000 to securitize a portion of PECO's
stranded cost recovery.
Interest Income
Interest income is recorded in other, net on the Condensed Consolidated
Statements of Income and Comprehensive Income, but is excluded from the
calculation of EBIT. Interest income remained flat at $32 million, due to net
realized losses of $35 million on the nuclear decommissioning trust funds offset
by increased income of $35 million, primarily from the investments of Unicom
Investment.
Income Taxes
The effective income tax rate was 41% for the nine months ended September 30,
2001 as compared to 37.8% for the same period in June 1999. In July 1999, Duff
& Phelps upgraded ComEd's ratings2000. The increase in the
effective income tax rate was primarily attributable to goodwill amortization
associated with the merger which is not deductible for securedtax purposes and unsecureda higher
effective state income tax rate due to operations in Illinois subsequent to the
merger.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2001, Exelon adopted Statement of Financial Accounting Standards
No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133), as amended, resulting in a benefit of $20 million ($12 million, net of
income taxes). On January 1, 2000, Exelon recorded a benefit of $40 million ($24
million, net of income taxes) representing the cumulative effect of a change in
accounting method for nuclear outage costs by PECO in conjunction with the
synchronization of accounting policies in connection with the merger.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations for the nine months ended September 30, 2001
were $2,969 million as compared to $597 million for the same 2000 period. The
increase was attributable to increased cash flow from operations of $1,647
million and changes in working capital of $725 million.
Cash flows used in investing activities for the nine months ended
September 30, 2001 were $1,565 million as compared to $593 million for the same
2000 period. The increase was attributable to additional capital expenditures of
$927 million and lower Enterprises acquisitions and investments of $45 million.
Cash flows used in financing activities were $553 million for the nine
months ended September 30, 2001 as compared to $1 million for the same 2000
period. The increase in cash flows used in financing activities was primarily
attributable to additional debt securitiesservice of $361 million and announced that ComEd's securities remainadditional payments
of dividends on "Rating Watch-Up."
Capital Structure. ComEd's ratiocommon stock of $317 million. The common stock dividends of $448
million cover the period from October 20, 2000, the date of the merger, through
August 15, 2001.
At September 30, 2001, Exelon's capital structure consisted of 62% of
long-term debt of Exelon and subsidiaries, 33% common stock, 2% notes payable
and 3% preferred securities of subsidiaries. Long-term debt included $7.0
billion of securitization debt constituting obligations of certain consolidated
special purpose entities, representing 30% of capitalization.
At September 30, 2001, Exelon had outstanding $416 million of notes
payable consisting principally of commercial paper. For the nine months ended
September 30, 2001, the average interest rate
45
on notes payable was approximately 4.4%. Certain of the credit agreements to
which Exelon, ComEd and PECO are a party require each of them to maintain a debt
to total capitalization has decreasedratio of 65% or less (excluding securitization debt and
for PECO, the receivable from parent recorded in PECO's shareholders' equity).
At September 30, 2001, the debt to 57.1% attotal capitalization ratios on that basis for
Exelon, ComEd and PECO were 49%, 46%, and 35%, respectively.
On May 8, 2001, Exelon issued $500 million of unsecured senior notes
with a maturity date of May 1, 2011 and an interest rate of 6.75%. On June 30, 1999 from 58.0% at December 31, 1998. As11,
2001, Generation issued $700 million of unsecured senior notes with a maturity
date of June 15, 2011 and an interest rate of 6.95%. The proceeds from these
financings were used to repay a $1.2 billion term loan.
During 2001, Generation issued $121 million of Pollution Control
Revenue Refunding Bonds at an average variable commercial paper interest rate of
2.685% with maturities of 20 to 33 years. The proceeds from these offerings were
used to retire $121 million of PECO pollution control notes with an average
interest rate of 7.01%.
On October 30, 19992001, PECO issued, through a private placement, $250
million of its First and December 31, 1998, $509Refunding Mortgage Bonds with an interest rate of 5.95%
and maturity date of November 11, 2011. Proceeds from the first mortgage bonds
were used to repay $250 million aggregate principal amount of PECO's First and
$494Refunding Mortgage Bonds, having an interest rate of 5.625% and a maturity date
of November 1, 2001.
On November 5, 2001, ComEd offered to purchase for cash $250 million respectively, of
retained earnings had been appropriated for Unicom's future
dividend payments. Asits First Mortgage Bonds, with an interest rate of 9.875% and a maturity date of
June 30, 1999 and December 31, 1998, $627 million and
$580 million, respectively,15, 2020. The tender price is based on a fixed spread of retained earnings had been appropriated for
ComEd's future dividend payments.
Year 2000 Conversion. Unicom, including ComEd, uses various software
applications and embedded systems throughout its businesses that will be
affected by80 basis points
over the so-called "Year 2000 issues." These issues may prevent an
application or system from correctly processing dates upyield 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.
As of June 30, 1999, Unicom declared all of its systems and applications
"Year 2000 ready" in accordance with goals and criteria recommended by the
NERC. Even though Unicom has achieved Year 2000 ready status, the remainder of
1999 will be used to continue quality reviews, contingency planning efforts
and internal as well as external readiness drills; specifically, the focusmaturity of the project has moved from "find it-fix it" activities to "increase certainty,
strengthen readiness-demonstration" activities. Key accomplishments of the
Unicom Year 2000 project included the following:
. All nuclear stations are Year 2000 ready
. All fossil stations are Year 2000 ready
. Transmission and distribution systems and computers are Year 2000 ready
. Distributed operations (LAN, WAN and related systems) are Year 2000 ready
. All office facilities are Year 2000 ready
. Mission critical products and services of supply chain are Year 2000
ready
. Completed independent verification and validation of the corporate
project
.6.5% U.S. Treasury Note due May 15, 2005. The
NRC conducted a Year 2000 readiness audit of the Braidwood Nuclear
Station and reviewed the contingency plans for nuclear operations
. Implemented "Clean Management" procedures to ensure newly renovated
applications and inventory remain Year 2000 ready
. Unicom Contingency Plan/Operating Plan is Year 2000 ready--submitted
final version of plans to MAINoffer will expire on November 16, 2001, unless extended or earlier terminated.
46
The Unicom YearCOMMONWEALTH EDISON COMPANY
- ---------------------------
GENERAL
On October 20, 2000, readiness program included the detailed reviewComEd became a 99.9% owned subsidiary of more
than 15 million lines of code and 30,000 embedded systems. At the height of
the project, which began in mid-1996, more than 300 people were assigned to
the company-wide Year 2000 team representing every business segment with many
others assisting the core team. The Unicom Year 2000 team focused on three
elements that were integral to the project: business continuity, project
management and risk management. Business continuity involved the continuation
of reliable electric supply and service in a safe, cost-effective manner.
Project management involved defining and meeting the project scope, schedule
and budget. Risk management involved customer communications, contingency
planning and legal issues.
Unicom's approach to identifying and addressing noncompliant software
applications and embedded systems consisted of the following stages:
inventory, analysis, renovation, testing and deployment. The first stage was
to inventory all applications and systems. The analysis stage involved
assessing whether software applications and embedded systems were Year 2000
ready. The renovation stage involved remediating or upgrading applications and
systems to make them Year 2000 ready. The testing stage determined whether the
renovated applications and systems were Year 2000 ready. The deployment stage
occurred when the tested applications and systems were implemented. Unicom was
also engaged in contingency planning for potential Year 2000 problems.
Unicom's Year 2000 project focused 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 payroll and
customer service and billing software with new software that is Year 2000
ready and that addresses Unicom's strategic needs as it enters a less
regulated environment.
The following table summarizes the status, as of August 13, 1999, of
Unicom's Year 2000 project. The figures set forth in the table represent the
extent to which Unicom has completed each phase of the Year 2000 project for
software applications and embedded systems.
Software Embedded
Applications Systems
------------ --------
Inventory........................................... 100% 100%
Analysis............................................ 100% 100%
Renovation.......................................... 100% 100%
Testing............................................. 100% 100%
Deployment.......................................... 100% 100%
A Year 2000 Moratorium is in effect from July 1, 1999 to March 31, 2000 and
during this time there is a company-wide freeze on configuration changes or
additions to existing information systems to ensure hardware, software and
embedded systems remain Year 2000 ready.
In addition to its internal efforts, Unicom has been working and will
continue to work 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. On August 3, 1999, NERC presented to the DOE its second quarter
1999 status report and a letter of assurance that the electric systems of
North America are ready to operate into the Year 2000 and beyond.
47
Additionally, Unicom participated in an industry-wide NERC readiness drill
on April 9, 1999. The drill simulated the partial loss of voice and data
communications and tested Unicom's ability to maintain bulk power system
operations in the event of a loss of microwave communication with partial
EMS/SCADA functionality. The drill involved approximately 68 employees
throughout the transmission and distribution, nuclear generation and fossil
generation areas. The successful completion of the drill demonstrated Unicom's
ability to continue its bulk power operations in the event this data is not
available through normal means during the Year 2000 rollover period. Unicom
will participate in the second industry-wide NERC readiness drill on September
9, 1999, which is scheduled to be a "dress rehearsal" for the Year 2000
rollover. Throughout 1999, Unicom will continue to work with the various
industry groups as appropriate.
Unicom also depends upon third parties, including customers, suppliers,
government agencies and financial institutions, to reliably deliver its
products and services. Unicom completed additional initiatives to assess the
degree to which third parties with whom it has business relationships are
addressing Year 2000 issues. These initiatives included analysis of the Year
2000 readiness 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
ready on a continuing basis. Unicom's contingency planning addressed
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 and this activity is
scheduled to continue for the remainder of 1999.
As of July 14, 1999, approximately $33 million has been expended 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 installedExelon as a result
of strategic replacement
projects described earlier. Such replacement projects were not accelerated
becausethe transactions relating to the merger of Year 2000 issues.
Unicom has existing contingency plans in place for events such as extreme
heat, storms, equipment failuresPECO and accidents. Unicom preparedComEd's former parent,
Unicom. Effective January 1, 2001, Exelon undertook a restructuring to separate
its Year 2000
contingency plans based on the framework of existing emergency management
system preparationgeneration and scenario development to address the possibility that
applications and systems may not be Year 2000 ready at the end of the five
step remediation process.
Unicom developed contingency plans that identify key risks and address the
most reasonably likely worst case scenarios that could occur in the event that
various Year 2000 issues were not resolved in a timely manner. Key risks
identified in Unicom's contingency plans include: uncharacteristic load
patterns, human behavior, availability of key personnel, loss of critical
business systems, readiness of supply base, loss of EMS/SCADA functionality,
readiness of neighboring utilities, loss of critical voice and data
communications, security, constrained fuel supplies and increased risk of
generator trips/unit availability. Unicom submitted its Year 2000 contingency
plans to MAIN in June 1999. Contingency planning is an ongoing process and
will continue through the fourth quarter of 1999.
Unicom is using an approach in its contingency planning process that has
been recognized by NERC and 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.
Unicom also performed activities beyond contingency planning to further
increase certainty and strengthen readiness. An independent consultant was
engaged and performed an assessment of the process used to address the Year
2000 issue.
48
Based on Unicom's current status with regard to Year 2000 tasks, it believes
that its planning was adequate to secure Year 2000 readiness of its critical,
medium priority and low priority 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 materiallyother competitive businesses 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. The estimated fair value of the forwardregulated energy
contracts, including
options at June 30, 1999, was approximately $85 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 ten percent rate.delivery business. See "Management'sITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations" subcaption "Liquidity and Capital Resources--Interest Rate
Exposure" and "--Market Price Exposure," in Unicom and ComEd's Current Reports
on Form 8-K dated February 19, 1999. There has not been - Exelon Corporation - General for
information about Exelon's corporate restructuring. As a material change in
ComEd's exposure to interest rate or market price risk since December 31,
1998. See "Energy Risk Management Contracts" in Note 1 of Notes to Financial
Statements regarding the accounting for energy risk management contracts.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through subsidiaries, in energy service
activities which are not subject to utility regulation by federal or state
agencies. One of these subsidiaries, UT Holdings, provides district cooling
and related services to offices and other buildings in the central business
districtresult of the City 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 energy management systems. Through an alliance with
AlliedSignal Power Systems, Inc., a subsidiary of AlliedSignal Inc., Unicom
Energy Services is the exclusive distributormerger,
ComEd's consolidated financial information for the Parallon 75(TM)
TurboGenerator system, which provides customers with on-site electricity
production.period after the merger has a
different cost basis than in previous periods. Material variances caused by the
different cost basis and restructuring have been disclosed where applicable. The
Parallon 75(TM) system was developed by AlliedSignal. Unicom
Energy Services' territory encompasses 12 Midwest states, Ontario, Canada and
Puerto Rico.
Unicom Energy Inc., alsorestructuring has had a subsidiarysignificant impact on all components of Unicom Enterprises, is currently
engaged in providing retail gas services to commercial and industrial
customers in the Midwest region and is expected to provide retail electric and
gas services as an unregulated retail energy supplier as restructuringComEd's results
of electricity markets occurs in the Midwest.
In July 1999, Unicom Enterprises entered into a Stock Purchase Agreement to
acquire alloperations. The estimated impact of the capital stockrestructuring set forth herein
reflects the effects of KHB Inc., MMSD, Inc. and MMCD, Inc. These
three companies, which conduct
49
business under the name "Midwest Mechanical", design, install and service
heating, ventilation and air conditioning facilities for commercial and
industrial customers in the City and the surrounding area. The closing is
expected to occur in the third quarter of 1999, and the final price will not
have a material impact on Unicom's financial position.
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 June 30, 1999, UT
Holdings' purchase commitments, principally related to construction, were
approximately $50 million.
Unicom has approved capital expenditures for 1999 of approximately $47
million for Unicom Energy Services. As of June 30, 1999, Unicom Energy
Services had purchase commitments of approximately $6 million.
Capital Resources. Unicom expects to obtain funds to invest in its
unregulated subsidiaries principally from the fossil plant sale proceeds to be
received by Unicom Investment, although it may also obtain funds from
dividends received on its ComEd common stock and from borrowings. The
availability of ComEd's dividends to Unicom is dependent on ComEd's financial
performance and cash position, as well as legal restrictions on the payment of
dividends by public utilities. Other forms of financing by ComEd to Unicom or
the unregulated subsidiaries of Unicom, such as additional loans or additional
equity investments, which are not expected, would be subject to prior approval
by the ICC.
The fossil plant sale proceeds received by Unicom Investment, after the
payment of the Demand Note to ComEd, will be used to invest in business
opportunities.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $80 million was unused as of June 30, 1999. The
credit facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings and Unicom Energy
Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Interest rates for borrowings under the credit
facility are set at the time of a borrowing and are based on either a prime
interest rate or a floating rate bank index plus a spread which varies with
the credit rating of ComEd's outstanding first mortgage bonds. The credit
facility is expected to be refinanced by Unicom Enterprises in the fourth
quarter of 1999. See Note 12 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 a $120 million 7.38% unsecured
guaranteed senior Note due May 2012, the proceeds of which were used to
refinance existing debt. The Note is guaranteed by Unicom and includes certain
covenants with respect to Unicom and Unicom Thermal's operations.
In June 1999, Northwind Midway issued $12 million of 7.68% guaranteed senior
Notes due June 2023, the proceeds of which will be used primarily to finance
certain project construction costs. The Notes are guaranteed by Unicom and
include certain covenants with respect to Unicom and Northwind Midway's
operations.
S&P's current rating on Unicom's senior debt obligations is BBB+. Ratings
have not been obtained from Moody's or Duff & Phelps.
Regulation
ComEd and Indiana Company are subject to federal and state regulation in the
conduct of their respective businesses, includingremoving 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.
50
Rate Matters. See "Changes in the Electric Utility Industry," subcaption
"The 1997 Act" above, for information regarding the effect of the 1997 Act on
rate matters.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd. ComEd operates five nuclear plants--Braidwood, Byron, Dresden,
LaSalle and Quad Cities Stations, and is committedrelated to 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.
On May 6, 1999, ComEd's LaSalle Station was officially removed from the
NRC's listing of plants that require increased regulatory scrutiny. LaSalle
Station had been on this list since January 1997. Concurrent with the LaSalle
Station action, the NRC announced the formal removal of the Quad Cities
Station from its list of plants with declining performance trends. Quad Cities
Station had been on the declining trend list since January 1998. With these
actions, all of ComEd's nuclear plants are now placed in the NRC's "routine
oversight" category. This represents the first time since 1990 that none of ComEd's nuclear
generating units arestations and obtaining energy and capacity from Generation under special NRC oversight.
The NRC and representatives of ComEd's management have met, and will
continue to meet periodically in the
future, to discuss the overall
performanceterms of the ComEd nuclear program.
Based on ComEd's most recent study, decommissioning costs are estimated to
be $5.4 billion in current-year (1999) dollars, including a contingency
allowance. This estimate includes $515 million of non-radiological costs,
which are included in ComEd's proposed rider for recovery, as discussed below.
ComEd's decommissioning cost expenditures at the end of the units' operating
lives are estimated to total approximately $13.8 billion. These expenditures
will occur primarily during the period from 2007 through 2034. 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 lives 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. Under its most recent annual rider, filed with
the ICC on February 26, 1999, ComEd has proposed to increase its estimated
annual decommissioning cost accrual from $84 million to $130 million. The
proposed increase primarily reflects an increase in low-level waste disposal
cost escalation, the inclusion of $209 million in current-year (1999) dollars
for safety-related costs of maintaining Zion Station in a mothballed condition
until dismantlement begins, and the inclusion of non-radiological costs in the
decommissioning cost estimates for recovery under the rider. 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
51
in future construction expenditures and operating expenses and changes in
operating procedures. See Note 21 of Notes to Financial Statements for
additional information.
Results of Operations
Unicom's basic and diluted earnings/(loss) per common sharePPA for the three months, six months and twelvenine months ended JuneSeptember 30, 1999 and 1998 were as
follows:2000.
47
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Significant Operating Trends
Six Months
Three Months
Ended Ended Twelve Months Ended
JuneComponents of Variance
September 30, June 30 June 30
------------------- ----------- --------------------
1999 1998 1999 1998 1999 1998
--------- ---------------------------------------------------
------------------------ Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
----- --------- ----------(In millions)
Basic Earnings/(Loss) per
Common Share............ $0.55 $0.37 $0.87 $0.62 $2.60 $(4.55)
========= ========= ===== ===== ========= ==========
Diluted Earnings/(Loss)
per Common Share........ $0.55 $0.37 $0.87 $0.62 $2.59 $(4.55)
========= ========= ===== ===== ========= ==========
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 diluted EPS.
Net Income for the Three Months Ended June 30, 1999. The increase in ComEd's
net income in the recent three-month period reflects, among other factors, the
continued improvement of ComEd's nuclear fleet, which reduced energy costs.
The reduction in energy costs helped to offset the reduction in revenues due
to a 15% residential base rate reduction and increased O&M expenditures.
Kilowatthour sales increased 13% for the second quarter of 1999, compared to
the same period in 1998. Both periods benefited from warmer than normal
weather. The increase in kilowatthour sales included a 93% increase in
kilowatthour sales to other utilities, which represented a $32 million (after-
tax), or $0.15 per common share, increase in earnings helping to offset the
15% residential base rate reduction. See "Operating Revenues" below for
additional information.
Fuel and purchased power costs decreased 31% in the second quarter of 1999,
compared to the same period in 1998, reflecting increased generation output by
the nuclear fleet, which reduced purchased power requirements. See "Fuel
Costs" and "Purchased Power" below for additional information.
O&M expenses increased 12% for the second quarter of 1999, compared to the
second quarter of 1998, as discussed in "Operation and Maintenance Expenses"
below.
Earnings for the second quarter of 1999 were also positively impacted by an
unrealized gain of $20 million (after-tax), or $0.09 per common share,
recorded related to a forward share repurchase arrangement. A reduction in the
estimated liability for closing costs related to the Zion Station also
increased earnings by $7 million (after-tax), or $0.03 per common share. In
addition, ComEd recorded $6 million (after-tax), or $0.03 per common share, in
interest income earned on the temporary investment of securitization proceeds.
Partially offsetting the increases to earnings was an increase of $20 million
(after-tax), or $0.09 per common share, for additional regulatory asset
amortization expense.
Net Income for the Six Months Ended June 30, 1999. The increase in ComEd's
net income in the recent six-month period reflects, among other factors, the
continued improvement of ComEd's nuclear fleet, which reduced energy costs.
The reduction in energy costs helped to offset the reduction in revenues due
to the 15% residential base rate reduction and increased O&M expenditures.
52
Kilowatthour sales increased 10% for the six months ended June 30, 1999,
compared to the same period in 1998, which included a 69% increase in
kilowatthour sales to other utilities, representing a $49 million (after-tax),
or $0.22 per common share, increase in earnings during the first half of 1999,
as well as continued economic growth in ComEd's service territory. See
"Operating Revenues" below for additional information.
Fuel and purchased power costs decreased 28% during the six months ended
June 30, 1999, compared to the same period in 1998, reflecting the effects of
the continued improvement of ComEd's nuclear fleet. See "Fuel Costs" and
"Purchased Power" below for additional information.
O&M expenses increased 4% for the six months ended June 30, 1999, compared
to the same period in 1998, as discussed in "Operation and Maintenance
Expenses" below.
Earnings for the six months ended June 30, 1999 were also positively
impacted by unrealized gains of $33 million (after-tax), or $0.15 per common
share, recorded related to a forward share repurchase arrangement. A reduction
in the estimated liability for closing costs related to the Zion Station also
increased earnings by $7 million (after-tax), or $0.03 per common share. In
addition, ComEd recorded $15 million (after-tax), or $0.07 per common share,
in interest income earned on the temporary investment of securitization
proceeds. Partially offsetting the increases to earnings was an increase of
$20 million (after-tax), or $0.09 per common share, for additional regulatory
asset amortization expense.
Also partially offsetting the increases in earnings were charges totaling
$38 million (after-tax), or $0.17 per common share, related to the early
redemption of long-term debt, sinking fund debentures and preference stock
completed in the first quarter of 1999.
Net Income for the Twelve Months Ended June 30, 1999. The increase in
ComEd's net income in the recent twelve-month period was primarily due to the
continued improvement of the nuclear fleet, which reduced energy costs. Also
increasing operating results were lower O&M expenses, lower depreciation and
amortization expense, gains from certain asset sales, increased interest
income and a reduction in the estimated liability for Zion Station closing
costs. The twelve months ended June 30, 1998 included write downs associated
with the discontinuation of regulatory accounting practices for the generation
portion of its business and other charges recorded in response to the 1997
Act. The twelve months ended June 30, 1998 also included a write-off in
connection with the closure of Zion Station.
ComEd's kilowatthour sales increased 8% for the twelve months ended June 30,
1999, compared to the same period last year, as discussed in "Operating
Revenues" below. O&M expenses decreased 1% during the same period, as
discussed in "Operation and Maintenance Expenses" below.
Fuel and purchased power costs decreased 9% for the twelve months ended June
30, 1999, compared to the same period last year, due to overall improved
performance at ComEd's nuclear stations, which helped to reduce purchased
power requirements. See "Fuel Costs" and "Purchased Power" below for
additional information.
The twelve months ended June 30, 1999 also included a 2% reduction in
depreciation and amortization expense, see "Depreciation, Amortization and
Decommissioning" below, and a $22 million (after-tax), or $0.10 per common
share, reduction in the estimated liability for closing costs related to the
Zion Station, both of which increased operating results.
Also, the twelve months ended June 30, 1999 reflected gains on the sales of
certain assets of $18 million (after-tax), or $0.08 per common share,
consisting principally of surplus inventory of emission allowances. In
addition, operating results increased for the recent period due to unrealized
gains of $33 million (after-tax), or $0.15 per common share, recorded in the
first half of 1999
53
related to the forward share repurchase arrangement, and interest income of
$20 million (after-tax), or $0.09 per common share, earned on the temporary
investment of securitization proceeds.
Partially offsetting the increases in earnings were charges totaling $38
million (after-tax), or $0.17 per common share, related to the early
redemption of long-term debt, sinking fund debentures and preference stock
completed in the first quarter of 1999.
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
for the twelve months ended June 30, 1998 of $810 million (after-tax), or
$3.75 per common share.
Also, the twelve months ended June 30, 1998 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 of $60 million (after-tax), or $0.28 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 for the twelve months ended
June 30, 1998 of $44 million (after-tax), or $0.20 per common share.
The twelve months ended June 30, 1998 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.
Operating Revenues. ComEd's electric operating revenues reflect revenues
from sales to ultimate consumers (including residential, commercial and
industrial customers within its service territory) and revenues from sales for
resale (i.e., sales to wholesale customers, principally other electric
utilities). Operating revenues are affected by kilowatthour sales and rate
levels. Kilowatthour sales, in turn, are affected by weather, the level of
economic activity within ComEd's service area, and off-system or wholesale
sales to other utilities. Off-system sales are affected by a number of
factors, including nuclear generating availability and performance.
Operating revenues decreased $98 million in the three months ended June 30,
1999, compared to the three months ended June 30, 1998, primarily due to the
approximately $90 million impact of the 15% residential base rate reduction
that took effect August 1, 1998. Kilowatthour sales increased 13%, primarily
due to sales to other utilities. Operating revenues were also reduced by
approximately $231 million in the six months ended June 30, 1999, compared to
the six months ended June 30, 1998, primarily due to the approximately $180
million impact of the 15% residential base rate reduction that took effect
August 1, 1998. Kilowatthour sales increased 10%, compared to the same period
in 1998, primarily due to sales to other utilities. Operating revenues
decreased $268 million in the twelve months ended June 30, 1999, compared to
the same period in 1998, primarily due to the approximately $350 million
impact of the 15% residential base rate reduction that took effect August 1,
1998. Kilowatthour sales increased 8%, compared to the same period last year,
primarily due to sales to other utilities. Operating revenues for the twelve
months ended June 30, 1999 were also reduced by approximately $22 million
(after-tax), or $0.10 per common share, due to various federal and state
litigation matters. In addition, operating revenues were reduced by
approximately $50 million, $118 million and $213 million for the three months,
six months and twelve months ended June 30, 1999, respectively, due to a
change in presentation for certain state and municipal taxes.
54
Fuel Costs. Changes in fuel expense for the three months, six months and
twelve months ended June 30, 1999, compared to the same periods ended June 30,
1998, 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:
Three Months Ended Six Months Twelve Months Ended
June 30 Ended June 30 June 30
-------------------- -------------- --------------------
1999 1998 1999 1998 1999 1998
--------- --------- ------ ------ --------- ---------
Cost of fuel consumed (per million Btu):
Nuclear..................................... $0.49 $0.60 $0.49 $0.62 $0.49 $0.59
Coal........................................ $2.23 $2.46 $2.28 $2.18 $2.42 $2.17
Oil......................................... $3.85 $3.72 $3.47 $3.45 $3.57 $3.64
Natural gas................................. $2.35 $2.50 $2.28 $2.46 $2.29 $2.60
Average all fuels........................... $0.99 $1.29 $0.98 $1.27 $1.07 $1.29
Net generation of electric energy (millions of
kilowatthours)............................... 24,531 18,163 47,692 35,491 95,503 80,271Operating Revenues $ 1,919 $ 2,093 $ (162) $ (12) $ (174)
Fuel sources of kilowatthour generation:
Nuclear..................................... 72% 64% 73% 61% 70% 59%
Coal........................................ 24 28 24 31 27 35
Oil......................................... -- -- -- 1 -- 1
Natural gas................................. 4 8 3 7 3 5
--------- --------- ------ ------ --------- ---------
100% 100% 100% 100% 100% 100%
========= ========= ====== ====== ========= =========
The increases in net generation of electric energy and nuclear generation
for the periods ended June 30, 1999, compared to the prior periods, are
primarily due to significant improvement in ComEd's nuclear fleet. The overall
nuclear capacity factor was 86% for the second quarter of 1999, compared to
57% for the second quarter of 1998. See "Regulation," subcaption "Nuclear
Matters" above, for information regarding 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," subcaption "UTILITY OPERATIONS--Construction Program,"
above and Note 21 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 decreased $181 million,
$283 million and $171 million for the three months, six months and twelve
months ended June 30, 1999, respectively, compared to the same periods ended
June 30, 1998. The decrease in purchased power is primarily due to increased
output from ComEd's nuclear fleet, which reduced purchased power requirements.
See "Regulation," subcaption "Nuclear Matters" above, for information
regarding ComEd's nuclear generating stations.
The number and average cost of kilowatthours purchased were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
--------------------- ------------------ --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
Kilowatthours
(millions)............. 2,040 5,764 3,993 14,449 10,248 22,139
Cost per kilowatthour... 4.82c 4.85c 4.26c 3.46c 4.54c 3.24c
55
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. See
"Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Market
Risks" above, for additional information.
Operation and Maintenance Expenses. O&M expenses include the expenses
associated with operating and maintaining ComEd's generation, transmission and
distribution assets, as well as administrative overhead and support. Given the
variety of expense categories covered, there are a number of factors which
affect the level of such expenses within any given period. Two major
components of such expenses, however, are the costs associated with operating
and maintaining ComEd's nuclear and fossil generating facilities. Generating
station expenses are affected by the cost of materials, regulatory
requirements and expectations, the age of facilities and cost control efforts.
During the three months and six months ended June 30, 1999, the aggregate
level of O&M expenses increased 12% and 4%, respectively, compared to the same
periods ended June 30, 1998. O&M expenses for the twelve months ended June 30,
1999 decreased 1%, compared to the same period last year.
O&M expenses associated with nuclear generating stations decreased $13
million, $19 million and $59 million during the three months, six months and
twelve months ended June 30, 1999, respectively, compared to the same periods
ended June 30, 1998. The decreases in the recent three-month, six-month and
twelve-month periods were due to shorter refueling outages and fewer forced
outages. The nuclear O&M decrease in the recent twelve-month period was also
due to the permanent cessation of nuclear generation operations at Zion
Station in December 1997. See "Changes in the Electric Utility Industry,"
subcaption "Response to Regulatory Changes" above, regarding the permanent
cessation of nuclear operations at Zion Station.
During the three months, six months and twelve months ended June 30, 1999,
O&M expenses associated with fossil generating stations decreased $11 million,
$17 million and $37 million, respectively, compared to the same periods ended
June 30, 1998. The decreases in the recent periods for the fossil generating
stations were primarily due to reductions in general plant maintenance costs.
Also, the twelve months ended June 30, 1999 fossil O&M expenses were lower due
to the sales of State Line and Kincaid Stations in December 1997 and February
1998, respectively.
O&M expenses associated with ComEd's transmission and distribution system
increased $25 million, $36 million and $58 million during the three months,
six months and twelve months ended June 30, 1999, respectively, compared to
the same periods last year. The increases in the recent three-month and six-
month periods reflect higher maintenance costs, which include an increase in
tree trimming expenses partially offset by a reduction in emergency storm
restoration costs. The increase in the recent twelve-month period reflects
higher maintenance costs, including emergency storm restoration of electric
service and tree trimming. O&M expenses associated with customer-related
activities increased $13 million, $19 million and $23 million for the three
months, six months and twelve months ended June 30, 1999, respectively,
compared to the same periods ended June 30, 1998, primarily due to the
implementation of a new customer information and billing system.
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 postretirement health care benefits, in addition
to certain other employee-related costs, resulting in charges of $5 million
and $8 million for the three months ended June 30, 1999 and 1998,
respectively, $5 million and $24 million for the six months ended June 30,
1999 and 1998, respectively, and $30 million and $56 million for the twelve
months ended June 30, 1999 and 1998, respectively.
56
Other employee benefits expenses, excluding the effects of employee
separation plans and certain other employee-related costs, increased $31
million, $33 million and $69 million for the three months, six months and
twelve months ended June 30, 1999, respectively, compared to the same periods
ended June 30, 1998. The increases for the recent periods were primarily due
to accruals for incentive compensation.
O&M expenses included a $25 million charge for the six months and twelve
months ended June 30, 1999 as a result of a settlement agreement with the City
during the first quarter of 1999. O&M expenses for the twelve months ended
June 30, 1999 also reflect a reduction of $34 million in certain nuclear
maintenance costs due to technological improvements, compared to the same
period last year. In addition, O&M expenses for the twelve months ended June
30, 1998 included $25 million for the additional write-off of obsolete
materials and supplies.
O&M expenses associated with certain administrative and general costs
increased $27 million, and decreased $10 million and $21 million for the three
months, six months and twelve months ended June 30, 1999, respectively,
compared to the same periods ended June 30, 1998. The increase in the recent
three-month period was principally due to increased charges for uncollectible
accounts resulting from billing and collection delays experienced following
the ongoing implementation of a new customer information system and the
temporary suspension of credit activities in the last half of 1998 and early
1999. The decreases in the recent six-month and twelve-month periods were due
to a variety of reasons, including reductions in nuclear insurance and safety
costs partially offset by additional charges for uncollectible accounts of $25
million and $35 million in the six-months and twelve months ended June 30,
1999, respectively. 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, Amortization and Decommissioning. Depreciation, amortization
and decommissioning expense increased $34 million and $16 million for the
three months and six months ended June 30, 1999, respectively, compared to the
same periods ended June 30, 1998. The twelve months ended June 30, 1999
decreased $23 million, compared to the same period last year. The increases in
the recent three-month and six-month periods were primarily due to additional
regulatory asset amortization expense of $33 million recorded in the second
quarter of 1999. The decrease in the recent twelve-month period was primarily
due to the retirement of Zion Station in December 1997 and the sales of State
Line and Kincaid Stations in December 1997 and February 1998, respectively,
partially offset by $33 million in additional regulatory asset amortization
expense. See Note 1 of Notes to Financial Statements, under "Depreciation,
Amortization of Regulatory Assets and Decommissioning," for additional
information.
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 costs of 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 their results of operations due to ComEd's
ability to recover decommissioning costs through rates.
Interest on Debt. Changes in interest on long-term debt and notes payable
for the three months, six months and twelve months ended June 30, 1999,
compared to the same periods ended June 30, 1998, were due to changes in
average interest rates and in the amounts of long-term debt and notes payable
outstanding. Changes in interest on ComEd's long-term debt also reflected new
issues of debt, the retirement and early redemption of debt, and the
retirement and redemption of issues which were refinanced at generally lower
rates of interest. See Notes 2 and 6 of Notes to Financial Statements for
information regarding the redemptions and repurchases of debt and equity.
57
The average amounts of ComEd's long-term debt and notes payable outstanding
and average interest rates thereon were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
--------------------- --------------------- ---------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- ----------
Long-term debt outstand-
ing:
Average amount (mil-
lions)................ $8,128 $5,696 $8,329 $5,847 $7,167 $5,973
Average interest rate.. 6.76% 7.78% 6.77% 7.71% 7.19% 7.69%
Notes payable outstand-
ing:
Average amount (mil-
lions)................ $ 290 $ 402 $ 256 $ 308 $ 318 $ 217
Average interest rate.. 5.22% 5.88% 6.09% 5.90% 5.73% 5.95%
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, and as a result, began capitalizing interest in 1998. ComEd
capitalized $6 million for each of the three months ended June 30, 1999 and
1998, $12 million and $8 million for the six months ended June 30, 1999 and
1998, respectively, and $32 million and $8 million for the twelve months ended
June 30, 1999 and 1998, respectively, 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 twelve months ended June
30, 1999 and December 31, 1998 were 2.62 and 2.67, respectively. ComEd's
ratios of earnings to fixed charges and preferred and preference stock
dividend requirements for the twelve months ended June 30, 1999 and December
31, 1998 were 2.33 and 2.29, respectively.
Business corporations, in general, have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate
to replace, at increased costs, the productive assets consumed. Electric
utilities, in particular, have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental requirements. Because the
regulatory process limits the amount of depreciation expense included in
ComEd's revenue allowance to the original cost of utility plant investment,
the resulting cash flows are inadequate to provide for replacement of that
investment in future years or preserve the purchasing power of common equity
capital previously invested.
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" and "Liquidity and Capital
Resources--UNREGULATED OPERATIONS--Construction Program," and "Changes in the
Electric Utility Industry--Response to Regulatory Changes," (3) 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
58
Decommissioning," (4) statements regarding cleanup costs associated with MGPs
and other remediation sites in Note 21 of Notes to Financial Statements, (5)
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 Risks," (6) statements regarding the risks and uncertainties relating
to Year 2000 issues set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Liquidity and
Capital Resources--UTILITY OPERATIONS--Year 2000 Conversion," including
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, (7) statements regarding the fossil plant sale in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaptions "Changes in the Electric Utility Industry--Fossil
Plant Sale," "Liquidity and Capital Resources--UTILITY OPERATIONS--
Construction Program," and "Liquidity and Capital Resources--UNREGULATED
OPERATIONS--Capital Resources," and in Note 4 of Notes to Financial Statements
and (8) statements regarding estimates of claims and other restoration costs
resulting from the July 1999 outages set forth in Note 22 of Notes to
Financial Statements. Management cannot predict the course of future events or
anticipate the interaction of multiple factors beyond management's control and
their effect on revenues, project timing and costs. The statements regarding
revenue reductions 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, 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 also
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 fair value of forward energy
contracts are subject to changes in generating capability and a reduction in
the demand for electricity. The statement regarding the use of proceeds from
the fossil plant sale is subject to the possibility that regulatory action
might affect the amount and use of such proceeds and the possibility that, due
to changing market conditions, Unicom and ComEd may determine that other uses
of the proceeds may be in their best interest. The statements regarding
estimates of claims and other restoration costs resulting from the July 1999
outages are subject to the risk that the actual amount of losses suffered by
customers and restoration costs may exceed the estimated amounts. Unicom and
ComEd make no commitment to disclose any revisions to the forward-looking
statements, or any facts, events or circumstances after the date hereof that
may bear upon forward-looking statements.
59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Commonwealth Edison Company:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Commonwealth Edison Company (an Illinois
corporation) and subsidiary companies as of June 30, 1999 and December 31,
1998, and the related statements of consolidated operations, retained
earnings/(deficit) and cash flows for the three-month, six-month and twelve-
month periods ended June 30, 1999 and 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commonwealth Edison
Company and subsidiary companies as of June 30, 1999 and December 31, 1998,
and the results of their operations and their cash flows for the three-month,
six-month and twelve-month periods ended June 30, 1999 and 1998, in conformity
with accounting principles generally accepted in the United States.
Arthur Andersen LLP
Chicago, Illinois
August 13, 1999
(except with respect to
Note 1 as to which the
date is May 12, 2000)
60
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months,
six months and twelve months ended June 30, 1999 and 1998 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, asset
dispositions, 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.
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
---------------------- ---------------------- -----------------------
1999 1998 1999 1998 1999 1998
---------- ---------- ---------- ---------- ---------- -----------
(Thousands of Dollars)
Electricand Purchased Power 954 789 189 (24) 165
Operating Revenues............... $1,678,983 $1,776,972 $3,207,783 $3,439,247 $6,857,078 $ 7,124,743
---------- ---------- ---------- ---------- ---------- -----------
Electricand Maintenance 265 573 (292) (16) (308)
Depreciation and Amortization 178 226 (80) 32 (48)
Taxes Other Than Income 82 139 (25) (32) (57)
------- ------- ------- ------- -------
Total Operating Expenses and Taxes:
Fuel................... $ 259,639 $ 241,873 $ 494,473 $ 464,166 $1,087,835 $ 1,067,845
Purchased power........ 98,301 279,359 169,983 452,751 465,249 636,316
Operation.............. 428,536 345,264 749,922 689,254 1,518,014 1,575,382
Maintenance............ 198,992 213,371 421,579 434,130 776,711 746,362
Depreciation and
amortization.......... 265,334 231,008 495,103 478,766 953,940 977,193
Taxes (except income).. 129,924 184,599 261,542 391,565 567,128 801,4821,479 1,727 (208) (40) (248)
------- ------- ------- ------- -------
Operating Income taxes--
Current--Federal..... 90,010 67,684 185,720 122,140 349,571 279,499
--State.............. 19,427 14,279 40,101 25,510 66,421 70,009
Deferred--Federal--
net................. (36,356) (12,001) (75,375) (19,017) (25,598) 18,571
--State--net......... (7,617) (2,028) (15,819) (2,591) (691) 1,559
Investment tax credits
deferred--net......... (7,021) (6,888) (14,042) (14,048) (27,723) (29,270)
---------- ---------- ---------- ---------- ---------- -----------
$1,439,169 $1,556,520 $2,713,187 $3,022,626 $5,730,857 $ 6,144,948
---------- ---------- ---------- ---------- ---------- -----------
Electric Operating
Income................. $ 239,814 $ 220,452 $ 494,596 $ 416,621 $1,126,221 $ 979,795
---------- ---------- ---------- ---------- ---------- -----------
Other Income and
(Deductions):440 366 46 28 74
------- ------- ------- ------- -------
Interest Expense (148) (143) 11 (16) (5)
Distributions on long-term
debt, net of interest
capitalized........... $ (131,599) $ (104,892) $ (270,158) $ (217,337) $ (483,424) $ (451,395)
Interest on notes
payable............... (3,769) (5,897) (7,721) (9,016) (18,264) (12,900)
Allowance for funds
used during
construction.......... 5,190 4,698 9,401 7,858 18,006 30,394
Income taxes
applicable to
nonoperating
activities............ (1,833) 3,324 (3,249) 17,275 (17,827) 34,830
Provision for
dividends on company-
obligated mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely the
Company's
subordinated debt
securities............ (7,427) (7,428) (14,855) (14,855) (29,710) (29,639)
Loss on nuclear plant
closure............... -- -- -- -- -- (885,611)
Income tax effect of
nuclear plant
closure............... -- -- -- -- -- 362,952
Miscellaneous--net..... 29,609 (5,804) 43,948 (24,260) 74,880 (118,620)
---------- ---------- ---------- ---------- ---------- -----------
$ (109,829) $ (115,999) $ (242,634) $ (240,335) $ (456,339) $(1,069,989)
---------- ---------- ---------- ---------- ---------- -----------
Net Income/(Loss) before
Extraordinary Items.... $ 129,985 $ 104,453 $ 251,962 $ 176,286 $ 669,882 $ (90,194)
Extraordinary Losses,
less Applicable Income
Taxes.................. -- -- (27,576) -- (27,576) (810,335)
---------- ---------- ---------- ---------- ---------- -----------
Net Income/(Loss)....... $ 129,985 $ 104,453 $ 224,386 $ 176,286 $ 642,306 $ (900,529)
Provision for Dividends
on Preferred and
Preference Stocks...... 3,043 14,462 18,340 29,009 46,215 58,483
---------- ---------- ---------- ---------- ---------- -----------
Net Income/(Loss) on
Common Stock........... $ 126,942 $ 89,991 $ 206,046 $ 147,277 $ 596,091 $ (959,012)
========== ========== ========== ========== ========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
61
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 1999 1998
------ ----------- ------------
(Thousands of Dollars)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $872 million and
$858 million, respectively)....................... $28,245,096 $27,801,246
Less--Accumulated provision for depreciation....... 15,662,340 15,234,320
----------- -----------
$12,582,756 $12,566,926
Nuclear fuel, at amortized cost.................... 856,379 874,979
----------- -----------
$13,439,135 $13,441,905
----------- -----------
Investments:
Nuclear decommissioning funds...................... $ 2,450,974 $ 2,267,317
Subsidiary companies............................... 51,949 48,636
Other investments, at cost......................... 44,380 57,031
----------- -----------
$ 2,547,303 $ 2,372,984
----------- -----------
Current Assets:
Cash............................................... $ 233 $ 219
Temporary cash investments......................... 27,811 26,935
Cash held to redemption of securities.............. 671,233 3,062,816
Special deposits................................... 382 271
Receivables--
Customers........................................ 1,331,922 1,364,760
Forward share repurchase contract................ 695,530 --
Other............................................ 130,929 155,492
Provisions for uncollectible accounts............ (63,711) (48,008)
Coal and fuel oil, at average cost................. 145,740 134,965
Materials and supplies, at average cost............ 239,513 229,532
Deferred income taxes related to current assets and
liabilities....................................... 29,881 26,486
Prepayments and other.............................. 39,648 18,387
----------- -----------
$ 3,249,111 $ 4,971,855
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 4,432,593 $ 4,578,427
Other.............................................. 61,123 85,406
----------- -----------
$ 4,493,716 $ 4,663,833
----------- -----------
$23,729,265 $25,450,577
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
62
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
June 30, December
CAPITALIZATION AND LIABILITIES 1999 31, 1998
------------------------------ ----------- -----------
(Thousands of Dollars)
Capitalization (see accompanying statements):
Common stock equity.................................. $ 5,073,007 $ 5,055,854
Preferred and preference stocks without mandatory
redemption requirements............................. 18,827 91,479
Preference stock subject to mandatory redemption
requirements........................................ -- 69,475
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the
Company's subordinated debt securities*............. 350,000 350,000
Long-term debt....................................... 7,233,302 7,677,219
----------- -----------
$12,675,136 $13,244,027
----------- -----------
Current Liabilities:
Notes payable........................................ $ 411,850 $ 276,356
Current portion of long-term debt, redeemable
preference stock and capitalized lease obligations.. 1,100,113 2,226,868
Accounts payable..................................... 486,767 605,712
Accrued interest..................................... 148,757 178,238
Accrued taxes........................................ 296,602 165,466
Dividends payable.................................... 94,475 104,022
Customer deposits.................................... 62,889 56,954
Accrued plant closing costs.......................... 43,411 78,430
Other................................................ 131,232 149,304
----------- -----------
$ 2,776,096 $ 3,841,350
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes................................ $ 3,700,936 $ 3,787,978
Nuclear decommissioning liability for retired plants. 1,252,100 1,215,400
Accumulated deferred investment tax credits.......... 544,262 562,285
Accrued spent nuclear fuel disposal fee and related
interest............................................ 745,066 728,413
Obligations under capital leases..................... 257,598 333,653
Regulatory liabilities............................... 587,639 595,005
Other................................................ 1,190,432 1,142,466
----------- -----------
$ 8,278,033 $ 8,365,200
----------- -----------
Commitments and Contingent Liabilities (Note 21)
$23,729,265 $25,450,577
=========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
63
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
June 30, December 31,
1999 1998
----------- ------------
(Thousands of Dollars)
Common Stock Equity:
Common stock, $12.50 par value per share--
Outstanding--213,972,307 shares and 214,057,171
shares, respectively............................. $ 2,677,976 $ 2,677,969
Premium on common stock and other paid-in capital.. 2,207,260 2,223,706
Capital stock and warrant expense.................. (12,894) (15,664)
Retained earnings.................................. 211,003 176,643
Treasury stock--264,406 shares and 178,982 shares,
respectively...................................... (10,338) (6,800)
----------- -----------
$ 5,073,007 $ 5,055,854
----------- -----------
Preferred and Preference Stocks Without Mandatory
Redemption Requirements:
Preference stock, non-cumulative, without par val-
ue--
Outstanding--2,600 shares......................... $ 16,991 $ 16,991
Preference stock, cumulative, without par value--
Outstanding--3,000,000 shares and 13,499,549
shares, respectively ............................ 72,638 504,957
Current redemption requirements for preference
stock included in current liabilities............. (72,638) (432,320)
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--57,725 shares and 58,211 shares, re-
spectively....................................... 1,836 1,851
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding............................. -- --
----------- -----------
$ 18,827 $ 91,479
----------- -----------
Preference Stock Subject to Mandatory Redemption Re-
quirements:
Preference stock, cumulative, without par value--
Outstanding--700,000 shares and 1,720,345 shares,
respectively..................................... $ 69,475 $ 171,348
Current redemption requirements for preference
stock included in current liabilities............. (69,475) (101,873)
----------- -----------
$ -- $ 69,475
----------- ----------- Company-Obligated
Mandatorily Redeemable
Preferred Securities of Subsidiary
Trusts Holding Solely the Company's
Subordinated Debt Securities.............. $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1999 through 2003--6 3/8% to 9 3/8%..... $ 672,242 $ 1,080,000
Maturing 2004 through 2013--4.40% to 8 3/8%...... 1,305,400 1,485,400
Maturing 2014 through 2023--5.85% to 9 7/8%...... 1,609,442 1,981,000
----------- -----------
$ 3,587,084 $ 4,546,400
Transitional trust notes, due 2000 through 2008--
5.29% to 5.74%.................................... 3,260,000 3,400,000
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%.................................. 32,418 94,159
Pollution control obligations, due 2007 through
2014--3.45% to 5 7/8%............................. 139,200 140,700
Other long-term debt............................... 1,056,301 1,056,346
Deposit for retirement of long-term debt........... (1,021) --
Current maturities of long-term debt included in
current liabilities............................... (787,985) (1,497,706)
Unamortized net debt discount and premium.......... (52,695) (62,680)
----------- -----------
$ 7,233,302 $ 7,677,219
----------- -----------
$12,675,136 $13,244,027
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
64
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS/(DEFICIT)
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- ----------------- --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- -------- ----------
(Thousands of Dollars)
Balance at Beginning of
Period................. $ 169,578 $ (47,579) $176,643 $(19,172) $(43,295) $1,258,599
Add--Net income/(loss).. 129,985 104,453 224,386 176,286 642,306 (900,529)
--------- --------- -------- -------- -------- ----------
$ 299,563 $ 56,874 $401,029 $157,114 $599,011 $ 358,070
--------- --------- -------- -------- -------- ----------
Deduct--
Dividends declared
on--
Common stock........ $ 85,517 $ 85,694 $171,106 $171,387 $342,495 $ 342,769
Preferred and
preference stocks.. 3,043 14,419 6,085 28,966 32,437 58,135
Preference stock
redemption premiums.Securities (7) (7) -- -- 9,984 -- 9,984 --
Other, capital stock
transactions--net...Net 34 67 -- 56 2,851 56 3,092 461
--------- --------- -------- -------- -------- ----------
$ 88,560 $ 100,169 $190,026 $200,409 $388,008 $ 401,365
--------- --------- -------- -------- -------- ----------
Balance at End(33) (33)
------- ------- ------- ------- -------
Income Before Income Taxes and
Extraordinary Items 319 283 57 (21) 36
Income Taxes 141 86 27 28 55
------- ------- ------- ------- -------
Net Income Before Extraordinary Items 178 197 30 (49) (19)
Extraordinary Items (net of Period
(Includes $627 million
and $360 million of
appropriated retained
earnings at June 30,
1999 and 1998,
respectively).......... $ 211,003 $ (43,295) $211,003 $(43,295) $211,003 $ (43,295)
========= ========= ======== ======== ======== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
65
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ---------------------- -----------------------
1999 1998 1999 1998 1999 1998
--------- --------- ----------- --------- ----------- ----------
(Thousands of Dollars)
Cash Flow from Operating
Activities:
Net income/(loss)...... $ 129,985 $ 104,453 $ 224,386 $ 176,286 $ 642,306 $(900,529)
Adjustments to
reconcile net
income/(loss) to net
cash provided by
operating activities:
Depreciation and
amortization........ 284,156 245,342 528,904 506,061 1,011,988 1,030,887
Deferred income taxes
and investment tax
credits--net........ (47,937) (20,160) (103,198) 4,340 (44,743) (344,933)
Extraordinary loss
related to write-off
of certain net
regulatory assets...taxes) -- -- -- -- --
810,335
Loss------- ------- ------- ------- -------
Net Income 178 197 30 (49) (19)
Preferred and Preference Stock Dividends -- (1) -- 1 1
------- ------- ------- ------- -------
Net Income on nuclear plant
closure............. -- -- -- -- -- 885,611
Provisions/(payments)
for revenue
refunds--net........ 2,635 (10,966) (19,858) (45,470) 2,745 --
Equity component of
allowance for funds
used during
construction........ (2,003) (1,960) (3,756) (3,544) (7,170) (16,529)
Provisions/(payments)
for liability for
separation costs--
net................. (1,018) (389) (9,798) 7,036 (7,076) 22,219
Net effect on cash
flows of changes in:
Receivables........ (149,642) (213,687) 39,687 (149,402) (296,744) (218,289)
Coal and fuel oil.. 7,495 (48,322) (10,775) (84,508) 59,432 (25,022)
Materials and
supplies.......... (5,841) (2,899) (9,981) (6,638) 19,176 34,480
Accounts payable
excluding nuclear
fuel lease
principal payments
and separation
costs--net........ 29,482 138,721 (108,067) 116,763 (112,850) 154,778
Accrued interest
and taxes......... (35,359) 89,692 119,705 97,959 (913) 57,889
Other changes in
certain current
assets and
liabilities....... 26,468 34,984 54,232 51,688 143,732 247,016
Other--net........... 45,482 (480) 126,451 57,686 114,388 122,247
--------- --------- ----------- --------- ----------- ----------Common Stock $ 283,903178 $ 314,329196 $ 827,93230 $ 728,257(48) $ 1,524,271 $1,860,160
--------- --------- ----------- --------- ----------- ----------
Cash Flow from Investing
Activities:
Construction
expenditures.......... $(245,292) $(249,136) $ (473,708) $(420,122) $ (956,817) $ (963,904)
Nuclear fuel
expenditures.......... (63,862) (34,418) (113,947) (94,967) (185,147) (189,625)
Sales of generating
plants................ -- -- -- 177,454 -- 238,245
Equity component of
allowance for funds
used during
construction.......... 2,003 1,960 3,756 3,544 7,170 16,529
Contributions to
nuclear
decommissioning
funds................. -- -- (39,426) (80,077) (96,120) (114,721)
Other investments and
special deposits...... (2,180) (85) (2,468) (946) (2,695) 23,651
--------- --------- ----------- --------- ----------- ----------
$(309,331) $(281,679) $ (625,793) $(415,114) $(1,233,609) $ (989,825)
--------- --------- ----------- --------- ----------- ----------
Cash Flow from Financing
Activities:
Issuance of
securities--
Transitional trust
notes................ $ -- $ -- $ -- $ -- $ 3,382,629 $ --
Other long-term debt.. -- -- -- -- 222,068 --
Capital stock......... 9 91 15 224 17,043 274
Retirement and
redemption of
securities--
Transitional trust
notes................ (140,000) -- (140,000) -- (140,000) --
Other long-term debt.. (5,355) (8,139) (1,058,435) (372,183) (1,184,443) (532,469)
Capital stock......... (51) (6,092) (564,264) (6,225) (598,905) (47,096)
Deposits and
securities held for
retirement and
redemption of
securities............ -- 3,069 -- (995) -- (766)
Prepayment of forward
share repurchase
contract.............. -- -- (662,113) -- (662,113) --
Cash dividends paid on
capital stock......... (92,800) (104,480) (201,593) (215,334) (416,126) (431,336)
Proceeds from
sale/leaseback of
nuclear fuel.......... -- 44,861 -- 61,426 39,612 130,109
Nuclear fuel lease
principal payments.... (48,191) (128,823) (101,936) (161,009) (196,531) (241,566)
Increase/(decrease) in
short-term
borrowings............ 207,643 110,196 135,494 331,696 (77,996) 226,096
--------- --------- ----------- --------- ----------- ----------
$ (78,745) $ (89,317) $(2,592,832) $(362,400) $ 385,238 $ (896,754)
--------- --------- ----------- --------- ----------- ----------
Change in Net Cash
Balance................ $(104,173) $ (56,667) $(2,390,693) $ (49,257) $ 675,900 $ (26,419)
Cash, Temporary Cash
Investments and Cash
Held for Redemption of
Securities:
Balance at Beginning
of Period............. 803,450 80,044 3,089,970 72,634 23,377 49,796
--------- --------- ----------- --------- ----------- ----------
Balance at End of
Period................ $ 699,277 $ 23,377 $ 699,277 $ 23,377 $ 699,277 $ 23,377
========= ========= =========== ========= =========== ==========(18)
======= ======= ======= ======= =======
The accompanying NotesNet Income
Net income decreased $68 million, or 28%, as compared to Financial Statements are an integral partthe same period in
2000, excluding the effects of restructuring and non-recurring merger costs. Net
income decreased $19 million, or 10%, after reflecting the above statements.
66
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) Summary$30 million
restructuring impact and $32 million of Significant Accounting Policies.
See Unicom's Note 1non-recurring merger costs ($19 million,
net of Notes to Financial Statements for a discussion of
significant accounting policies, except for the following specific policies
discussed below and the subcaption "Average Common Shares Outstanding" in
Unicom's Note 1.
Income Taxes. ComEd is included in the consolidated federal and state income tax returns filed by Unicom. Current and deferred income taxes of the
consolidated group are allocated to ComEd as if ComEd filed separate tax
returns. Deferred income taxes are provided for income and expense items
recognized for financial accounting purposes in periods that differ from those
for income tax purposes. Income taxes deferred in prior years are charged or
credited to income as the book/tax 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.
Interest. Total interest coststaxes) incurred on debt, leases and other
obligations were $152 million and $133 million for the three months ended JuneSeptember 30, 1999 and 1998, respectively, $3152000.
48
Operating Revenues
Operating revenues decreased $12 million, and $270 million for the six
months ended June 30, 1999 and 1998, respectively, and $562 million and $559
million for the twelve months ended June 30, 1999 and 1998, respectively.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months, six
months and twelve months ended June 30, 1999 and 1998 was as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------------------------ -------------------
1999 1998 1999 1998 1999 1998
--------- ----------------- -------- --------- ---------
(Thousands of Dollars)
Supplemental Cash Flow
Information:
Cash paid during the
period for:
Interest (net of
amount capitalized). $164,112 $95,583 $322,856 $246,120 $536,558 $493,127
Income taxes (net of
refunds)............ $ 110,028 $ 506 $ 84,107 $ 506 $ 385,890 $ 226,373
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Capital lease obliga-
tions incurred........ $ 274 $ 45,983 $ 1,436 $ 63,979 $ 43,828 $ 136,618
(2) Accounting Effects Related to the 1997 Act. See Unicom's Note 2 of Notes
to Financial Statements, except for EPS information.
(3) Rate Matters. See Unicom's Note 3 of Notes to Financial Statements.
(4) Closure and Sale of Plants. See Unicom's Note 4 of Notes to Financial
Statements, except for EPS information.
(5) Authorized Shares and Voting Rights of Capital Stock. At June 30, 1999,
the authorized shares of capital stock were: common stock--250,000,000 shares;
preference stock--10,510,451 shares; $1.425 convertible preferred stock--
57,725 shares; and prior preferred stock--850,000 shares. The preference and
prior preferred stocks are issuable in series and may be issued with or without mandatory redemption requirements. Holders of shares at any time
outstanding, regardless of class, are entitled to one vote for each share held
on each matter submitted to a vote at a meeting of shareholders, with the
right to cumulate votes in all elections for directors.
67
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(6) Common Equity. In the fourth quarter of 1998, ComEd entered into a
forward purchase arrangement with Unicom for the repurchase of $200 million of
ComEd common stock. This contract, which was accounted for as an equity
instrument as of December 31, 1998, was settled on a net cash basis in
February 1999 resulting in a $16 million reduction to common stock equity on
the Consolidated Balance Sheets.
In February 1999, ComEd also entered into a prepaid forward purchase
agreement with Unicom for the repurchase of approximately 15 million shares of
Unicom common stock. This forward purchase arrangement was amended to also
include the repurchase of approximately 5.1 million shares for a total of 20.1
million shares, subsequent to the net cash settlement of the $200 million
repurchase program, as described above. The repurchase arrangement, as
amended, provides for final settlement no later than February 2000, on either
a physical (share) basis, or a net cash basis. The terms of the repurchase
agreement between ComEd and Unicom are identical to the terms of Unicom's
repurchase agreement with the financial institution. The repurchase agreement
between ComEd and Unicom is expected to be settled on the same basis Unicom
settles its repurchase arrangements with the financial institution. The amount
at which the arrangement can be settled is dependent principally upon the
average market price at which Unicom common shares have been repurchased under
its repurchase agreement, compared to the forward price per share. The share
repurchases will not reduce shares outstanding or common stock equity, and
resulting return on common equity calculations, until the date of physical
settlement. ComEd does not currently anticipate that settlement will occur in
1999. The repurchase arrangement has been recorded as a receivable on the
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. Unrealized gains of $20 million (after-tax)1%, for the three months ended
and $33 million (after-tax) for the six and twelve months ended
JuneSeptember 30, 1999 have been recorded related2001, compared to the arrangement.
Atsame 2000 period, excluding the effects of
restructuring. Revenues from retail customers increased $100 million, before a
$25 million reduction due to a change in recording certain revenue taxes as
operating revenue and tax expense to collections recorded as liabilities
resulting from Illinois legislation. This increase in revenues from retail
customers was primarily attributable to favorable weather conditions and
continued growth in residential operating revenues due to a strong housing
market, partially offset by the negative effects of a slower economy on
non-residential customers. Non-residential customers continue to migrate to
alternative retail electric suppliers (ARES) or the power purchase option (PPO).
There was also a shift from the PPO to ARES due to the higher price of PPO
energy compared to the market price of ARES energy. The negative revenue impact
of these shifts in customer base was offset by the increase in revenues from the
higher PPO price of energy. Additionally, operating revenues were negatively
affected by a $97 million decrease in sales for resale due to the expiration of
wholesale contracts being offered by ComEd from June 30, 1999, shares of common stock were reserved for2000 to May 2001 to support
the following
purposes:
Conversion of $1.425 convertible preferred stock................... 58,879
Conversion of warrants............................................. 25,279
------
84,158
======
Shares of common stock issuedopen access program in Illinois.
Revenues from retail customers reflect a 3% increase in the total kWh
sales for the three months six months and twelve
months ended JuneSeptember 30, 1999 and 19982001 compared to the same 2000
period. Residential sales, which increased 18%, were as follows:
Six Months
Three Months Ended Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ---------- -------------------
1999 1998 1999 1998 1999 1998
--------- ---------- ---- ----- --------- ---------
Conversion of $1.425 con-
vertible preferred stock... 283 2,927 495 7,196 1,147 8,803
Conversion of warrants...... 36 40 65 124 169 174
-------- ---------- --- ----- --------- ---------
319 2,967 560 7,320 1,316 8,977
======== ========== === ===== ========= =========
partially offset by a 3%
decrease in non-residential sales. As of JuneSeptember 30, 19992001, approximately
15,400 retail customers had elected to purchase energy from ARES or the PPO,
compared to approximately 7,900 customers as of September 30, 2000. Delivered
kWhs to such customers increased from approximately 4.2 billion to 5.1 billion,
or from 17% to 21% of total quarterly retail sales.
Fuel and December 31, 1998, 264,406Purchased Power Expense
Fuel and 178,982 shares,
respectively,purchased power expense decreased $24 million, or 2%, compared to the
same 2000 period, excluding the effects of ComEd common stock were reacquiredrestructuring. The decrease in fuel
and heldpurchased power expense was primarily attributable to a decrease in MWhs
purchased due to an increased number of customers purchasing energy from ARES,
partially offset by an increase in the weighted average on-peak/off-peak cost
per MWh.
Operating and Maintenance Expense
Operating and maintenance (O&M) expense decreased $16 million or 6% compared to
the same 2000 period, excluding the effects of restructuring. The decrease in
O&M expense is primarily attributable to non-recurring merger costs of $32
million in 2000, partially offset by higher administrative and general costs in
2001.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $32 million, or 22%, compared to
the same 2000 period, excluding the effects of restructuring. The increase in
depreciation and amortization expense was attributable to goodwill amortization
of $32 million.
49
Taxes Other Than Income
Taxes other than income decreased $32 million, or 28%, compared to the same 2000
period, excluding the effects of restructuring. The decrease in taxes other than
income was primarily attributable to the effect of the change in municipal
utility taxes from operating revenue and tax expense to collections recorded as
treasury stock
at a costliabilities resulting from Illinois legislation.
Interest Charges
Interest charges consist of $10 millioninterest expense and $7 million, respectively.
At June 30, 1999 and December 31, 1998, 75,839 and 76,079, respectively, of
common stock purchase warrants were outstanding. The warrants entitle the
holders to convert such warrants into common stock at a conversion rate of one
share of common stockprovisions for three warrants.
68
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
As of June 30, 1999 and December 31, 1998, $627 million and $580 million,
respectively, of retained earnings had been appropriated for future dividend
payments.
(7) Stock Option Awards/Employee Stock Purchase Plan. See Unicom's Note 7 of
Notes to Financial Statements, except for EPS information.
(8) Preferred and Preference Stocks Without Mandatory Redemption
Requirements. See Unicom's Note 8 of Notes to Financial Statements.
(9) Preference Stock Subject to Mandatory Redemption Requirements. See
Unicom's Note 9 of Notes to Financial Statements.
(10)distributions on
Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding SolelyTrusts. Interest charges, excluding the Company's Subordinated Debt Securities.
See Unicom's Note 10effects of Notesrestructuring, increased $16
million, or 12%, compared to Financial Statements.
(11) Long-Term Debt. See Unicom's Note 11the same 2000 period. The increase was primarily
attributable to increased interest accrued on estimated tax liabilities and
interest on amounts due to affiliates.
Other Income and Deductions
Other income and deductions, excluding interest charges, decreased $33 million,
compared to the same 2000 period. The decrease was primarily attributable to
lower interest income in 2001 from an affiliate, Unicom Investment, Inc.,
reflecting the impact of Notes to Financial Statements,
exceptdeclining interest rates and an $850 million reduction
in notes receivable in the fourth quarter of 2000.
Income Taxes
The effective income tax rate was 44.2% for the last two paragraphs regarding Unicom Thermalthree months ended September 30,
2001, compared to 30.4% for the same 2000 period. The increase in the effective
tax rate was primarily attributable to goodwill amortization in 2001, which is
not deductible for tax purposes, and Northwind
Midway's guaranteed senior Notes.
(12) Lineslower investment tax credit amortization
resulting from the application of Credit. Seepurchase accounting in connection with the
first paragraph of Unicom's Note 12 of Notesmerger.
50
Nine Months Ended September 30, 2001 Compared to Financial Statements.
(13) Disposal of Spent Nuclear Fuel. See Unicom's Note 13 of Notes to
Financial Statements.
(14) Fair Value of Financial Instruments. See Unicom's Note 14 of Notes to
Financial Statements, except for following section.
Capitalization. The estimated fair values of preferred and preference
stocks, company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely the Company'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 JuneNine Months Ended September 30,
1999 and December 31, 1998 were as follows:2000
Significant Operating Trends
JuneNine Months
Ended Components of Variance
September 30, 1999 December 31, 1998
--------------------------------- --------------------------------
Unrealized
Carrying Losses/ Carrying Unrealized Fair
Value (Gains) Fair Value Value Losses Value-------------------------------------------
---------------------- Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)-----
(In millions)
Operating Revenues $ 4,895 $ 5,367 $ (512) $ 40 $ (472)
Fuel and Purchased Power 2,149 1,585 519 45 564
Operating and Maintenance 731 1,559 (769) (59) (828)
Depreciation and Amortization 512 822 (237) (73) (310)
Taxes Other Than Income 223 401 (99) (79) (178)
------- ------- ------- ------- -------
Total Operating Expenses 3,615 4,367 (586) (166) (752)
------- ------- ------- ------- -------
Operating Income 1,280 1,000 74 206 280
------- ------- ------- ------- -------
Interest Expense (432) (421) 31 (42) (11)
Distributions on Company-Obligated
Mandatorily Redeemable
Preferred Securities of Subsidiary
Trusts Holding Solely the Company's
Subordinated Debt Securities (22) (22) -- -- --
Other, Net 93 248 -- (155) (155)
------- ------- ------- ------- -------
Income Before Income Taxes and
Extraordinary Items 919 805 105 9 114
Income Taxes 412 221 56 135 191
------- ------- ------- ------- -------
Net Income Before Extraordinary Items 507 584 49 (126) (77)
Extraordinary Items (net of income taxes) -- (4) -- 4 4
------- ------- ------- ------- -------
Net Income 507 580 49 (122) (73)
Preferred and preference
stocks.................Preference Stock Dividends -- (3) -- 3 3
------- ------- ------- ------- -------
Net Income on Common Stock $ 143,949507 $ 3,127577 $ 147,07649 $ 678,156(119) $ 11,500 $ 689,656
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely the
Company's subordinated
debt securities........ $ 350,000 $ 10,975 $ 360,975 $ 350,000 $ 20,678 $ 370,678
Transitional trust
notes.................. $3,245,118 $ (84,814) $3,160,304 $3,382,821 $ 67,168 $3,449,989
Long-term debt.......... $4,776,889 $ 211,504 $4,988,393 $5,791,757 $442,077 $6,233,834(70)
======= ======= ======= ======= =======
(15) PensionNet Income
Net income decreased $155 million, or 23%, as compared to the same period in
2000, excluding the effects of restructuring, an extraordinary item and
Postretirement Benefits. See Unicom's Note 15 of Notes to
Financial Statements.
(16) Separation Plan Costs. See Unicom's Note 16 of Notes to Financial
Statements, except for EPS information.
69
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(17) Income Taxes. The componentsnon-recurring merger costs. Net income decreased $73 million, or 13%, after
reflecting the effects of the $49 million restructuring impact, the $4 million
extraordinary item, and $49 million of non-recurring merger costs ($29 million,
net deferredof income taxes) incurred for the nine months ended September 30, 2000.
51
Operating Revenues
Operating revenues increased $40 million, or 1%, for the nine months ended
September 30, 2001 compared to the same period in 2000, excluding the effects of
restructuring. Revenues from retail customers increased $106 million, before a
$69 million reduction due to a change in recording certain revenue taxes as
operating revenue and tax liability
at June 30, 1999expense to collections recorded as liabilities
resulting from Illinois legislation. The increase in revenues from retail
customers was primarily attributable to favorable weather conditions and
December 31, 1998 were as follows:
June 30, December 31,
1999 1998
---------- ------------
(Thousands of Dollars)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs.......................... $3,964,028 $4,007,681
Overheads capitalized................................ 137,850 140,922
Repair allowance..................................... 228,020 233,861
Regulatory assets recoverable through future rates... 667,728 680,356
Deferred income tax assets:
Postretirement benefits.............................. (351,309) (331,566)
Unamortized investment tax credits................... (184,732) (191,135)
Regulatory liabilities to be settled through future
rates............................................... (587,639) (595,005)
Nuclear plant closure................................ (24,400) (38,354)
Other--net........................................... (178,491) (145,268)
---------- ----------
Net deferred income tax liability..................... $3,671,055 $3,761,492
========== ==========
continued growth in residential operating revenues due to a strong housing
market, partially offset by the negative effects of a slower economy on
non-residential customers. Non-residential customers continue to migrate to ARES
or the PPO. During the third quarter, there was also a shift from the PPO to
ARES due to the higher price of PPO energy compared to the market price of ARES
energy. The $90negative revenue impact of these shifts in customer base was
partially offset by the increase in revenues from the higher PPO price of
energy. Additionally, operating revenues reflect a $70 million decrease in sales
for resale due to the net deferredexpiration of wholesale contracts being offered by ComEd
from June 2000 to May 2001 to support the open access program in Illinois,
partially offset by a $47 million increase in transmission service revenues and
the reversal of a $15 million reserve for revenue refunds to ComEd's municipal
customers as the result of a favorable FERC ruling.
Revenues from retail customers reflect a consistent amount of total kWh
sales for the nine months ended September 30, 2001 as compared to the same 2000
period. Residential sales, which increased 10%, were offset by a 2% decrease in
non-residential sales. As of September 30, 2001, approximately 15,400 retail
customers had elected to purchase energy from ARES or the PPO, compared to
approximately 7,900 customers as of September 30, 2000. Delivered kWhs to such
customers increased from approximately 10.0 billion to 13.7 billion, or from 15%
to 21% of total year-to-date retail sales.
Fuel and Purchased Power Expense
Fuel and purchased power expense for the nine months ended September 30, 2001
increased $45 million, or 2%, compared to the same period in 2000, excluding the
effects of restructuring. The increase in fuel and purchased power expense was
primarily attributable to increases in the weighted average on-peak/off-peak
cost per MWh, partially offset by a decrease in MWhs purchased.
Operating and Maintenance Expense
O&M expense for the nine months ended September 30, 2001 decreased $59 million,
or 7%, compared to the same period in 2000, excluding the effects of
restructuring. The decrease in O&M expense is primarily related to non-recurring
merger costs of $49 million in 2000, a decrease in customer credit and billing
costs due to process improvements, and a decrease in storm restoration and
service reliability costs, partially offset by higher administrative and general
costs.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased $73 million, or 12%, compared to
the same period in 2000, excluding the effects of restructuring. Regulatory
asset amortization decreased $185 million as a result of the recognition of
additional amortization in the first quarter of 2000 associated with the
settlement of the common stock forward purchase arrangement , partially offset
by goodwill amortization of $97 million, and an increase in depreciation expense
of $15 million from increased plant in service due to continued transmission and
distribution capital improvements.
52
Taxes Other Than Income
Taxes other than income decreased $79 million, or 26%, from the same period in
2000, excluding the effects of restructuring. The decrease in taxes other than
income was primarily attributable to the effect of the change in municipal
utility taxes from operating revenue and tax expense to collections recorded as
liabilities resulting from Illinois legislation.
Interest Charges
Interest charges increased $42 million, or 10%, compared to the same period in
2000, excluding the effects of restructuring. The increase was primarily due to
increased interest accrued on estimated tax liabilities and interest due on
amounts due to affiliates.
Other Income and Deductions
Other income and deductions, excluding interest charges, decreased $155 million,
compared to the same period in 2000. The decrease was primarily attributable to
the $113 million gain on the forward share repurchase arrangement recognized
during the first quarter of 2000 and an $87 million reduction in interest income
in 2001 from an affiliate, Unicom Investment, Inc., reflecting the impact of
declining interest rates and an $850 million reduction in notes receivable in
the fourth quarter of 2000, partially offset by the $38 million loss on the sale
of Cotter Corporation, a ComEd subsidiary, recognized during the first quarter
of 2000.
Income Taxes
The effective income tax liabilityrate was 44.8% for the nine months ended September 30,
2001, compared to 27.5% for the same period in 2000. The increase in the
effective tax rate was primarily attributable to the effects of the gain on the
forward share repurchase arrangement recorded in the first quarter of 2000,
which was not recognized for tax purposes, goodwill amortization in 2001, which
is not deductible for tax purposes, and lower investment tax credit amortization
resulting from December 31, 1998the application of purchase accounting in connection with the
merger.
Extraordinary Items
Extraordinary charges aggregating $6 million ($4 million, net of income taxes)
were incurred for the nine months ended September 30, 2000, and consisted of
prepayment premiums and the write-off of unamortized deferred financing costs
associated with the early retirement of debt.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $1,044 million for the nine months ended
September 30, 2001 compared to June 30, 1999 is comprised of an $85$727 million creditfor the same nine months in 2000.
The increase in cash flows was primarily attributable to net deferreda $669 million increase
in working capital due to a decrease in income tax expense andpayments from the first
quarter of 2000, which included tax payments related to the 1999 gain on the
sale of fossil plants, partially offset by $352 million in lower cash flows from
changes in operating activities other than working capital following the
transfer of assets to Generation.
Cash flows used in investing activities were $207 million for the nine
months ended September 30, 2001 compared to $1,111 million for the same nine
months in 2000. The decrease in cash flows used in investing activities in 2001
was attributable to a $5$507 million decrease in regulatoryplant investment primarily as a
result of the transfer of assets net of regulatory liabilities pertaining to income taxesGeneration and a $424 million increase in
proceeds from affiliates.
53
Cash flows used in financing activities were $543 million for the period. The
amount of accelerated cost recovery and liberalized depreciation included in
deferred income tax liabilities for both periods, includes amounts relatednine
months ended September 30, 2001 compared 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$641 million for the threesame nine
months six monthsin 2000. The decrease in cash flows used in financing activities in 2001
was primarily attributable to $70 million of mandatorily redeemable preferred
stock retirements and twelve months ended June 30,
1999 and 1998 were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ------------------ --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Electric operating in-
come:
Current income taxes... $ 109,437 $ 81,963 $225,821 $147,650 $ 415,992 $ 349,508
Deferred income taxes.. (43,973) (14,029) (91,194) (21,608) (26,289) 20,130
Investment tax credits
deferred--net......... (7,021) (6,888) (14,042) (14,048) (27,723) (29,270)
Other (income) and de-
ductions:
Current income taxes... (899) (4,165) 1,769 (57,232) 9,147 (62,134)
Deferred income taxes.. 5,242 796 6,080 47,544 17,993 (337,474)
Investment tax credits. (2,153) -- (3,981) (7,472) (8,616) (29,997)
--------- --------- -------- -------- --------- ---------
Net income taxes
charged/(credited) to
continuing operations.. $ 60,633 $ 57,677 $124,453 $ 94,834 $ 380,504 $ (89,237)
========= ========= ======== ======== ========= =========
70
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted$270 million in the following effective
income tax rates for the three months, six months and twelve months ended June
30, 1999 and 1998:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
-------------------- ------------------ ---------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- ---------- ---------
Pre-tax book
income/(loss) (thou-
sands)................. $190,688 $162,130 $376,415 $271,120 $1,050,386 $(179,431)
Effective income tax
rate................... 31.8% 35.6% 33.1% 35.0% 36.2% 49.7%
Thenuclear fuel principal differences between net income taxes charged/(credited) to
continuing operations and the amounts computed at the federal statutory rate of
35% for the three months, six months and twelve months ended June 30, 1999 and
1998 were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- ------------------ --------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Federal income taxes
computed at statutory
rate................... $ 66,741 $ 56,745 $131,745 $ 94,892 $ 367,635 $ (62,801)
Equity component of
AFUDC which was
excluded from taxable
income................. (112) (110) (210) (198) (401) (4,743)
Amortization of
investment tax credits,
net of deferred income
taxes ................. (5,907) (4,517) (11,618) (13,728) (23,395) (43,274)
State income taxes, net
of federal income
taxes.................. 8,125 7,529 16,589 13,663 46,586 4,242
Unrealized gain on for-
ward share repurchase
contract............... (6,891) -- (11,696) -- (11,696) --
Earnings on nontax-qual-
ified decommissioning
fund................... (2,768) -- (2,768) -- (2,768) --
Differences between book
and tax accounting,
primarily property-
related deductions..... 1,445 (1,970) 2,411 205 4,543 17,339
-------- --------- -------- -------- --------- ---------
Net income taxes
charged/(credited) to
continuing operations.. $ 60,633 $ 57,677 $124,453 $ 94,834 $ 380,504 $ (89,237)
======== ========= ======== ======== ========= =========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes,
for the three months, six months and twelve months ended June 30, 1999 and 1998
were as follows:
Three Months Ended Six Months Ended Twelve Months Ended
June 30 June 30 June 30
------------------- ----------------- -------------------
1999 1998 1999 1998 1999 1998
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Illinois public utility
revenue................ $ 402 $ 44,247 $ 1,897 $101,928 $ 26,449 $ 222,869
Illinois invested capi-
tal.................... -- -- -- -- -- 47,486
Illinois electricity
distribution tax....... 26,336 24,911 54,672 51,629 113,069 51,629
Municipal utility gross
receipts............... 26,164 38,556 50,587 81,107 121,981 170,131
Real estate............. 29,479 29,229 62,506 64,360 122,776 141,976
Municipal compensation.. 18,494 24,214 36,801 44,085 70,426 85,446
Energy assistance and
renewable energy
charge................. 8,776 8,709 17,445 16,273 33,909 16,273
Other--net.............. 20,273 14,733 37,634 32,183 78,518 65,672
--------- --------- -------- -------- --------- ---------
$129,924 $ 184,599 $261,542 $391,565 $567,128 $ 801,482
========= ========= ======== ======== ========= =========
payments in 2000
partially offset by a $229 million increase in debt service in 2001.
Effective January 1, 1998,2001, Exelon contributed to ComEd a $1.0 billion
non-interest bearing receivable for the Illinois investedpurpose of funding future income tax
payments resulting from the collection of instrument funding charges. See ITEM
1. Financial Statements - Note 13 - Related-Party Transactions.
At September 30, 2001, ComEd's capital taxstructure, excluding the
deduction from shareholders' equity of the $1.0 billion receivable from Exelon,
consisted of 52% long-term debt, 46% of common stock, and 2% of preferred
securities of subsidiaries. Long-term debt included $2.4 billion of transitional
trust notes constituting obligations of certain consolidated special purpose
entities representing 18% of capitalization.
ComEd meets its short-term liquidity requirements primarily through the
issuance of commercial paper and borrowings under bank credit facilities. ComEd,
along with Exelon and PECO, entered into a $1.25 billion unsecured revolving
credit facility with a group of banks. ComEd has a $200 million sublimit under
this 364-day credit facility and expects to use the credit facility principally
to support its $200 million commercial paper program. The credit facility
requires ComEd to maintain a debt to total capitalization ratio of 65% or less
(excluding transitional trust notes). At September 30, 2001, ComEd's debt to
total capitalization ratio on that basis was repealed46%. At September 30, 2001, ComEd
had no short-term borrowings.
On November 5, 2001, ComEd offered to purchase for cash $250 million of
its First Mortgage Bonds, with an interest rate of 9.875% and the Illinois electricity distribution tax was enacted as a replacement.maturity date of
June 15, 2020. The new
taxtender price is based on a fixed spread of 80 basis points
over the kilowatthours deliveredyield to ultimate consumers.
Effective August 1, 1998,maturity of the 6.5% U.S. Treasury Note due May 15, 2005. The
offer will expire on November 16, 2001, unless extended or earlier terminated.
54
PECO ENERGY COMPANY
- -------------------
GENERAL
On October 20, 2000, PECO became a wholly owned subsidiary of Exelon as provided for bya result
of the 1997 Act, the Illinois
electricity excise tax, replacing the Illinois public utility revenue tax, and
certain municipal utility taxes are recorded as
71
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Concluded
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, duetransactions relating to the change in presentation for
such taxes was approximately $50 million, $118 millionmerger of PECO and $213 million for
the three months, six monthsUnicom. Effective January
1, 2001, Exelon undertook a restructuring to separate its generation and twelve months ended June 30, 1999,
respectively. This change in the presentation for such taxes did not have an
effect on results of operations.other
competitive businesses from its regulated energy delivery business. See Unicom's Note 21 for additional information regarding Illinois invested
capital taxes.
(19) Lease Obligations. See the first and second paragraphs of Unicom's Note
19 of Notes to Financial Statements.
Future minimum rental payments at June 30, 1999 for operating leases are
estimated to aggregate to $269 million, including $20 million in 1999, $38
million in 2000, $30 million in 2001, $25 million in 2002, $22 million in 2003
and $134 million in 2004-2024.
(20) Joint Plant Ownership. See Unicom's Note 20 of Notes to Financial
Statements.
(21) Commitments and Contingent Liabilities. See Unicom's Note 21 of Notes
to Financial Statements.
(22) Subsequent Events. See Unicom's Note 22 of Notes to Financial
Statements.
72
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in the Electric Utility Industry. See Unicom's "Management'sITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations"
subcaption "Changes in the Electric Utility Industry," which is incorporated
herein by this reference, except - Exelon Corporation - General for EPS information.
Liquidity and Capital Resources. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Liquidity and Capital Resources--UTILITY OPERATIONS," which is incorporated
herein by this reference, except for EPS information.
Regulation. See Unicom's "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Regulation," which is
incorporated herein by this reference.
Results of Operations. See Unicom's "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Results of
Operations" (other than the first paragraph thereof), which is incorporated
herein by this reference, except for EPS information.
Forward-Looking Information. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Forward-Looking Information," which is incorporated herein by this reference,
except for references to Unregulated Operations.
73
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the first half of 1999, no civil penalties were imposed on ComEd for
violations of NRC regulations. There were two enforcement issues pending as of
the end of the second quarter of 1999. One of these two issues was
subsequently resolved on July 20, 1999, with ComEd receivinginformation about Exelon's
corporate restructuring. The restructuring has had a Severity Level
III violation with no civil penalty. To ComEd's knowledge, there is currently
only one enforcement issue pending or under review by the NRC.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that Cotter has permitted radioactive and other
hazardous material to be released from its mill into areas owned or occupied
by the plaintiffs resulting in property damage and potential adverse health
effects. 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 and in favor of the
plaintiff, after an amended judgement was issued March 11, 1999, totaled
approximately $6 million, including compensatory and punitive damages,
interest, and 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 materialsignificant impact on their financial position orall
components of PECO's results of operations. On April 18, 1996,As part of the restructuring, the
non-regulated operations and related assets and liabilities previously included
in PECO's Generation and Enterprises business segments were transferred to
separate subsidiaries of Exelon. As a ComEd truck struckresult, effective January 1, 2001, PECO
operates in a car that had slowed or stopped to
make a turn. The truck pushed this car into oncoming traffic causing a head-on
collision with a third vehicle. The driversingle business segment, Energy Delivery, and its operations
consist of this third vehicle suffered
extensive injuries resultingits retail electricity distribution and transmission business in
numerous surgical procedures. On May 28, 1999,
after a trialsoutheastern Pennsylvania and its natural gas distribution business in the
Circuit CourtPennsylvania counties surrounding the City of Cook County, Illinois, a jury returned a
verdict of $14Philadelphia.
55
RESULTS OF OPERATIONS
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Significant Operating Trends
Three Months
Ended Components of Variance
September 30, -----------------------------------------
------------------------ Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
(In millions)
Operating Revenues $ 1,051 $ 1,629 $ (752) $ 174 $ (578)
Fuel and Purchased Power 471 576 (180) 75 (105)
Operating and Maintenance 156 457 (324) 23 (301)
Depreciation and Amortization 115 83 (37) 69 32
Taxes Other Than Income 51 67 (22) 6 (16)
------- ------- ------- ------- -------
Total Operating Expenses 793 1,183 (563) 173 (390)
------- ------- ------- ------- -------
Operating Income 258 446 (189) 1 (188)
------- ------- ------- ------- -------
Interest Expense (105) (113) 12 (4) 8
Distributions on Company-Obligated
Mandatorily Redeemable
Preferred Securities of a Partnership,
which holds Solely Subordinated
Debentures of the Company (2) (2) -- -- --
Equity in Earnings (Losses) of
Unconsolidated Affiliates, Net -- 23 (23) -- (23)
Other, Net 12 23 (14) 3 (11)
------- ------- ------- ------- -------
Income Before Income Taxes and
Extraordinary Item 163 377 (214) -- (214)
Income Taxes 59 141 (87) 5 (82)
------- ------- ------- ------- -------
Net Income Before Extraordinary Item 104 236 (127) (5) (132)
Extraordinary Item (net of income taxes) -- (1) -- 1 1
------- ------- ------- ------- -------
Net Income 104 235 (127) (4) (131)
Preferred Stock Dividends (2) (3) -- 1 1
------- ------- ------- ------- -------
Net Income on Common Stock $ 102 $ 232 $ (127) $ (3) $ (130)
======= ======= ======= ======= =======
Net Income
Net income decreased $4 million, in favoror 4%, for the three months ended September 30,
2001, excluding the effects of the plaintiffs. The matter is currently on
appeal. ComEd expects that insurance coverage above ComEd's $5 million self-
insured retention will be available.
CERCLA provides for immediate response and removal actions coordinated byrestructuring, as compared to the U.S. EPA to releases of hazardous substances into the environment and
authorizes the U.S. Government either to clean up sites at which hazardous
substances have created actual or potential environmental hazards or to order
persons responsiblesame 2000
period.
Operating Revenues
Operating revenues for the situationthree months ended September 30, 2001 increased $174
million, or 20%, as compared to do so. Under CERCLA, generatorsthe same 2000 period, excluding the effects of
the restructuring. The increase in operating
56
revenues was attributable to higher electric revenues of $162 million and
transportersadditional gas revenues of hazardous substances,$12 million. The increase in electric revenues was
primarily attributable to $142 million from customers in Pennsylvania selecting
or returning to PECO as welltheir electric generation supplier and rate adjustments,
$25 million attributable to higher delivery volume and $18 million as pasta result
of favorable weather conditions, partially offset by $22 million related to the
payment of nuclear decommissioning cost recovery to Generation under an
agreement effective September 2001. Total kWh sales to retail customers
increased 2% compared to the same 2000 period. Small commercial and present ownersindustrial
sales increased 7% and operatorsresidential sales increased 6%. These increases were
partially offset by a decrease in large commercial and industrial sales of hazardous waste sites, are made strictly, jointly2%.
The increase in regulated gas revenues was primarily attributable to $32 million
related to higher natural gas prices, partially offset by a decrease of $10
million attributable to lower delivery volume.
Fuel and severally
liablePurchased Power Expense
Fuel and purchased power expense for the cleanup coststhree months ended September 30, 2001
increased $75 million, or 19%, as compared to the same 2000 period, excluding
the effects of waste at sites, mostthe restructuring. The increase in fuel and purchased power
expense was primarily attributable to $95 million from customers in Pennsylvania
selecting or returning to PECO as their electric generation supplier, $26
million from increased prices related to gas and $11 million as a result of
whichfavorable weather conditions. These increases are listedpartially offset by lower PJM
ancillary charges of $55 million and a decrease of $8 million attributable to
lower delivery volume related to gas.
Operating and Maintenance Expense
O&M expense for the U.S. EPA onthree months ended September 30, 2001 increased $23 million,
or 17%, as compared to the NPL. These responsible parties can be orderedsame 2000 period, excluding the effects of the
restructuring. The increase in O&M expense was primarily attributable to perform a
cleanup, can be sued for$18
million of additional employee severance costs associated with the merger and $6
million of incremental costs related to a U.S. EPA directed cleanup,
may voluntarily settlestorm in the third quarter of 2001.
Depreciation and Amortization Expense
Depreciation and amortization expense for the three months ended September 30,
2001 increased $69 million, or 150%, as compared to the same 2000 period,
excluding the effects of the restructuring. The increase was attributable to $60
million of additional amortization of PECO's CTC and a $9 million increase in
depreciation expense associated with additional plant in service. The additional
amortization of the CTC is in accordance with PECO's original settlement under
the Pennsylvania Electricity Generation Customer Choice and Competition Act
(Pennsylvania Competition Act).
Taxes Other Than Income
Taxes other than income for the three months ended September 30, 2001 increased
$6 million, or 13%, as compared to the same 2000 period, excluding the effects
of the restructuring. The increase was primarily attributable to $3 million of
additional gross receipts tax associated with higher retail electric revenue.
Interest Charges
Interest charges consist of interest expense and distributions on
Company-Obligated Mandatorily Redeemable Preferred Securities of a Partnership
(COMRPS). Interest charges for the three months ended September 30, 2001
increased $4 million, or 4%, as compared to the same 2000 period, excluding the
effects of the restructuring.
57
Equity in Earnings (Losses) of Unconsolidated Affiliates
As part of the corporate restructuring, PECO's unconsolidated affiliates were
transferred to Generation and Enterprises.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in earnings
(losses) of unconsolidated affiliates for the three months ended September 30,
2001 increased by $3 million, as compared to the same 2000 period, excluding the
effects of the restructuring. The increase is primarily attributable to
additional interest income of $6 million in the third quarter of 2001.
Income Taxes
The effective income tax rate was 36.2% for the three months ended September 30,
2001 as compared to 37.4% for the same 2000 period. The decrease in the
effective income tax rate was primarily attributable to tax benefits associated
with the U.S. Government concerningimplementation of state tax planning strategies.
Preferred Stock Dividends
Preferred stock dividends for the three months ended September 30, 2001 were
consistent with the same 2000 period.
58
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Significant Operating Trends
Nine Months
Ended Components of Variance
September 30, ------------------------------------------
--------------------- Restructuring Normal
2001 2000 Impact Operations Total
---- ---- ------ ---------- -----
(In millions)
Operating Revenues $ 3,008 $ 4,366 $(1,870) $ 512 $(1,358)
Fuel and Purchased Power 1,353 1,515 (513) 351 (162)
Operating and Maintenance 414 1,304 (923) 33 (890)
Depreciation and Amortization 315 244 (117) 188 71
Taxes Other Than Income 135 197 (60) (2) (62)
------- ------- ------- ------- -------
Total Operating Expenses 2,217 3,260 (1,613) 570 (1,043)
------- ------- ------- ------- -------
Operating Income 791 1,106 (257) (58) (315)
------- ------- ------- ------- -------
Interest Expense (332) (333) 41 (40) 1
Distributions on Company-Obligated
Mandatorily Redeemable
Preferred Securities of a Partnership,
which holds Solely Subordinated
Debentures of the Company (7) (7) -- -- --
Equity in Earnings (Losses) of
Unconsolidated Affiliates, Net -- 26 (26) -- (26)
Other, Net 30 52 (34) 12 (22)
------- ------- ------- ------- -------
Income Before Income Taxes, Extraordinary Item
and Cumulative Effect of a Change of
Accounting Principle 482 844 (276) (86) (362)
Income Taxes 171 316 (107) (38) (145)
------- ------- ------- ------- -------
Net Income Before Extraordinary Item and
Cumulative Effect of a Change of
Accounting Principle 311 528 (169) (48) (217)
Extraordinary Item (net of income taxes) -- (4) 4 -- 4
Cumulative Effect of a Change
of Accounting Principle -- 24 (24) -- (24)
------- ------- ------- ------- -------
Net Income 311 548 (189) (48) (237)
Preferred Stock Dividends (7) (8) -- 1 1
------- ------- ------- ------- -------
Net Income on Common Stock $ 304 $ 540 $ (189) $ (47) $ (236)
======= ======= ======= ======= =======
Net Income
Net income decreased $48 million, or 13%, for the nine months ended September
30, 2001, excluding the effects of the restructuring, as compared to the same
2000 period.
59
Operating Revenues
Operating revenues for the nine months ended September 30, 2001 increased $512
million, or 21%, as compared to the same 2000 period, excluding the effects of
the restructuring. The increase in operating revenues was attributable to higher
electric revenues of $378 million and additional gas revenues of $134 million.
The increase in electric revenues was primarily attributable to $350 million
from customers in Pennsylvania selecting or returning to PECO as their liabilityelectric
generation supplier and rate adjustments, $27 million attributable to higher
delivery volume, $17 million as a result of favorable weather conditions, and an
$11 million settlement of competitive transition charges by a large customer.
These increases were partially offset by $22 million related to the payment of
nuclear decommissioning cost recovery to Generation under an agreement effective
September 2001. Total kWh sales to retail customers increased by 1% compared to
the same 2000 period. Residential sales and small commercial and industrial
sales, which both increased 4%, were partially offset by a decrease in large
commercial and industrial sales of 2%. The increase in regulated gas revenues
was primarily attributable to increases of $153 million related to higher
natural gas prices and $11 million as a result of favorable weather conditions,
partially offset by $13 million attributable to lower delivery volume and $7
million related to the elimination of the gross receipts tax on gas sales
effective July 1, 2000.
Fuel and Purchased Power Expense
Fuel and purchased power expense for cleanup costs,the nine months ended September 30, 2001
increased $351 million, or may voluntarily begin35%, as compared to the same 2000 period, excluding
the effects of the restructuring. The increase in fuel and purchased power
expense was primarily attributable to $230 million from customers in
Pennsylvania selecting or returning to PECO as their electric generation
supplier, $128 million from increased prices related to gas and $18 million as a
site investigationresult of favorable weather conditions. These increases were partially offset by
lower PJM ancillary charges of $32 million and site
remediation prior$10 million attributable to listing onlower
delivery volume related to gas.
Operating and Maintenance Expense
O&M expense for the NPL under state oversight. Various states,
including Illinois, have enacted statutes which contain provisions
substantially similarnine months ended September 30, 2001 increased $33 million,
or 9%, as compared to CERCLA. ComEd and its subsidiaries are or are likelythe same 2000 period, excluding the effects of the
restructuring. The increase in O&M expense was primarily attributable 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$18
million of sites, including MGP sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. See Note 21 of
Notes to Financial Statements for information regardingadditional employee severance costs associated with investigatingthe merger, $12
million of incremental costs related to two storms in 2001 and remediating former MGP sites.
From time to time, Unicom$5 million
associated with the write-off of excess and its subsidiaries are, or are claimed to be, in
violation of or in default under orders, statutes, rules or regulations
relating to environmental controlsobsolete inventory.
Depreciation and other matters, compliance plans imposed
upon or agreed to by them or permits issued by various federalAmortization Expense
Depreciation and state
agenciesamortization expense for the constructionnine months ended September 30,
2001 increased $188 million, or operation148%, as compared to the same 2000 period,
excluding the effects of their facilities. Unicomthe restructuring. The increase was primarily
attributable to $162 million of additional amortization of PECO's CTC and ComEd do not believe, so far as they now foresee, that such violations or
defaults will have a material adverse effect on their future business and
operating results, except for events otherwise described$26
million increase in Unicom and ComEd's
Annual Reports on Form 10-Kdepreciation expense associated with additional plant in
service. The additional amortization of the CTC is in accordance with PECO's
original settlement under the Pennsylvania Competition Act.
Taxes Other Than Income
Taxes other than income for the yearnine months ended December 31, 1998September 30, 2001 decreased
$2 million, or in these
Quarterly Reports1%, as compared to the same 2000 period, excluding the effects of
the restructuring. The decrease was primarily attributable to the elimination of
the gross receipts tax on Form 10-Qgas sales effective July 1, 2000.
60
Interest Charges
Interest charges for the quarterlynine months ended September 30, 2001 increased $40
million, or 14%, as compared to the same 2000 period, ended June 30, 1999,
which could have such an effect.
74
Item 4. Submissionexcluding the effects of
Mattersthe restructuring. The increase was primarily attributable to interest of $25
million on the additional transition bonds issued in May 2000 to securitize a
portion of PECO's stranded cost recovery and interest expense related to a Voteloan
from an affiliate in 2001 of Security Holders.
Unicom's annual meeting$8 million.
Equity in Earnings (Losses) of shareholders was held on May 25, 1999. At that
meeting, eachUnconsolidated Affiliates
As part of the persons namedcorporate restructuring, PECO's unconsolidated affiliates were
transferred to Generation and Enterprises.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in earnings
(losses) of unconsolidated affiliates for the nine months ended September 30,
2001 increased by $12 million as compared to the same 2000 period, excluding the
effects of the restructuring. The increase was primarily attributable to
intercompany interest income of $10 million in the table belowthird quarter of 2001, a gain
on the settlement of an interest rate swap of $6 million and the favorable
settlement of a customer contract of $3 million.
Income Taxes
The effective tax rate was elected as a
director. Vote totals for each director are shown below:
Shares Shares
Nominee Voted For Withheld From
------- ----------- -------------
Edward A. Brennan..................................... 176,390,405 2,809,654
Carlos H. Cantu....................................... 172,134,699 7,065,360
James W. Compton...................................... 176,441,251 2,758,808
Bruce DeMars.......................................... 176,528,732 2,671,327
Sue L. Gin............................................ 176,536,918 2,663,141
Donald P. Jacobs...................................... 176,351,077 2,848,982
Edgar D. Jannotta..................................... 174,974,160 4,225,899
Elizabeth A. Moler.................................... 176,344,371 2,855,688
John W. Rogers........................................ 174,582,515 4,617,544
John W. Rowe.......................................... 176,582,994 2,617,065
Richard L. Thomas..................................... 176,438,130 2,761,929
Also at the meeting, the appointment by Unicom's Board of Directors of
Arthur Andersen LLP as auditors35.5% for the year 1999nine months ended September 30, 2001 as
compared to 37.4% for the same 2000 period. The decrease in the effective tax
rate was approved. A totalprimarily attributable to tax benefits associated with the
implementation of 176,282,157 shares votedstate tax planning strategies.
Cumulative Effect of a Change in Accounting Principle
On January 1, 2000, PECO recorded a benefit of $40 million ($24 million, net of
income taxes) representing the cumulative effect of a change in accounting
method for nuclear outage costs in conjunction with the synchronization of
accounting policies in connection with the merger.
Preferred Stock Dividends
Preferred stock dividends for the nine months ended September 30, 2001 were
consistent with the same 2000 period.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operations were $719 million for the nine months ended
September 30, 2001 as compared to approve$605 million in the appointment, 762,248 shares voted
againstsame 2000 period. The
increase was attributable to an increase in working capital of $337 million
partially offset by less cash generated by operations of $223 million.
Cash flows used in investing activities were $154 million for the appointmentnine
months ended September 30, 2001 as compared to $593 million in the same 2000
period. The decrease was attributable to lower capital expenditures of $255
million, a decrease in other investing activities of $93 million and 2,155,654 shares abstained.
In addition, amendmentsthe
acquisition of four infrastructure services businesses in 2000 of $91 million.
Cash flows used in financing activities were $483 million for the nine
months ended September 30, 2001 as compared to $9 million for the Unicom Corporation Long-Term Incentive Plan
were approved atsame period in
2000. The increase in cash flows used in financing activities was primarily
attributable to short-term debt repayments of $161 million as compared
61
to borrowings of $118 million in the meeting. The amendments increasesame 2000 period and debt service including
refinancings of $121 million. Cash flows from financing activities in 2001
includes $241 million of debt service. Cash flows from financing activities in
2000 include $144 million of debt service partially offset by net proceeds of
$120 million from the numbersecuritization of stock
options, stock appreciation rights$1 billion of stranded cost recovery in
May 2000 and performance units that can be awarded
to any one individual under the plan. A total of 150,430,048 shares voted to
approve the amendments, 25,625,591 shares voted against approval of the
amendments and 3,144,420 shares abstained.
Also, the material terms of performance-based incentives in performance unit
awards under the Unicom Corporation Long-Term Incentive Plan were approved at
the meeting. A total of 164,929,776 shares voted to approve the material
terms, 10,975,984 shares voted against approval of the material terms and
3,294,299 shares abstained.
Finally, a shareholder proposal that would have required Unicom to develop
and implement programs expanding the use of energy efficiency and renewable
energy resources was not approved atrelated proceeds. These decreases were partially offset
by $31 million of proceeds from the meeting. A totalsettlement of 10,478,211 shares
votedinterest rate swaps.
Effective January 1, 2001, Exelon contributed to approvePECO a $2.0 billion
non-interest bearing receivable for the proposal, 139,765,031 shares voted against approvalpurpose of funding future income tax
payments resulting from the collection of intangible transition charges. See
ITEM 1. Financial Statements - Note 13 - Related-Party Transactions.
At September 30, 2001, PECO's capital structure, excluding the
deduction from shareholders' equity of the proposal, 10,016,558 shares abstained$2.0 billion receivable from Exelon,
consisted of 27% common equity, 3% preferred stock and 18,940,259 shares were not
voted.
ComEd's annual meetingCOMRPS (which comprised
1% of shareholders was held on May 25, 1999. At that
meeting, eachPECO's total capitalization structure), and 70% long-term debt including
transition bonds issued by PECO Energy Transition Trust (PETT). Long-term debt
included $4.6 billion of transition bonds representing 53% of capitalization.
PECO meets its short-term liquidity requirements primarily through the
issuance of commercial paper and borrowings under bank credit facilities. PECO,
along with Exelon and ComEd, entered into a $1.25 billion unsecured revolving
credit facility with a group of banks. PECO has an $300 million sublimit under
this 364-day credit facility and expects to use the credit facility principally
to support its $300 million commercial paper program. This credit facility
requires PECO to maintain a debt to total capitalization ratio of 65% or less
(excluding transition bonds and the receivable from parent recorded in PECO's
shareholders' equity). As a result of the persons named incorporate restructuring, at September
30, 2001, PECO's debt to total capitalization ratio on that basis was 35%. At
September 30, 2001, PECO had no short-term borrowings.
During 2001, PECO retired $121 million of its pollution control notes
with proceeds from a capital contribution from Exelon.
On October 30, 2001, PECO issued, through a private placement, $250
million of its First and Refunding Mortgage Bonds with an interest rate of 5.95%
and maturity date of November 11, 2011. Proceeds from the table below was elected asfirst mortgage bonds
were used to repay $250 million aggregate principal amount of PECO's First and
Refunding Mortgage Bonds, having an interest rate of 5.625% and a director. Vote totals for each director are shown below:
Shares
Nominee Voted For
------- -----------
Edward A. Brennan................................................... 213,967,856
Carlos H. Cantu..................................................... 213,967,856
James W. Compton.................................................... 213,967,856
Bruce DeMars........................................................ 213,967,856
Sue L. Gin.......................................................... 213,967,856
Donald P. Jacobs.................................................... 213,967,856
Edgar D. Jannotta................................................... 213,967,856
Elizabeth A. Moler.................................................. 213,967,856
John W. Rogers...................................................... 213,967,856
John W. Rowe........................................................ 213,967,856
Richard L. Thomas................................................... 213,967,856
75
Also at the meeting, the appointment by ComEd's Boardmaturity date
of Directors of Arthur
Andersen LLP as auditors for the year 1999 was approved. A total of
213,967,856 shares voted to approve the appointment.
In addition, amendments to the Unicom Corporation Long-Term Incentive Plan
were approved at the meeting. The amendments increase the number of stock
options, stock appreciation rights and performance units that can be awarded
to any one individual under the plan. A total of 213,967,856 shares voted to
approve the amendments.
Also, the material terms of performance-based incentives in performance unit
awards under the Unicom Corporation Long-Term Incentive Plan were approved at
the meeting. A total of 213,967,856 shares voted to approve the material
terms.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
------- --------------------------------------------------------------
(23)-1 Consent of independent public accountants applicable to Unicom
Corporation.
(23)-2 Consent of independent public accountants applicable to
Commonwealth Edison Company.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated May 27, 1999 was filed by Unicom and
ComEd announcing the changes made by the Illinois General Assembly to the
1997 Restructuring Law which provided a new set of benefits for consumers,
Illinois industry and the environment.
76November 1, 2001.
62
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, eachthe
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 13th day of August, 1999. The
signature for each undersigned company shall be deemed to relate only to
matters having reference to such companyauthorized.
EXELON CORPORATION
/s/ Jean H. Gibson
--------------------------
JEAN H. GIBSON
Vice President and
its subsidiaries thereof.
Unicom Corporation
RegistrantController
(Chief Accounting Officer)
COMMONWEALTH EDISON COMPANY
/s/ Robert E. Berdelle
By __________________________________
Robert--------------------------
ROBERT E. BerdelleBERDELLE
Vice President and
ComptrollerChief Financial Officer
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
Commonwealth Edison Company
Registrant
Robert E. Berdelle
By __________________________________
Robert E. BerdelleAccounting Officer)
PECO ENERGY COMPANY
/s/ Thomas P. Hill, Jr.
--------------------------
THOMAS P. HILL, JR.
Vice President and
ComptrollerChief Financial Officer
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
77Accounting Officer)
Date: January 31, 2002
63