- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 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 Registrant; State of Incorporation; IRS Employer Number Address; and Telephone Number Identification No. ---------- ----------------------------------- ------------------ 1-11375 UNICOM CORPORATION 36-3961038 (an Illinois corporation) 37th Floor, 10 South Dearborn Street Post Office Box A-3005 Chicago, Illinois 60690-3005 312/394-7399 1-1839 COMMONWEALTH EDISON COMPANY (an Illinois corpo- 36-0938600 ration) 37th Floor, 10 South Dearborn Street Post Office Box 767 Chicago, Illinois 60690-0767 312/394-4321 Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) have been subject to such filing requirements for the past 90 days. Yes 3 No Common Stock outstanding at April 30, 2000: Unicom Corporation 177,783,904 shares Commonwealth Edison Company 183,745,079 shares - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Unicom Corporation and Commonwealth Edison Company Quarterly Reports on Form 10-Q to the Securities and Exchange Commission for the Quarterly Period Ended March 31, 2000 This document contains the Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2000 for each of Unicom Corporation and Commonwealth Edison Company. Information contained herein relating to an individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Commonwealth Edison Company makes no representation as to information relating to Unicom Corporation or to any other companies affiliated with Unicom Corporation. In addition, several portions of these Quarterly Reports contain forward-looking statements; and reference is made to pages 58-59 for the location and character of such statements. INDEX 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 and twelve months ended March 31, 2000 and 1999................................ 5 Consolidated Balance Sheets--March 31, 2000 and December 31, 1999.... 6-7 Statements of Consolidated Capitalization--March 31, 2000 and December 31, 1999 .................................................. 8 Statements of Consolidated Retained Earnings for the three months and twelve months ended March 31, 2000 and 1999......................... 9 Statements of Consolidated Comprehensive Income for the three months and twelve months ended March 31, 2000 and 1999..................... 9 Statements of Consolidated Cash Flows for the three months and twelve months ended March 31, 2000 and 1999................................ 10 Notes to Financial Statements........................................ 11-40 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 41-59 Commonwealth Edison Company and Subsidiary Companies: Financial Statements-- Report of Independent Public Accountants............................. 60 Statements of Consolidated Operations for the three months and twelve months ended March 31, 2000 and 1999................................ 61 Consolidated Balance Sheets--March 31, 2000 and December 31, 1999.... 62-63 Statements of Consolidated Capitalization--March 31, 2000 and December 31, 1999................................................... 64 Statements of Consolidated Retained Earnings for the three months and twelve months ended March 31, 2000 and 1999......................... 65 Statements of Consolidated Comprehensive Income for the three months and twelve months ended March 31, 2000 and 1999..................... 65 Statements of Consolidated Cash Flows for the three months and twelve months ended March 31, 2000 and 1999................................ 66 Notes to Financial Statements........................................ 67-71 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 72 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 73-74 Item 6. Exhibits and Reports on Form 8-K............................... 74 SIGNATURES............................................................... 75 2 DEFINITIONS The following terms are used in this document with the following meanings: Term Meaning ---------------------- ------------------------------------------------------- 1997 Act Illinois Electric Service Customer Choice and Rate Relief Law of 1997, as amended 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 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 EME Edison Mission Energy, an Edison International subsidiary EPS Earnings/(Loss) per Common Share ESPP Employee Stock Purchase Plan 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 MGP Manufactured gas plant NEIL Nuclear Electric Insurance Limited Northwind Midway Northwind Midway, LLC, a UT Holdings subsidiary NRC Nuclear Regulatory Commission O&M Operation and maintenance PECO PECO Energy Company, a Pennsylvania company PPAs Purchase Power Agreements RES Retail Electric Supplier 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 Enterprises subsidiary Unicom Power Holdings Unicom Power Holdings Inc., a Unicom Enterprises 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 the Shareholders of Unicom Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of UNICOM CORPORATION (an Illinois corporation) and subsidiary companies as of March 31, 2000 and December 31, 1999, and the related statements of consolidated operations, retained earnings, comprehensive income and cash flows for the three-month and twelve-month periods ended March 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unicom Corporation and subsidiary companies as of March 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for the three- month and twelve-month periods ended March 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois May 12, 2000 4 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months and twelve months ended March 31, 2000 and 1999 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 Twelve Months Ended March 31 March 31 ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (Thousands Except Per Share Data) Operating Revenues............. $1,657,786 $1,537,804 $6,967,929 $6,977,431 ---------- ---------- ---------- ---------- Operating Expenses and Taxes: Fuel......................... $ 99,208 $ 234,834 $ 861,636 $1,070,069 Purchased power.............. 226,733 71,682 706,627 646,306 Operation and maintenance.... 548,737 555,402 2,420,933 2,272,742 Depreciation and amortization................ 374,697 231,332 986,613 925,571 Taxes (except income)........ 138,388 132,360 514,480 624,709 Income taxes................. 33,409 63,264 329,343 377,280 Investment tax credits deferred--net .............. (5,499) (7,021) (24,306) (27,591) ---------- ---------- ---------- ---------- $1,415,673 $1,281,853 $5,795,326 $5,889,086 ---------- ---------- ---------- ---------- Operating Income............... $ 242,113 $ 255,951 $1,172,603 $1,088,345 ---------- ---------- ---------- ---------- Other Income and (Deductions): Interest on long-term debt, net of interest capitalized. $ (134,365) $ (142,558) $ (536,984) $ (471,526) Interest on notes payable.... (969) (3,952) (15,619) (20,392) Allowance for funds used during construction......... 5,619 4,211 23,219 17,515 Income taxes applicable to nonoperating activities..... (6,389) (1,416) 22,110 3,747 Provisions for dividends and redemption premiums-- Preferred and preference stocks of ComEd............ (1,222) (15,297) (9,681) (57,634) ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities................. (7,428) (7,428) (29,710) (29,710) Miscellaneous--net........... 97,722 7,638 69,239 23,273 ---------- ---------- ---------- ---------- $ (47,032) $ (158,802) $ (477,426) $ (534,727) ---------- ---------- ---------- ---------- Net Income before Extraordinary Items ........................ $ 195,081 $ 97,149 $ 695,177 $ 553,618 Extraordinary Losses, less Applicable Income Taxes....... (2,744) (27,506) (2,817) (27,506) ---------- ---------- ---------- ---------- Net Income..................... $ 192,337 $ 69,643 $ 692,360 $ 526,112 ========== ========== ========== ========== Earnings per common share before extraordinary items Basic........................ $ 1.02 $ 0.45 $ 3.29 $ 2.55 Diluted...................... $ 1.01 $ 0.45 $ 3.28 $ 2.55 Extraordinary losses, less applicable income taxes (basic and diluted).................. $ (0.01) $ (0.13) $ (0.01) $ (0.13) Earnings per common share-- Basic........................ $ 1.01 $ 0.32 $ 3.28 $ 2.42 Diluted...................... $ 1.00 $ 0.32 $ 3.27 $ 2.42 Cash Dividends Declared per Common Share.................. $ 0.40 $ 0.40 $ 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 March 31, December 31, ASSETS 2000 1999 ------ ----------- ------------ (Thousands of Dollars) Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $768 million and $672 million, respectively)....................... $25,290,040 $25,007,637 Less--Accumulated provision for depreciation....... 13,988,275 13,729,223 ----------- ----------- $11,301,765 $11,278,414 Nuclear fuel, at amortized cost.................... 797,087 843,724 ----------- ----------- $12,098,852 $12,122,138 ----------- ----------- Investments and Other Property: Nuclear decommissioning funds...................... $ 2,671,305 $ 2,546,540 Subsidiary companies............................... 17,290 50,417 Other, at cost..................................... 600,139 470,848 ----------- ----------- $ 3,288,734 $ 3,067,805 ----------- ----------- Current Assets: Cash and temporary cash investments................ $ 652,666 $ 1,696,336 Cash held for redemption of securities............. 64,577 285,056 Other cash investments............................. 24 62 Special deposits................................... 1,802,506 1,845,730 Receivables-- Customers........................................ 1,084,066 1,224,678 Forward share repurchase contract................ -- 813,046 Other............................................ 190,191 181,532 Provisions for uncollectible accounts............ (51,437) (50,814) Coal and fuel oil, at average cost................. 17,575 15,613 Materials and supplies, at average cost............ 231,652 221,157 Deferred income taxes related to current assets and liabilities....................................... 66,714 60,056 Prepayments and other.............................. 36,643 36,268 ----------- ----------- $ 4,095,177 $ 6,328,720 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Regulatory assets.................................. $ 1,585,225 $ 1,792,907 Other.............................................. 87,902 94,463 ----------- ----------- $ 1,673,127 $ 1,887,370 ----------- ----------- $21,155,890 $23,406,033 =========== =========== The accompanying Notes to Financial Statements are an integral part of the above statements. 6 UNICOM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS March 31, December 31, CAPITALIZATION AND LIABILITIES 2000 1999 ------------------------------ ----------- ------------ (Thousands of Dollars) Capitalization (see accompanying statements): Common stock equity................................. $ 3,932,138 $ 5,332,611 Preferred and preference stocks of ComEd-- Without mandatory redemption requirements......... 1,678 1,790 ComEd-obligated mandatorily redeemable preferred se- curities of subsidiary trusts holding solely ComEd's subordinated debt securities*.............. 350,000 350,000 Long-term debt...................................... 6,965,357 7,129,906 ----------- ----------- $11,249,173 $12,814,307 ----------- ----------- Current Liabilities: Notes payable....................................... $ 445,000 $ 4,750 Current portion of long-term debt, redeemable pref- erence stock and capitalized lease obligations of subsidiary companies............................... 894,498 915,439 Accounts payable.................................... 477,677 582,920 Accrued interest.................................... 124,495 146,718 Accrued taxes....................................... 420,499 1,386,930 Dividends payable................................... 74,940 94,090 Customer deposits................................... 72,102 68,128 Other............................................... 267,925 316,542 ----------- ----------- $ 2,777,136 $ 3,515,517 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes............................... $ 2,464,423 $ 2,484,883 Nuclear decommissioning liability for retired plants............................................. 1,274,900 1,259,700 Accumulated deferred investment tax credits......... 477,065 484,717 Accrued spent nuclear fuel disposal fee and related interest........................................... 773,996 763,427 Obligations under capital leases of subsidiary com- panies............................................. 132,105 161,611 Regulatory liabilities.............................. 581,963 596,157 Other............................................... 1,425,129 1,325,714 ----------- ----------- $ 7,129,581 $ 7,076,209 ----------- ----------- Commitments and Contingent Liabilities (Note 21) $21,155,890 $23,406,033 =========== =========== *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. 7 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CAPITALIZATION March 31, December 31, 2000 1999 ----------- ------------ (Thousands of Dollars) Common Stock Equity: Common stock, without par value-- Outstanding--218,265,888 shares and 217,835,570 shares, respectively.............................. $ 4,975,791 $ 4,971,618 Preference stock expense of ComEd................... (72) (72) Retained earnings................................... 484,896 363,621 Accumulated other comprehensive income.............. 8,569 7,539 Treasury stock--40,619,106 shares and 264,406 shares, respectively............................... (1,537,046) (10,095) ----------- ----------- $ 3,932,138 $ 5,332,611 ----------- ----------- Preferred and Preference Stocks of ComEd-- Without Mandatory Redemption Requirements: $1.425 convertible preferred stock, cumulative, without par value--Outstanding--52,753 shares and 56,291 shares, respectively...................... $ 1,678 $ 1,790 Prior preferred stock, cumulative, $100 par value per share-- No shares outstanding............................ -- -- ----------- ----------- $ 1,678 $ 1,790 ----------- ----------- Subject to Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--700,000 shares and 700,000 shares, respectively.................................... $ 69,475 $ 69,475 Current redemption requirements for preference stock included in current liabilities........................... (69,475) (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 2000 through 2004--5.30% to 9 3/8%....... $ 656,000 $ 698,245 Maturing 2005 through 2014--4.40% to 8 3/8%....... 1,299,400 1,299,400 Maturing 2015 through 2023--6.75% to 9 7/8%....... 1,511,000 1,589,443 ----------- ----------- $ 3,466,400 $ 3,587,088 Transitional trust notes, due 2001 through 2008-- 5.29% to 5.74%..................................... 2,975,033 3,070,000 Sinking fund debentures, due 2001 through 2011--2 7/8% to 4.75%...................................... 30,857 30,866 Pollution control obligations, due 2007 through 2014--3.85% to 5 7/8%.............................. 139,200 139,200 Other long-term debt................................ 1,088,065 1,089,347 Deposit for retirement of long-term debt............ (4,183) -- Current maturities of long-term debt included in current liabilities................................ (684,162) (737,615) Unamortized net debt discount and premium........... (45,853) (48,980) ----------- ----------- $ 6,965,357 $ 7,129,906 ----------- ----------- $11,249,173 $12,814,307 ----------- ----------- 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 Three Months Twelve Months Ended Ended March 31 March 31 ----------------- ------------------- 2000 1999 2000 1999 -------- -------- --------- --------- (Thousands of Dollars) Balance at Beginning of Period.......... $363,621 $142,813 $124,991 $(54,207) Add--Net income......................... 192,337 69,643 692,360 526,112 -------- -------- --------- --------- $555,958 $212,456 $817,351 $ 471,905 -------- -------- --------- --------- Deduct-- Cash dividends declared on common stock....................... $ 71,062 $ 86,865 $331,980 $347,287 Other capital stock transactions-- net................................ -- 600 475 (373) -------- -------- --------- --------- $ 71,062 $ 87,465 $332 ,455 $346,914 -------- -------- --------- --------- Balance at End of Period (Includes $837 million and $477 million of appropriated retained earnings at March 31, 2000 and 1999, respectively)......................... $484,896 $124,991 $484 ,896 $124,991 ======== ======== ========= ========= UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME Three Months Ended Twelve Months Ended March 31 March 31 ---------------------------------------- 2000 1999 2000 1999 --------- ------------------ --------- (Thousands of Dollars) Net Income............................ $ 192,337 $ 69,643 $692,360 $526,112 Other Comprehensive Income Unrealized gains on securities...... $ 1,704 $ -- $ 14,175 $ -- Income taxes on other comprehensive income............................. (674) -- (5,606) -- --------- -------- --------- --------- Other comprehensive income, net of tax................................ $ 1,030 $ -- $ 8,569 $ -- --------- -------- --------- --------- Comprehensive Income.................. $ 193,367 $ 69,643 $ 700,929 $526,112 ========= ======== ========= ========= 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 Twelve Months Ended March 31 March 31 ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Thousands of Dollars) Cash Flow from Operating Activities: Net income................ $ 192,337 $ 69,643 $ 692,360 $ 526,112 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 407,613 246,312 1,076,425 979,162 Deferred income taxes and investment tax credits--net........... (37,101) (53,656) (1,431,809) (8,639) Contribution to environmental trust.... -- -- (250,000) -- Recovery of coal reserve regulatory assets...... -- 19,936 178,038 (10,515) Change in MGP remediation liability.. -- -- 68,078 -- Gain on forward share arrangements........... (113,071) (13,728) (55,370) (13,728) Provisions/(payments) for revenue refunds-- net.................... -- (22,493) (110) (10,856) Equity component of allowance for funds used during construction........... (2,751) (1,753) (8,787) (7,128) Provisions/(payments) for liability for separation costs--net.. (8,889) (8,780) (62,505) (6,448) Net effect on cash flows of changes in: Receivables........... 128,521 194,299 37,699 (336,548) Coal and fuel oil..... 555 (18,143) 19,316 3,292 Materials and supplies............. (10,456) (4,139) (11,519) 20,887 Accounts payable excluding nuclear fuel lease principal payments and separation costs-- net.................. (98,012) (130,879) 12,983 2,373 Accrued interest and taxes................ (986,873) 148,474 111,218 117,073 Other changes in certain current assets and liabilities.......... 49,310 27,850 145,614 154,592 Other--net.............. 110,952 87,382 (58,628) 107,914 ----------- ----------- ----------- ----------- $ (367,865) $ 540,325 $ 463,003 $ 1,517,543 ----------- ----------- ----------- ----------- Cash Flow from Investing Activities: Construction expenditures............. $ (329,878) $ (231,075) $(1,301,309) $ (981,905) Nuclear fuel expenditures............. (29,622) (50,085) (233,019) (155,705) Sales of generating plants................... -- -- 4,885,720 -- Equity component of allowance for funds used during construction...... 2,751 1,753 8,787 7,128 Contributions to nuclear decommissioning funds.... (39,400) (39,426) (89,919) (96,120) Other investments and special deposits......... (37,357) (4,815) (1,878,511) 1,073 Plant removal costs--net.. (2,253) (26,679) (59,188) (73,178) ----------- ----------- ----------- ----------- $ (435,759) $ (350,327) $ 1,332,561 $(1,298,707) ----------- ----------- ----------- ----------- Cash Flow from Financing Activities: Issuance of securities-- Transitional trust notes................... $ -- $ -- $ -- $ 3,382,629 Other long-term debt..... -- 35,000 166,764 392,270 Capital stock............ 4,173 824 24,290 13,245 Retirement, redemption and repurchase of securities-- Transitional trust notes................... (94,967) -- (424,967) -- Other long-term debt..... (122,012) (1,055,655) (497,915) (1,304,998) Common stock............. (533,702) (3,570) (533,702) (10,370) Preferred stock.......... (113) (544,187) (75,166) (578,120) Common stock forward repurchase arrangements.. (67,133) (678,569) (262,039) (678,569) Cash dividends paid on common stock............. (87,021) (86,806) (347,780) (347,150) Proceeds from sale/leaseback of nuclear fuel............. -- -- -- 84,473 Nuclear fuel lease principal payments....... -- (53,745) (201,657) (277,163) Increase/(decrease) in short-term borrowings.... 440,250 (72,149) 224,216 (158,836) ----------- ----------- ----------- ----------- $ (460,525) $(2,458,857) $(1,927,956) $ 517,411 ----------- ----------- ----------- ----------- Change in Net Cash Balance. $(1,264,149) $(2,268,859) $ (132,392) $ 736,247 Cash, Temporary Cash Investments and Cash Held for Redemption of Securities: Balance at Beginning of Period................. 1,981,392 3,118,494 849,635 113,388 ----------- ----------- ----------- ----------- Balance at End of Period................. $ 717,243 $ 849,635 $ 717,243 $ 849,635 =========== =========== =========== =========== 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 for the period July 1998 through November 1999 than in previous and subsequent periods. 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. ComEd's investment in generation-related net utility plant, not subject to cost-based rate regulation, including construction work in progress and nuclear fuel, and excluding the decommissioning costs included in the accumulated provision for depreciation was $7.7 billion and $7.8 billion as of March 31, 2000 and December 31, 1999, respectively. 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 March 31, 2000 and December 31, 1999 were as follows: March 31, December 31, 2000 1999 ---------- ------------ (Thousands of Dollars) Regulatory assets: Impaired production plant(1).......................... $ 178,537 $ 366,221 Deferred income taxes (2)............................. 685,327 688,946 Nuclear decommissioning costs--Dresden Unit 1......... 193,269 202,308 Nuclear decommissioning costs--Zion Units 1 and 2..... 490,418 496,638 Unamortized loss on reacquired debt (3)............... 37,674 38,794 ---------- ---------- $1,585,225 $1,792,907 ========== ========== Regulatory liabilities: Deferred income taxes (2)............................. $ 581,963 $ 596,157 ========== ========== - -------- (1) Expected to be substantially recovered through regulated cash flow by the end of 2000. (2) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for non-generation related temporary differences. (3) 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. The regulatory assets for Dresden Unit 1 and Zion Units 1 and 2 represent unrecovered nuclear decommissioning costs, which are expected to be recovered over the periods 2000-2011 and 2000-2013, respectively, through future rate recoveries and related trust fund earnings. See "Depreciation, Amortization of Regulatory Assets and Liabilities and Decommissioning" below for additional information. Depreciation, Amortization of Regulatory Assets and Liabilities, and Decommissioning. Depreciation, amortization of regulatory assets and liabilities, and decommissioning for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- ------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Depreciation expense................... $ 166,058 $ 177,438 $ 701,960 $ 743,601 Amortization of regulatory assets and liabilities--net...................... 187,684 32,939 200,833 98,150 --------- --------- --------- --------- $353,742 $210,377 $902,793 $841,751 Decommissioning expense................ 20,955 20,955 83,820 83,820 --------- --------- --------- --------- $374,697 $231,332 $986,613 $925,571 ========= ========= ========= ========= The increased regulatory asset amortization recorded in the recent three- month and twelve-month periods represents amounts calculated in accordance with the earnings cap provisions of the 1997 Act. The increased regulatory asset amortization was primarily recorded as a result of higher net income in the first quarter of 2000, compared to the first quarter of 1999, before reflecting such increased amortization. 12 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the December 1999 sale of fossil plant assets of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statements of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million in the fourth quarter of 1999. See Note 3 for additional information regarding amortization of regulatory assets with respect to limits on ComEd's earnings due to statutory sharing provisions. See Note 4 for additional information regarding the fossil plant sale. Provisions for depreciation, including nuclear plant, were at average annual rates of average depreciable utility plant and equipment for the three months and twelve months ended March 31, 2000 and 1999 as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------ ------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Average annual depreciation rates....... 2.69% 2.65% 2.67% 2.83% 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 twelve-month period ended March 31, 2000, compared to the same period ended March 31, 1999, 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. 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. Dismantling is expected to occur relatively soon after the end of the current NRC license life of each generating station currently operating. The accrual for decommissioning is based on the prompt removal method authorized by NRC guidelines. ComEd's ten operating units have remaining current NRC license lives ranging from 7 to 28 years. ComEd's Zion Station and Dresden Unit 1, are retired and are expected to be dismantled beginning in the years 2014 and 2011, respectively, which is consistent with the regulatory treatment for recovery of the related decommissioning costs. Based on ComEd's most recent study, decommissioning costs are estimated to be $5.6 billion in current-year (2000) dollars, including a contingency allowance. These expenditures are expected to 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 ICC has 13 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued approved ComEd's current funding plan, which provides for annual contributions of current accruals and ratable contributions of past accruals over the remaining current NRC license lives of the nuclear plants. Following the merger with PECO, it is anticipated that ComEd will transfer its nuclear generating assets, including the decommissioning trust funds, to a generation and power marketing subsidiary of Exelon ("Genco"). Genco will assume responsibility for the decommissioning of the nuclear generating stations, including Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue collecting decommissioning-related charges from its retail customers and contribute such amounts to Genco's trust funds. In conjunction with the ICC regulatory approval proceeding related to Genco, ComEd is currently considering an alternative decommissioning funding structure that would provide for i) collection of amounts sufficient to satisfy the decommissioning obligation from customers over a period that is generally shorter than the remaining NRC license lives of the units, and ii) a waiver of ComEd's rights to further collections after that shorter period. Although ComEd cannot currently determine whether an alternative funding structure will ultimately be approved and implemented, such a structure could increase the decommissioning cost recovery risk. See Note 2 for additional information on the planned merger of Unicom and PECO. For the ten operating nuclear units, decommissioning cost accruals are recorded as portions of depreciation expense and accumulated provision for depreciation on the Statements of Consolidated Operations and the Consolidated Balance Sheets, respectively, as such costs are recovered through rates. As of March 31, 2000, the total decommissioning costs included in the accumulated provision for depreciation were $2,176 million. For ComEd's retired nuclear units, the total estimated liability for nuclear decommissioning in current-year (2000) dollars is recorded as a noncurrent liability. The unrecovered portion of the liability is recorded as a regulatory asset. The nuclear decommissioning liability for retired plants as of March 31, 2000 was as follows: Zion Dresden Units Unit 1 1 and 2 Total -------- -------- ---------- (Thousands of Dollars) Amounts recovered through rates and investment fund earnings.................................... $117,531 $473,682 $ 591,213 Unrecovered portion of the liability.............. 193,269 490,418 683,687 -------- -------- ---------- Nuclear decommissioning liability for retired plants.......................................... $310,800 $964,100 $1,274,900 ======== ======== ========== 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 fair value of funds accumulated in the external trusts at March 31, 2000 was $2,671 million, which includes pre-tax unrealized appreciation of $749 million. The earnings on the external trusts for operating plants accumulate in the fund balance and accumulated provision for depreciation. Nuclear decommissioning funding as of March 31, 2000 was as follows: (Thousands of Dollars) Amounts recovered through rates and investment fund earnings for operating plants (included in the accumulated provision for depreciation)................ $2,175,656 Amounts recovered through rates and investment fund earnings for retired plants............................ 591,213 Less past accruals not yet contributed to the trusts.... 95,564 ---------- Fair value of external trust funds..................... $2,671,305 ========== 14 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued In February, 2000 the FASB issued an exposure draft addressing the accounting for asset removal costs, including those relating to nuclear decommissioning. The exposure draft would require utilities to recognize the entire decommissioning liability on the balance sheet when the liability is incurred very early in the operating life of the generating station, rather than ratably over the operating life of the station as is the current industry accounting practice. The cost basis of the related nuclear power plant would be increased by a corresponding amount at the time the liability is recorded and depreciated over the operating life. Although over the life of the stations total decommissioning provisions would approximate the total amount recognized over the life of the stations under current electric utility accounting practices, amounts for interim years could increase or decrease from currently expected decommissioning provisions. However, ComEd does not believe such changes will adversely impact results of operations due to the ability to recover decommissioning costs through rates. The exposure draft is proposed to be effective for financial statements issued for fiscal years beginning after June 15, 2001. A final statement is expected to be issued before the end of 2000. 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 March 31, 2000. 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 in 1999. ComEd had approximately 3.5 million electric customers at March 31, 2000. Revenues are recognized as electric and delivery services are provided to customers. 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 receivable from customers. Receivables from customers include $70 million and $103 million as of March 31, 2000 and December 31, 1999, respectively, in estimated unbilled revenue 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 the receivables that are not expected to be recoverable. Such provisions increased O&M expenses by $35 million in the twelve months ended March 31, 2000, compared to normally expected levels. Receivables from customers as of March 31, 2000 and December 31, 1999 also include $257 million and $295 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 "Use of Estimates" above for additional information regarding ComEd's revenues and net receivables. See Notes 3 and 18 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 $99 million and $89 million for the three months ended March 31, 2000 and 1999, respectively and $391 million and $321 million for the twelve months ended March 31, 2000 and 1999, respectively. 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 for AFUDC were 8.29% and 8.02% for the three months ended March 31, 2000 and 1999, respectively, and 7.87% and 8.11% for the twelve months ended March 31, 2000 and 1999, respectively. In accordance with SFAS No. 34, Capitalization of Interest Cost, ComEd capitalized $16 million and $32 million for the twelve months ended March 31, 2000 and 1999, 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. Interest. Total interest costs incurred on debt, leases and other obligations were $151 million and $167 million for the three months ended March 31, 2000 and 1999, respectively, and $654 million and $577 million for the twelve months ended March 31, 2000 and 1999, respectively. Debt Discount, Premium and Expense. Discount, premium and expense on long- term debt of ComEd are being amortized over the lives of the respective issues. Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss from ComEd's reacquisition, in connection with the refinancing of first mortgage bonds, sinking fund debentures and pollution control obligations prior to their scheduled maturity dates, is deferred and amortized over the lives of the long-term debt issued to finance the reacquisition for non- generation related financings. See "Regulatory Assets and Liabilities" above and Note 3 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. The number of average outstanding common shares used to compute basic and diluted EPS for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- ------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Shares) Average Number of Common Shares Outstanding: Average Number of Common Shares-- Basic................................ 191,034 217,081 210,792 217,036 Potentially Dilutive Common Shares-- Treasury Method: Stock Options....................... 721 614 706 653 Other Convertible Securities........ 87 85 87 85 --------- --------- --------- --------- Average Number of Common Shares-- Diluted............................... 191,842 217,780 211,585 217,774 ========= ========= ========= ========= 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 are in the process of reviewing their various contracts to determine which contracts meet the requirements of SFAS No. 133 and would need to be reflected as derivatives under the standard and accounted for at fair value. Among the contracts that are being reviewed are purchase power agreements, contracts related to electricity purchases and sales, contracts related to gas purchases and sales, normal purchase orders, securities issued and insurance contracts. Unicom and ComEd have not yet quantified the effects on their financial statements of adopting SFAS No. 133. However, adoption of SFAS No. 133 could increase volatility in earnings and other comprehensive income. Reclassifications. Certain prior year amounts have been reclassified to conform with current period presentation. These reclassifications had no effect on operating results. 17 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Cash Held for Redemption of Securities. As of March 31, 2000, the cash held for redemption of securities reported on the Consolidated Balance Sheets includes $65 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 3 for additional information. Special Deposits. As of March 31, 2000, special deposits included $1.8 billion for cash deposited by Unicom Investments in connection with a contemplated like-kind exchange transaction involving certain of the sold fossil plants. 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, and cash held for redemption of securities are considered to be cash equivalents. Supplemental cash flow information for the three months and twelve months ended March 31, 2000 and 1999 was as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- ------------------- 2000 1999 2000 1999 --------- --------- ---------- -------- (Thousands of Dollars) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized)..................... $152,148 $161,651 $ 588,481 $475,122 Income taxes (net of refunds)..... $ 950,001 $ (25,921) $1,431,102 $246,555 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obligations incurred by subsidiary companies............ $ 33 $ 1,162 $ 615 $ 89,537 (2) Merger Agreement. In September 1999, the Boards of Directors of Unicom and PECO approved a merger of equals that will create a new holding company, Exelon. The merger is conditioned, among other things, upon the approvals of the shareholders of both companies and by various regulatory bodies. The merger was approved unanimously on April 12, 2000, without conditions, by the FERC. Aspects of the merger still must be approved by other federal and state regulatory agencies, including the SEC, the NRC, the Federal Communications Commission and the Pennsylvania Public Utility Commission and also by shareholders of both companies. In Pennsylvania, a settlement has been reached with virtually all intervenors, and the regulatory process in Illinois has been completed. The merger is currently expected to be completed in the latter half of 2000. Under the merger agreement, as amended and restated in January 2000, PECO and ComEd will become the principal utility subsidiaries of Exelon. This result will be achieved by a mandatory exchange of the outstanding common stock of PECO for common stock of Exelon, and a merger of Unicom with and into Exelon wherein holders of Unicom common stock will receive 0.875 shares of Exelon common stock plus $3.00 in cash for each of their shares of Unicom common stock. The merger transaction will be accounted for as a purchase of Unicom by PECO. Prior to the consummation of the merger, Unicom expects to repurchase approximately $1.0 billion of its outstanding common shares. These share repurchases are in addition to 26.3 million shares of Unicom common stock that Unicom repurchased in January 2000 upon settlement of certain forward purchase contracts. The $1.0 billion additional share repurchases will be funded from available funds, including funds resulting from the fossil plant sale. See Note 6 for additional information. Following the consummation of the Merger, it is anticipated that both ComEd and PECO will transfer their generating assets and wholesale power marketing operations to subsidiaries. Following 18 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued those transfers, these subsidiaries will be transferred to Exelon and ultimately will be combined into a single power generation and marketing company ("Genco"), which will be a direct subsidiary of Exelon. In ComEd's case, the transfer will include its Braidwood, Byron, Dresden, LaSalle and Quad Cities generating stations (nuclear generating stations) representing an aggregate generating capability of 9,566 megawatts, its Zion station, its rights and obligations under various power purchase agreements, the assets constituting its nuclear decommissioning trusts and its wholesale power marketing business. Genco will assume responsibility for the decommissioning of the nuclear generating stations, including Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue collecting decommissioning- related charges from its customers. Genco will enter into a power purchase agreement with ComEd in which Genco will undertake to supply ComEd's full requirements for electric energy through 2004 and all of ComEd's requirements up to the available capacity of the nuclear generating stations in 2005 and 2006. The proposed transfer is subject to various regulatory approvals. (3) Accounting Effects Related to the 1997 Act. In December 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act was amended in June 1999. As a result of the 1997 Act and FERC rules, prices for the supply of electric energy are expected to transition from cost-based, regulated rates to rates determined by competitive market forces. Accordingly, the 1997 Act provides for, among other things, gradual customer access to other electric suppliers or a power purchase option which allows the purchase of electric energy from ComEd at market based prices, and the collection of a CTC from customers who choose to purchase electric energy from a RES or elect the power purchase option during a transition period that extends through 2006. Effective October 1, 1999, the CTC was established in accordance with a formula defined in the 1997 Act. The CTC, which is 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. On October 1, 1999, more than 41,000 non-residential customers became eligible to choose a new electric supplier or elect the purchase power option. The remainder of non-residential customers will become eligible to choose an electric supplier or the purchase power option between June 1 and December 31, 2000. As of March 31, 2000, over 5,900 non-residential customers, representing approximately 13 percent of ComEd's retail kilowatthour sales for the twelve months prior to the introduction of open access, elected to receive their electric energy from a RES or chose the purchase power option. The impact of customer choice on results of operations will depend on various factors, including the extent to which customers elect to receive energy from a RES or the purchased power option, the development of a competitive market, the market price for energy, the extent to which ComEd develops new sources of revenue and the results of cost control efforts. Because of the inherent uncertainty in these factors ComEd is unable to predict the long term impact of customer choice on results of operations. However, ComEd does not expect customer choice to have a material effect in the near term as a result of the collection of CTCs as provided by the 1997 Act. 19 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select a RES can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based, regulated rates. The ICC issued orders in August and September 1999 approving, with modifications, ComEd's delivery service tariffs. The 1997 Act also provides for a 15% residential base rate reduction which became effective August 1, 1998 and an additional 5% residential base rate reduction in October 2001. ComEd's operating revenues were reduced by approximately $170 million in 1998 due to the 15% residential base rate reduction. The 15% rate reduction further reduced ComEd's operating revenues by approximately $226 million in 1999, compared to 1998 rate levels. Notwithstanding the 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. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity is based on the 30- Year Treasury Bond rate, plus 5.5% in the years 1998 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 for ComEd are each calculated on a two-year average basis. The earnings sharing provision is applicable only to ComEd's earnings. Consistent with the provisions of the 1997 Act, 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. ComEd's returns on average common equity for the years 1999 and 1998 were 11.56% and 10.86%, respectively. The average return of 11.21% for the two year period ended December 31, 1999 equaled the threshold return for that period under the earnings provisions of the 1997 Act. ComEd does not currently expect to trigger the earnings sharing provisions of the 1997 Act in the years 2000 and beyond. 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. 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, were, as required, used to redeem $1,101 million of long- term debt and $607 million of preference stock in 1999 and reduce by $500 million ComEd's outstanding short-term debt. During the year 1999, ComEd recorded an extraordinary loss related to the early redemptions of such long- term debt, which reduced net income on common stock by approximately $28 million (after-tax), or $0.13 per common share (diluted). ComEd also recorded $12 million (after-tax), or $0.05 per common share (diluted), for premiums paid in connection with the redemption of such 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 also repurchased shares of its common stock using $1,104 million of proceeds it received from ComEd's repurchase of its common stock held by Unicom. The balance of proceeds were used for the payment of fees and other debt 20 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued issuance costs totaling $23 million and a $17 million collateral requirement related to the transitional trust notes. See Note 6 for additional information regarding Unicom's share repurchases. 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. (4) Fossil Plant Sale. In December 1999, ComEd completed the sale of its fossil generating assets to EME for a cash purchase price of $4.8 billion. The fossil generating assets represent an aggregate generating capacity of approximately 9,772 megawatts. Just prior to the consummation of the fossil plant sale, ComEd transferred these assets to an affiliate, Unicom Investment. In consideration for the transferred assets, Unicom Investment paid ComEd consideration totalling approximately $4.8 billion in the form of a demand note in the amount of approximately $2.4 billion and an interest-bearing Note with a maturity of twelve years. Unicom Investment immediately sold the fossil plant assets to EME, in consideration of which Unicom Investment received approximately $4.8 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment paid the $2.4 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, including the share repurchases. Of the cash received by ComEd, $1.5 billion has been used to pay the costs and taxes associated with the fossil plant sale, including ComEd's contribution of $250 million of the proceeds to an environmental trust as required by the 1997 Act. 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 produced an after-tax gain of approximately $1.6 billion, after recognizing commitments associated with certain coal contracts ($350 million), recognizing employee-related costs ($112 million) and contributing to the environmental trust. The coal contract costs include the amortization of the remaining balance of ComEd's regulatory asset for unrecovered coal reserves of $178 million and the recognition of $172 million of settlement payments related to the above-market portion of coal purchase commitments ComEd assigned to EME at market value upon completion of the fossil plant sale. The severance costs included pension and post-retirement welfare benefit curtailment and special termination benefit costs of $51 million and transition, separation and retention payments of $61 million. A total of 1,730 fossil station employee positions were eliminated upon completion of the fossil plant sale on December 15, 1999. The employees whose positions were eliminated have been terminated, except for 17 affected employees who remain in an extended transition program. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the sale of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statement of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million. See Note 1, under "Regulatory Assets and Liabilities," for additional information. (5) Authorized Shares, Voting Rights and Stock Rights of Capital Stock. At March 31, 2000, Unicom's authorized shares consisted of 400,000,000 shares of common stock. The authorized 21 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued shares of ComEd preferred and preference stocks at March 31, 2000 were: preference stock--7,510,451 shares; $1.425 convertible preferred stock--52,753 shares; and prior preferred stock--850,000 shares. The preference and prior preferred stocks are issuable in series and may be issued with or without mandatory redemption requirements. Holders of outstanding Unicom shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders; and holders of outstanding ComEd shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders. All such shares have the right to cumulate votes in elections for the directors of the corporation which issued the shares. Pursuant to a plan adopted by the Unicom Board of Directors on February 2, 1998, each share of Unicom's common stock carries the right (referred to herein as a "Right") to purchase one-thousandth of one share of Unicom's common stock at a purchase price of $100 per whole share of common stock, subject to adjustment. The plan was amended on September 22, 1999 to render the Rights inapplicable to the transactions contemplated by the Merger Agreement. 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 January 2000, Unicom physically settled the forward share repurchase arrangements it had with financial institutions for the repurchase of 26.3 million Unicom common shares. Prior to settlement, the repurchase arrangements were recorded as a receivable on Unicom's Consolidated Balance Sheets based on the aggregate market value of the shares under the arrangements. In 1999, net unrealized losses of $44 million (after-tax), or $0.20 per common share were recorded related to the arrangements. The settlement of the arrangements in January 2000 resulted in a gain of $113 million (after-tax), which was recorded in the first quarter of 2000. The settlement of the arrangements resulted in a reduction in Unicom's outstanding common shares and common stock equity, effective January 2000. Consistent with Unicom's $1 billion share repurchase commitment in the pending merger agreement with PECO, Unicom has entered into repurchase agreements with financial institutions to repurchase shares of its common stock from the open-market. During the first quarter of 2000, Unicom expended $534 million to repurchase 14 million of its common shares pursuant to these agreements of which approximately $153 million was funded with proceeds from the 1998 issuance of transitional trust notes. 22 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued At March 31, 2000, shares of Unicom common stock were reserved for the following purposes: Long-Term Incentive Plan........................................ 1,787,144 Employee Stock Purchase Plan.................................... 323,797 Shareholder Rights Plan......................................... 400,000 Exchange for ComEd common stock not held by Unicom.............. 86,748 1996 Directors' Fee Plan........................................ 159,702 --------- 2,757,391 ========= Common stock issued/(reacquired) for the three months and twelve months ended March 31, 2000 and 1999 was as follows: Three Months Ended Twelve Months Ended March 31 March 31 --------------------- --------------------- 2000 1999 2000 1999 ----------- -------- ----------- -------- Shares of Common Stock Issued/(Reacquired): Long-Term Incentive Plan........ 444,619 148,813 747,307 468,828 Employee Stock Purchase Plan.... -- -- 89,500 94,270 Exchange for ComEd common stock not held by Unicom............. 902 (3,749) 2,197 5,531 1996 Directors' Fee Plan........ 2,757 2,244 6,034 10,903 Treasury Stock.................. (40,354,700) (85,424) (40,354,700) (264,406) ----------- -------- ----------- -------- (39,906,422) 61,884 (39,509,662) 315,126 =========== ======== =========== ======== (Thousands of Dollars) Changes in Common Stock Accounts: Total shares issued............. $ 4,095 $ 681 $ 24,704 $ 13,330 Net cash settlement of forward share repurchase contract...... -- (16,454) -- (16,454) Share repurchases............... (1,526,952) (3,295) (1,526,952) (10,095) Shares held by trustee for Unicom Stock Bonus Deferral Plan........................... -- -- -- 8,772 Other........................... 79 145 86 (83) ----------- -------- ----------- -------- $(1,522,778) $(18,923) $(1,502,162) $ (4,530) =========== ======== =========== ======== As of March 31, 2000 and December 31, 1999, 40,619,106 and 264,406 shares, respectively, of Unicom common stock were reacquired and held as treasury stock at a cost of $1,537 million and $10 million, respectively. At March 31, 2000 and December 31, 1999, 75,458 and 75,692, 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 March 31, 2000 and December 31, 1999, $837 million and $716 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 on each of the first three anniversaries of the option grant date. In addition, the stock options will become fully vested immediately if the holder dies, retires, is terminated by the Company, other than for cause, or qualifies for long-term disability. Options granted before July 22, 1998 also vest in full upon a change in control, 23 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued while options granted on or after July 22, 1998 vest in full if the option holder is terminated within 24 months after a change of control. Stock option transactions through March 31, 2000 are summarized as follows: Number of Weighted Average Options Exercise Price --------- ---------------- 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 year............................. 1,848,050 35.750 Exercised during the year........................... (313,231) 24.102 Expired/cancelled during year....................... (179,076) 33.551 --------- Outstanding as of December 31, 1999................. 4,498,636 31.719 Granted during the first quarter.................... 2,131,600 37.063 Exercised during the first quarter.................. (126,656) 26.587 Expired/cancelled during the first quarter.......... (66,794) 35.435 --------- Outstanding as of March 31, 2000.................... 6,436,786 33.551 ========= Of the stock options outstanding at March 31, 2000, 2,191,926 had vested with a weighted average exercise price of $30. 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 ----------------------- 2000 1999 1998 ------- ------- ------- Expected option life.................................... 7 years 7 years 7 years Dividend yield.......................................... 4.30% 4.50% 4.54% Expected volatility..................................... 21.97% 23.02% 21.95% Risk-free interest rate................................. 6.76% 4.83% 5.58% The estimated weighted average fair value for each stock option granted in the first quarter of 2000 and in years 1999 and 1998 was $8.19, $6.48 and $6.62, 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 their subsidiaries are eligible to participate in the ESPP. Unicom issued 89,500 and 94,270 shares of common stock for the twelve months ended March 31, 2000 and 1999, respectively, under the ESPP at a weighted average annual purchase price of $33.58 and $33.11, respectively. Unicom has adopted the disclosure-only provisions of SFAS No. 123. For financial reporting purposes, Unicom has adopted APB No. 25, and thus no compensation cost has been recognized for the stock option awards program or ESPP. If Unicom had recorded compensation expense for the stock options granted and the shares of common stock issued under the ESPP in accordance with SFAS No. 123 using the fair value based method of accounting, the additional charge to operations would have been $4 million (after-tax), or $0.02 per common share (diluted), and $3 million (after-tax), or $0.01 per common share (diluted), for the twelve months ended March 31, 2000 and 1999, respectively. 24 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (8) ComEd Preferred and Preference Stocks Without Mandatory Redemption Requirements. During the twelve months ended March 31, 2000 and 1999, 3,000,000 shares and 10,499,549 shares of preferred or preference stock without mandatory redemption requirements were redeemed, respectively, and no shares were issued. All series other than Series $1.425 have been redeemed. 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 March 31, 2000 and 1999, no shares of ComEd preference stock subject to mandatory redemption requirements were issued. During the twelve months ended March 31, 2000 and 1999, no shares and 1,358,560 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 1999. There were 700,000 shares of Series $6.875 preference stock outstanding at December 31, 1999, at an aggregate stated value of $69 million. This series was non-callable and was redeemed on May 1, 2000. The sinking fund price was $100 and the involuntary liquidation price was $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 circumstances. If the subordinated deferrable interest notes or debentures are redeemed, the Trusts 25 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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) 5.29% 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 ---------- $2,975,033 ========== 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 were used, as required, to redeem debt and equity. During 1999, ComEd redeemed or reacquired $1,101 million of long-term debt. Sinking fund requirements and scheduled maturities remaining through 2004 for ComEd's first mortgage bonds, transitional trust notes, sinking fund debentures and other long-term debt outstanding at March 31, 2000, after deducting deposits made for the retirement of sinking fund debentures, are summarized as follows: 2000--$589 million; 2001--$346 million; 2002--$645 million; 2003--$445 million; and 2004--$577 million. 26 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued At March 31, 2000, ComEd's outstanding first mortgage bonds maturing through 2004 were as follows: Series Principal Amount -------------------------------- ---------------------- (Thousands of Dollars) 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 5 3/10% due January 15, 2004....................... 26,000 -------- $656,000 ======== On April 15, 2000, ComEd redeemed $230 million of first mortgage bonds. Other long-term debt outstanding at March 31, 2000 is summarized as follows: Principal Debt Security Amount Interest Rate - ---------------------------------------- ---------- ------------------------------------------ (Thousands of Dollars) Unicom-- Loans Payable: Loan due January 1, 2003 $ 4,212 Interest rate of 8.31% Loan due January 1, 2004 5,021 Interest rate of 8.44% Loan due January 15, 2009 5,228 Interest rate of 8.30% Loan due January 15, 2009 6,568 Interest rate of 8.55% Loan due January 15, 2010 3,632 Interest rate of 8.65% Loan due January 15, 2010 6,880 Interest rate of 8.88% Loan due July 15, 2010 8,703 Interest rate of 7.98% ---------- $ 40,244 ---------- ComEd-- Notes: Medium Term Notes, Series 3N due vari- ous dates through October 15, 2004 $ 156,000 Interest rates ranging from 9.17% 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% ---------- $ 916,000 ---------- Purchase Contract Obligation due April 30, 2005 $ 254 Interest rate of 3.00% ---------- Total ComEd $ 916,254 ---------- Unicom Enterprises-- Notes: Unicom Thermal Guaranteed Senior Note due May 30, 2012 $ 120,000 Interest rate of 7.38% Northwind Midway Guaranteed Senior Note due June 30, 2023 11,523 Interest rate of 7.68% Unicom Mechanical Services Notes due various dates through October 31, 2002 44 Interest rate ranging from 2.90% to 9.40% ---------- Total Unicom Enterprises $ 131,567 ---------- Total Unicom $1,088,065 ========== 27 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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. 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 unused bank lines of credit of $800 million at March 31, 2000. Of that amount, $500 million expires on December 15, 2000 and $300 million expires on December 17, 2002. 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 and facility fees with respect to the line of credit. Unicom Enterprises has a $400 million credit facility which will expire December 15, 2000 of which $77 million was unused as of March 31, 2000. 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 $3.5 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 28 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued fuel and high-level radioactive waste. ComEd, as required by that Act, has entered into 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. The 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. On November 5, 1999, ComEd's case was stayed pending the decision of the United States Court of Appeals for the Federal Circuit in several similar cases brought by other utilities. (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 March 31, 2000 and December 31, 1999 was as follows: March 31, 2000 December 31, 1999 -------------------------------- -------------------------------- Unrealized Unrealized Gains/ Gains/ Cost Basis (Losses) Fair Value Cost Basis (Losses) Fair Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Short-term investments.. $ 57,558 $ 81 $ 57,639 $ 41,362 $ 95 $ 41,457 U.S. Government and Agency issues.......... 231,589 6,375 237,964 245,399 (1,993) 243,406 Municipal bonds......... 388,112 6,132 394,244 383,816 (940) 382,876 Corporate bonds......... 217,617 (5,760) 211,857 196,942 (5,699) 191,243 Common stock............ 897,855 744,338 1,642,193 832,802 732,893 1,565,695 Other................... 129,174 (1,766) 127,408 125,072 (3,209) 121,863 ---------- -------- ---------- ---------- -------- ---------- $1,921,905 $749,400 $2,671,305 $1,825,393 $721,147 $2,546,540 ========== ======== ========== ========== ======== ========== At March 31, 2000, the debt securities held by the nuclear decommissioning funds had the following maturities: Cost Basis Fair Value ---------- ---------- (Thousands of Dollars) Within 1 year....................................... $ 37,917 $ 38,228 1 through 5 years................................... 264,273 263,651 5 through 10 years.................................. 265,245 264,445 Over 10 years....................................... 410,870 412,100 29 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The net earnings of the nuclear decommissioning funds, which are recorded in the accumulated provision for depreciation, for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- --------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- (Thousands of Dollars) Gross proceeds from sales of securi- ties................................ $531,996 $ 385,688 $1,911,309 $1,753,169 Less cost based on specific identifi- cation.............................. 493,238 382,027 1,829,363 1,715,785 --------- --------- ---------- ---------- Realized gains on sales of securi- ties................................ $ 38,758 $ 3,661 $ 81,946 $ 37,384 Other realized fund earnings, net of expenses............................ 18,353 10,574 70,705 47,337 --------- --------- ---------- ---------- Total realized net earnings of the funds............................... $ 57,111 $ 14,235 $ 152,651 $ 84,721 Unrealized gains..................... 28,253 50,278 79,485 126,743 --------- --------- ---------- ---------- Total net earnings of the funds..... $ 85,364 $ 64,513 $ 232,136 $ 211,464 ========= ========= ========== ========== Securities held by certain trusts, which were established to provide for supplemental retirement benefits and executive medical claims, have been classified and accounted for as "available for sale." The estimated fair value of these securities, as determined by the trustee and based on published market data, as of March 31, 2000 was as follows: Cost Unrealized Fair Basis Gain Value ------- ---------- ------- (Thousands of Dollars) Short-term investments.............................. $ 198 $ -- $ 198 Registered investment companies..................... 21,735 14,175 35,910 ------- ------- ------- $21,933 $14,175 $36,108 ======= ======= ======= 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, 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 March 31, 2000 and December 31, 1999 were as follows: March 31, 2000 December 31, 1999 --------------------------------- --------------------------------- Unrealized Unrealized Carrying Gains/ Carrying Gains/ Fair Value (Losses) Fair Value Value (Losses) Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) ComEd preferred and preference stocks...... $ 71,153 $ 75 $ 71,228 $ 71,265 $ 58 $ 71,323 ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities............. $ 350,000 $ (15,798) $ 334,202 $ 350,000 $ (10,595) $ 339,405 Transitional trust notes.................. $2,963,030 $(149,007) $2,814,023 $3,057,112 $(163,600) $2,893,512 Long-term debt.......... $4,690,418 $ 13,357 $4,703,775 $4,810,108 $ (23,136) $4,786,972 30 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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 March 31, 2000 and December 31, 1999; therefore, the carrying value is equal to the fair value. (15) Pension and Postretirement Benefits. As of March 31, 2000, 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 March 31, 2000 and December 31, 1999 pension liabilities and related data were determined using the January 1, 1999 actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental retirement plan which covers any excess pension benefits that would be payable to management employees under the qualified plan but which are limited by the Internal Revenue Code. 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 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. Generally, the employees become eligible for postretirement benefits if they retire no earlier than 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 March 31, 2000 and December 31, 1999 postretirement benefit liabilities and related data were determined using the January 1, 1999 actuarial valuations. 31 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Reconciliations of the beginning and ending balances of the projected pension benefit obligation and the accumulated postretirement benefit obligation, and the funded status of these plans for the three months ended March 31, 2000 and twelve months ended December 31, 1999 were as follows: Three Months Ended March Twelve Months Ended 31, 2000 December 31, 1999 -------------------------- -------------------------- Other Other Pension Postretirement Pension Postretirement Benefits Benefits Benefits Benefits ---------- -------------- ---------- -------------- (Thousands of Dollars) Change in benefit obligation - ----------------- Benefit obligation at beginning of period.... $4,094,000 $1,151,000 $4,326,000 $1,236,000 Service cost............ 21,000 8,000 120,000 41,000 Interest cost........... 77,000 22,000 285,000 82,000 Plan participants' con- tributions............. -- 1,000 -- 4,000 Actuarial loss/(gain)... 3,000 (1,000) (458,000) (188,000) Benefits paid........... (65,000) (13,000) (241,000) (51,000) Special termination ben- efits.................. -- -- 62,000 27,000 ---------- ---------- ---------- ---------- Benefit obligation at end of period......... $4,130,000 $1,168,000 $4,094,000 $1,151,000 ---------- ---------- ---------- ---------- Change in plan assets - --------------------- Fair value of plan as- sets at beginning of period................. $4,268,000 $ 948,000 $4,015,000 $ 865,000 Actual return on plan assets................. 131,000 24,000 491,000 106,000 Employer contribution... -- -- 3,000 24,000 Plan participants' con- tributions............. -- 1,000 -- 4,000 Benefits paid........... (65,000) (13,000) (241,000) (51,000) ---------- ---------- ---------- ---------- Fair value of plan as- sets at end of period. $4,334,000 $ 960,000 $4,268,000 $ 948,000 ---------- ---------- ---------- ---------- Plan assets greater/(less) than benefit obligation..... $ 204,000 $ (208,000) $ 174,000 $ (203,000) Unrecognized net actuar- ial gain............... (549,000) (554,000) (522,000) (556,000) Unrecognized prior serv- ice cost/(asset)....... (50,000) 40,000 (51,000) 41,000 Unrecognized transition obligation/(asset)..... (76,000) 271,000 (79,000) 276,000 ---------- ---------- ---------- ---------- Accrued liability for benefits.............. $ (471,000) $ (451,000) $ (478,000) $ (442,000) ========== ========== ========== ========== The assumed discount rate used to determine the benefit obligation as of March 31, 2000 and December 31, 1999 was 7.75%. The fair value of plan assets excludes $27 million and $25 million held in grantor trust as of March 31, 2000 and December 31, 1999, respectively, for the payment of benefits under the supplemental plan and $9 million held in a grantor trust as of March 31, 2000 and December 31, 1999 for the payment of postretirement medical benefits. 32 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The components of pension and other postretirement benefit costs, portions of which were recorded as components of construction costs, for the three months and twelve months ended March 31, 2000 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- --------------------- 2000 1999 2000 1999 --------- --------- --------- ---------- (Thousands of Dollars) Pension Benefit Costs - --------------------- Service cost..................... $ 21,000 $ 31,000 $ 110,000 $ 115,000 Interest cost on projected bene- fit obligation.................. 77,000 71,000 291,000 274,000 Expected return on plan assets... (98,000) (90,000) (370,000) (346,000) Amortization of transition asset. (3,000) (3,000) (13,000) (12,000) Amortization of prior service as- set............................. (1,000) (1,000) (4,000) (4,000) Recognized loss/(gain)........... (1,000) 1,000 1,000 3,000 Curtailment loss................. -- -- 16,000 -- --------- --------- --------- ---------- Net periodic benefit cost....... $ (5,000) $ 9,000 $ 31,000 $ 30,000 ========= ========= ========= ========== Other Postretirement Benefit Costs - ---------------------------- Service cost..................... $ 8,000 $ 10,000 $ 39,000 $ 39,000 Interest cost on accumulated ben- efit obligation................. 22,000 21,000 83,000 80,000 Expected return on plan assets... (21,000) (19,000) (78,000) (71,000) Amortization of transition obli- gation.......................... 5,000 6,000 21,000 23,000 Amortization of prior service cost............................ 1,000 1,000 4,000 4,000 Recognized gain.................. (6,000) (3,000) (17,000) (12,000) Severance plan cost.............. -- -- 1,000 5,000 Curtailment loss................. -- -- 35,000 -- --------- --------- --------- ---------- Net periodic benefit cost....... $ 9,000 $ 16,000 $ 88,000 $ 68,000 ========= ========= ========= ========== 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 2000, 1999 and 1998: Other Postretirement Pension Benefits Benefits ----------------- ----------------- 2000 1999 1998 2000 1999 1998 ----- ----- ----- ----- ----- ----- Annual discount rate....................... 7.75% 6.75% 7.00% 7.75% 6.75% 7.00% Annual long-term rate of return on plan as- sets...................................... 9.50% 9.25% 9.50% 9.23% 8.97% 9.20% Annual rate of increase in future compensa- tion levels............................... 4.00% 4.00% 4.00% -- -- -- The pension and other postretirement benefit curtailment losses for the twelve months ended March 31, 2000 represent the recognition of prior service costs and transition obligations, and an increase in the benefit obligations resulting from special termination benefits, related to the reduction in the number of employees due to ComEd's December 1999 sale of the fossil stations. The health care cost trend rates used to measure the expected cost of the postretirement medical benefits are assumed to be 7.5% for pre-Medicare recipients and 5.5% for Medicare recipients for 2000. 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 33 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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...................................... $ 23,000 $ (18,000) Effect on postretirement benefit obligation as of March 31, 2000.................................. 195,000 (155,000) 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 $7 million for the three months ended March 31, 2000 and 1999, and $32 million and $31 million for the twelve months ended March 31, 2000 and 1999, respectively. (16) Separation Plan Costs. O&M expenses included $3 million and $0.3 million for the three months ended March 31, 2000 and 1999, respectively, and $12 million and $33 million for the twelve months ended March 31, 2000 and 1999, respectively, for costs related to voluntary separation offers to certain employees of ComEd, other than costs related to the fossil plant sale, as well as certain other employee-related costs. Such costs resulted in charges of $2 million (after-tax), or $0.01 per common share (diluted) and $0.2 million (after-tax), or less than $0.01 per common share (dilutive) for the three months ended March 31, 2000 and 1999, respectively, and $7 million (after-tax), or $0.04 per common share (diluted), and $20 million (after-tax), or $0.09 per common share (diluted), for the twelve months ended March 31, 2000 and 1999, respectively. See Note 4 regarding employee separation costs related to the fossil plant sale. (17) Income Taxes. The components of the net deferred income tax liability at March 31, 2000 and December 31, 1999 were as follows: March 31, December 31, 2000 1999 ---------- ------------ (Thousands of Dollars) Deferred income tax liabilities: Accelerated cost recovery and liberalized deprecia- tion, net of removal costs.......................... $2,723,915 $2,815,972 Overheads capitalized................................ 157,101 159,836 Repair allowance..................................... 218,674 221,502 Regulatory assets recoverable through future rates... 685,327 688,946 Deferred income tax assets: Postretirement benefits.............................. (377,790) (376,538) Unamortized investment tax credits................... (159,420) (161,756) Regulatory liabilities to be settled through future rates............................................... (581,963) (596,157) Nuclear plant closure................................ (5,454) (5,456) Other--net........................................... (262,681) (321,522) ---------- ---------- Net deferred income tax liability..................... $2,397,709 $2,424,827 ========== ========== The $27 million decrease in the net deferred income tax liability from December 31, 1999 to March 31, 2000 is comprised of a $40 million credit to net deferred income tax expense, a $11 million increase in regulatory assets net of regulatory liabilities pertaining to income taxes for the period, and $2 million related to other items. The amount of accelerated cost recovery and liberalized depreciation included in deferred income tax liabilities for both periods includes amounts related to the regulatory 34 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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 to continuing operations for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- --------------------- 2000 1999 2000 1999 --------- --------- ----------- -------- (Thousands of Dollars) Operating income: Current income taxes............ $ 74,779 $ 108,879 $ 1,728,182 $367,363 Deferred income taxes........... (41,370) (45,615) (1,398,839) 9,917 Investment tax credits de- ferred--net.................... (5,499) (7,021) (24,306) (27,591) Other (income) and deductions: Current income taxes............ (4,952) 2,668 (6,998) (10,496) Deferred income taxes........... 13,632 837 36,838 13,546 Investment tax credits.......... (2,153) (1,828) (52,064) (6,463) --------- --------- ----------- -------- Net income taxes charged to con- tinuing operations.............. $ 34,437 $ 57,920 $ 282,813 $346,276 ========= ========= =========== ======== Provisions for current and deferred federal and state income taxes and amortization of investment tax credits resulted in the following effective income tax rates for the three months and twelve months ended March 31, 2000 and 1999: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Net income before extraordinary items............................. $ 195,081 $ 97,149 $ 695,177 $553,618 Net income taxes charged to contin- uing operations................... 34,437 57,920 282,813 346,276 Provision for dividends on ComEd preferred and preference stocks... 1,222 15,297 9,681 57,634 --------- --------- --------- --------- Pre-tax income before extraordinary items and provision for dividends. $230,740 $ 170,366 $ 987,671 $957,528 ========= ========= ========= ========= Effective income tax rate.......... 14.9% 34.0% 28.6% 36.2% ========= ========= ========= ========= The principal differences between net income taxes charged to continuing operations and the amounts computed at the federal statutory rate of 35% for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Federal income taxes computed at statutory rate..................... $ 80,759 $ 59,628 $ 345,685 $ 335,135 Amortization of investment tax credits, net of deferred income taxes.............................. (5,235) (5,711) (47,740) (22,006) State income taxes, net of federal income taxes....................... 4,090 7,910 42,075 42,932 Net gain on forward share repurchase contract........................... (39,575) (4,805) (19,380) (4,805) Earnings on non-tax qualified decommissioning fund............... 406 -- (8,509) -- Differences between book and tax accounting, primarily property- related deductions................. (6,008) 898 (29,318) (4,980) --------- -------- --------- --------- Net income taxes charged to continuing operations.............. $ 34,437 $ 57,920 $ 282,813 $ 346,276 ========= ======== ========= ========= 35 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes, for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Twelve Months Ended Ended March 31 March 31 ------------------ -------------------- 2000 1999 2000 1999 -------- -------- --------- --------- (Thousands of Dollars) Illinois public utility revenue........ $ (3,685) $ 1,495 $ (4,199) $ 70,295 Illinois electricity distribution tax.. 25,603 28,337 111,507 111,644 Municipal utility gross receipts....... 27,450 24,758 102,392 138,453 Real estate............................ 36,066 33,394 117,880 123,424 Municipal compensation................. 22,273 18,471 77,150 79,653 Energy assistance and renewable energy charge................................ 8,799 8,669 34,553 33,841 Other--net............................. 21,882 17,236 75,197 67,399 -------- -------- --------- --------- $138,388 $132,360 $ 514,480 $ 624,709 ======== ======== ========= ========= The 1997 Act changed the nature of several state and municipal taxes that are collected through customer billings. Before August 1998, the utility taxes were assessed against the utility. Effective August 1998, the utility taxes are assessed on the electric consumer rather than the utility. Accordingly, ComEd records the collections as liabilities and no longer records the taxes collected through billings as revenues and tax expense. The reduction in operating revenues and taxes, except income taxes, due to the change in presentation for such taxes was approximately $82 million for the twelve months ended March 31, 2000 compared to the same period ended March 31, 1999. This change in presentation for such taxes did not have an effect on operations. See Note 21 for additional information regarding Illinois invested capital taxes. (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 $267 million, consisting of intermediate term notes, to finance the transactions. With respect to the intermediate term notes, $75 million expires on November 23, 2000, $40 million expires on November 23, 2001, $77 million expires on November 23, 2002 and $75 million expires on November 23, 2003. At March 31, 2000, ComEd's obligation to the lessor for leased nuclear fuel amounted to approximately $270 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 March 31, 2000, future minimum rental payments, net of executory costs, for capital leases are estimated to aggregate to $298 million, including $124 million in 2000, $94 million in 2001, $48 million in 2002 and $32 million in 2003. The estimated interest component of such rental payments aggregates $27 million. The estimated portions of obligations due within one year under capital leases of $141 million and $108 million at March 31, 2000 and December 31, 1999, respectively, were included in current liabilities on the Consolidated Balance Sheets. Future minimum rental payments at December 31, 1999 for operating leases are estimated to aggregate to $279 million, including $21 million in 2000, $25 million in 2001, $25 million in 2002, $23 million in 2003, $22 million in 2004 and $163 million in 2005-2043. 36 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (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 $28 million at March 31, 2000. (21) Commitments and Contingent Liabilities. Purchase commitments, principally related to construction, nuclear fuel, and coal in support of certain power purchase agreements approximated $651 million at March 31, 2000, comprised of $594 million for ComEd, $10 million for UT Holdings, $16 million for Unicom Energy Services and $31 million for Unicom Power Holdings. In addition, ComEd has substantial commitments for expected capacity payments and fixed charges related to power purchase agreements. Upon completion of the fossil plant sale with EME, ComEd entered into arrangements to assign or settle a substantial portion of its coal purchase commitments and entered into purchase power agreements with EME. 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 $33 million for primary property damage, $29 million for excess property damage and $10 million for replacement power. 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 $934 million in the event of an incident, limited to a maximum of $110 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. Three of ComEd's wholesale municipal customers filed a complaint and request for refund with the FERC alleging that ComEd failed to properly adjust their rates, as provided for under the terms of their electric service contracts, to track certain refunds made to ComEd's retail customers in the years 1992 through 1994. In the third quarter of 1998, the FERC granted the complaint and directed that refunds be made, with interest. ComEd filed and was granted a request for rehearing for purposes 37 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued of reconsideration with the FERC. If the order is upheld, ComEd must make refunds within 15 days of the resolution for rehearing. ComEd's management believes an adequate reserve has been established in connection with this case. 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 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. On February 11, 2000, the Tenth Circuit Court of Appeals agreed with Cotter, found that the trial judge had erred in critical rulings and reversed the jury verdict, remanding the case for new trial. A case involving the next group of plaintiffs is set for trial in federal district court in Denver on October 2, 2000. Although ComEd sold its investment in Cotter in February 2000, ComEd will continue to be liable for any court verdicts in favor of the plaintiffs. The other 1991 cases will necessarily involve the resolution of numerous contested issues of law and fact. It is Unicom and ComEd's assessment that these actions will not have a material impact on their financial position or results of operations. In August 1999, three class action lawsuits were filed against ComEd related to a series of service interruptions during the summer of 1999. The combined effect of these events resulted in over 100,000 customers losing service. On August 12, 1999, service was interrupted to ComEd customers on the near north and near west side of the City's central business district. While major commercial customers were affected, all service was restored on the same date. The class action complaints have been consolidated and seek to recover damages for personal injuries and property damage, as well as economic loss for these events. Further, ComEd initiated expedited claim settlements for those with primarily food spoilage claims. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. The lawsuits are pending in the Circuit Court of Cook County. ComEd has filed a motion challenging the legal sufficiency of the consolidated complaints. The plaintiff's response is overdue and the motion to dismiss is currently scheduled to be argued on May 23, 2000. ComEd's management believes adequate reserves have been established in connection with these cases. Following the summer 1999 service interruptions, the ICC opened a three- phase investigation of the design and reliability of ComEd's transmission and distribution system. At the conclusion of each phase of the investigation, the ICC will issue reports that will include specific recommendations for ComEd and a timetable for executing the recommendations. Although the recommendations are not legally binding on ComEd, the ICC may enforce the recommendations through litigation. The report on Phase I of the investigation was released the week of January 3, 2000, which focused on the outages of July and August 1999. The first of five reports on Phase II and Phase III, focusing on the transmission and distribution system, is anticipated in late spring. The investigation is expected to conclude by early 2001. 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 38 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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, and against ComEd for a declaratory order 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 by Order dated December 1, 1999. On April 14, 2000, the developer of one such facility requested leave to amend its complaint to allege claims for damages against ComEd based on breach by ComEd of an alleged contractual obligation to pay for electricity purchased from that developer at the state-subsidized rate. ComEd has objected to the developer's request for leave to amend, and intends vigorously to contest any assertion by such developer that it is entitled to any payment in excess of ComEd's avoided costs. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. ComEd generally did not operate MGPs as a corporate entity but did, however, acquire MGP sites as part of the absorption of smaller utilities. Approximately half of these sites were transferred to then Northern Illinois Gas Company (Nicor Gas) as part of a general conveyance in 1954. ComEd also acquired former MGP sites as vacant real estate on which ComEd facilities have been constructed. To date, ComEd has identified 44 former MGP sites for which it may be liable for remediation. In the fourth quarter of 1999, ComEd re- evaluated its environmental remediation strategies. As a result of this re- evaluation, ComEd's current best estimate of its cost of former MGP site investigation and remediation is $93 million in current-year (2000) dollars (reflecting an estimated inflation rate of 3.0% and a discount rate of 6.5%). Such estimate, reflecting an estimated inflation rate of 3% and before the effects of discounting, is $182 million. It is expected that the costs associated with investigation and remediation of former MGP sites will be substantially incurred through 2012, however monitoring and certain other costs are expected to be incurred through 2042. ComEd's current estimate of its costs of former MGP site investigation and remediation of $93 million is included in other noncurrent liabilities on the Consolidated Balance Sheets as of March 31, 2000. The increase in ComEd's estimated costs of former MGP sites of $68 million in the fourth quarter of 1999 was included in O & M expenses on Unicom and ComEd's Statements of Consolidated Operations. In addition, as of March 31, 2000 and December 31, 1999, 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 sites other than former MGP sites. These cost estimates are based on currently available information regarding the responsible parties likely to share in the costs of responding to site contamination, the extent of contamination at sites for which the investigation has not yet been completed and the cleanup levels to which sites are expected to have to be remediated. While ComEd may have rights of reimbursement under insurance policies, amounts that may be recoverable from other entities are not considered in establishing the estimated liability for the environment remediation costs. The IDR has issued Notices of Tax Liability to ComEd alleging deficiencies in Illinois invested capital tax payments for the years 1988 through 1997. The alleged deficiencies, including interest and 39 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued penalties, totaled approximately $53 million as of March 31, 2000. ComEd has protested the notices, and the matter is currently pending before the IDR's Office of Administrative Hearings. Interest will continue to accumulate on the alleged tax deficiencies. The 1997 Act also committed ComEd to spend at least $2 billion from 1999 through 2004 on transmission and distribution facilities outside of the City. (22) Segment Reporting. Unicom's reportable operating segments as determined under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information include its regulated electric utility and its unregulated business operations. Unicom's reportable segments are managed separately because of their different regulatory and operating environments. Unicom evaluates their performance based on net income. ComEd is an electric utility which is engaged in the generation, purchase, transmission, distribution and sale of electric energy in Northern Illinois. ComEd's rates and services are subject to federal and state regulations. Unicom's unregulated business operations, including energy services and development of new business ventures, are not subject to utility regulation by federal or state agencies. Prior to 1999, unregulated business operations were predominately in a developmental stage and did not meet the revenue, asset or net income criteria for a reportable segment under SFAS 131. However, as a result of the December 1999 fossil plant sale, as described in Note 4, the assets of unregulated businesses exceeded 10% of Unicom's total assets and, as such, constitute a reportable segment. The assets of the unregulated businesses include approximately $1.82 billion at March 31, 2000 representing special deposits and unused cash proceeds resulting from the fossil plant sale. 40 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The accounting policies of the segments are the same as those described in Note 1. Unicom's financial data for business segments are as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Thousands of Dollars) Operating Revenue: Electric Utility......... $ 1,549,868 $ 1,528,484 $ 6,778,841 $ 6,949,332 Unregulated Businesses... 107,918 9,320 189,088 28,099 Intersegment Revenue..... 10,976 316 37,335 5,734 Elimination.............. (10,976) (316) (37,335) (5,734) ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 1,657,786 $ 1,537,804 $ 6,967,929 $ 6,977,431 =========== =========== =========== =========== Depreciation, Amortization and Decommissioning: Electric Utility......... $ 372,016 $ 229,769 $ 978,392 $ 919,614 Unregulated Businesses... 2,681 1,563 8,221 5,957 ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 374,697 $ 231,332 $ 986,613 $ 925,571 =========== =========== =========== =========== Interest and Dividend Income: Electric Utility......... $ 67,360 $ 17,647 $ 108,864 $ 33,054 Unregulated Businesses... 41,378 854 50,010 4,213 Elimination.............. (54,326) (291) (64,840) (1,088) ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 54,412 $ 18,210 $ 94,034 $ 36,179 =========== =========== =========== =========== Interest Expense--Net: Electric Utility......... $ 130,060 $ 142,511 $ 532,901 $ 477,110 Unregulated Businesses... 59,600 4,290 84,542 15,896 Elimination.............. (54,326) (291) (64,840) (1,088) ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 135,334 $ 146,510 $ 552,603 $ 491,918 =========== =========== =========== =========== Income Tax Expense/(Benefit): Electric Utility......... $ 50,999 $ 70,579 $ 332,640 $ 404,845 Unregulated Businesses... (11,201) (5,899) (25,407) (31,312) ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 39,798 $ 64,680 $ 307,233 $ 373,533 =========== =========== =========== =========== Net Income: Electric Utility......... $ 206,326 $ 94,401 $ 734,654 $ 616,774 Unregulated Businesses... (13,989) (24,758) (42,294) (90,662) ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 192,337 $ 69,643 $ 692,360 $ 526,112 =========== =========== =========== =========== Total Assets: Electric Utility......... $20,943,770 $23,693,693 $20,943,770 $23,693,693 Unregulated Businesses... 3,472,796 1,085,269 3,472,796 1,085,269 Elimination.............. (3,260,676) (789,433) (3,260,676) (789,433) ----------- ----------- ----------- ----------- Consolidated Unicom....... $21,155,890 $23,989,529 $21,155,890 $23,989,529 =========== =========== =========== =========== Capital Expenditures: Electric Utility......... $ 260,619 $ 228,416 $ 1,115,601 $ 960,059 Unregulated Businesses... 69,259 2,659 185,708 21,846 ----------- ----------- ----------- ----------- Consolidated Unicom....... $ 329,878 $ 231,075 $ 1,301,309 $ 981,905 =========== =========== =========== =========== 41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in the Electric Utility Industry Unicom and its predominant business, electric energy generation, transmission and distribution, are in a period of fundamental change. These changes are attributable to changes in technology and regulation. Federal law and regulations have been amended to provide for open transmission system access, and various states, including Illinois, are considering, or have adopted, new regulatory structures to allow access by some or all customers to energy suppliers, in addition to the local utility. Electric Utility Industry. The electric utility industry historically has consisted of vertically integrated companies which combine generation, transmission and distribution assets; serve customers within relatively defined service territories; and operate under extensive regulation with respect to rates, operations and other matters. Utilities have operated under a regulatory compact with the state, with a statutory obligation to serve all of the electricity needs within their service territory in a nondiscriminatory manner. Historically, investment and operating decisions have been made based upon the utilities' respective assessment of the current and projected needs of their customers. In view of this obligation, regulation has focused on investment and operating costs, and rates have been based on recovery of some or all of such prudently incurred costs plus a return on invested capital. Such rate regulation, and the ability of utilities to recover investment and other costs through rates, have provided the basis for recording certain costs as regulatory assets. These assets represent costs which are allocated over future periods reflecting related regulatory treatment, rather than expensed in the current period. Federal Regulation. The Federal Energy Policy Act of 1992, among other things, empowered 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. As a result of the 1997 Act 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 provides for, among other things, gradual customer access to other electric suppliers or a power purchase option which allows the purchase of electric energy from ComEd at 42 market based prices, and the collection of a CTC from customers who choose to purchase electric energy from a RES or elect the power purchase option during a transition period that extends through 2006. Effective October 1, 1999, the CTC was established in accordance with a formula defined in the 1997 Act. The CTC, which is 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. On October 1, 1999, more than 41,000 non-residential customers became eligible to choose a new electric supplier or elect the purchase power option. The remainder of the non-residential customers will become eligible to choose an electric supplier or the purchase power option between June 1 and December 31, 2000. As of March 31, 2000, over 5,900 non-residential customers, representing approximately 13 percent of ComEd's retail kilowatthour sales for the twelve months prior to the introduction of open access, elected to receive their electric energy from a RES or chose the purchase power option. The impact of customer choice on results of operations will depend on various factors, including the extent to which customers elect to receive energy from a RES or the purchased power option, the development of a competitive market, the market price for energy, the extent to which ComEd develops new sources of revenue and the results of cost control efforts. Because of the inherent uncertainty in these factors, ComEd is unable to predict the long term impact of customer choice on results of operations. However, ComEd does not expect customer choice to have a material effect in the near term as a result of the collection of CTCs as provided by 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 a RES can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based, regulated rates. The 1997 Act committed ComEd to spend at least $2 billion during the period 1999 through 2004 on transmission and distribution facilities outside of the City and to contribute $250 million to an environmental trust, as a result of closing of the fossil plant sale. The 1997 Act also provides for a 15% residential base rate reduction which became effective August 1, 1998 and an additional 5% residential base rate reduction in October 2001. ComEd's operating revenues were reduced by approximately $170 million in 1998 due to the 15% residential base rate reduction. The 15% rate reduction further reduced ComEd's operating revenues by approximately $226 million in 1999, compared to 1998 rate levels. Notwithstanding the 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. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity for ComEd 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 43 basis. The earnings sharing provision is applicable only to ComEd's earnings. In accordance with the provisions of the 1997 Act, 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. ComEd's returns on average common equity for the years 1999 and 1998 were 11.56% and 10.86%, respectively. The average return of 11.21% for the two year period ended December 31, 1999 equaled the threshold return for that period under the earnings provisions of the 1997 Act. ComEd does not currently expect to trigger the earnings sharing provisions of the 1997 Act in the years 2000 and beyond. 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. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Capital Resources" below, and Notes 3 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, reliability requirement 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 3 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: (1) provide a reliable supply of electricity as the competitive marketplace evolves, (2) become a top quartile operator of competitive nuclear plants, (3) deliver competitive earnings while restructuring the balance sheet to reflect the realities of the marketplace, (4) expand the offering of energy-related products and services, and (5) transform the corporate culture of 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 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 44 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 joined with other Midwestern utilities to design the Midwest ISO in 1998. These utilities have agreed to place their transmission systems under the control of the Midwest ISO as soon as it achieves operational status in 2001. The Midwest ISO, a key element in accommodating the FERC-directed restructuring of the electric industry, is expected to promote enhanced reliability of the transmission system, equal access to the transmission system, and foster increased competition. The Midwest ISO will control the transmission system and will have authority to require modification in the operation of generators connected to that system during system emergencies. ComEd, like other utilities, 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 1999, ComEd and other Midwestern utilities filed a request with the FERC for a Declaratory Order approving a different organizational template for the regional transmission grid. The request sought approval for the creation of for-profit transmission companies, operating under the general oversight of the Midwest ISO, but fully separated from their previous vertically integrated utilities. The request was approved, in part, on February 24, 2000, subject to further development of its elements. In the absence of an ISO-related power exchange, ComEd has also agreed to cooperate with APX in the creation of the first electronic energy 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 has made a $3 million venture capital investment in APX in order to help finance its expansion in Midwest. Neither ComEd nor Unicom will 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 will be an active participant in the power exchange which opened in Illinois in the fourth quarter of 1999. Merger Agreement. In September 1999, the Boards of Directors of Unicom and PECO approved a merger of equals that will create a new holding company, Exelon. The merger is conditioned, among other things, upon the approvals of the shareholders of both companies and by various regulatory bodies. The merger was approved unanimously on April 12, 2000, without conditions, by the FERC. Aspects of the merger still must be approved by other federal and state regulatory agencies, including the SEC, the NRC, the Federal Communications Commission and the Pennsylvania Public Utility Commission and also by shareholders of both companies. In Pennsylvania, a settlement has been reached with virtually all intervenors, and the regulatory process in Illinois has been completed. The merger is currently expected to be completed in the latter half of 2000. Under the merger agreement, as amended and restated in January 2000, PECO and ComEd will become the principal utility subsidiaries of Exelon. This result will be achieved by a mandatory exchange of the outstanding common stock of PECO for common stock of Exelon, and a merger of Unicom with and into Exelon wherein holders of Unicom common stock will receive 0.875 shares of Exelon common stock plus $3.00 in cash for each of their shares of Unicom common stock. The merger transaction will be accounted for as a purchase of Unicom by PECO. Prior to the consummation of the merger, Unicom expects to repurchase approximately $1.0 billion of its outstanding common shares. These share repurchases are in addition to 26.3 million shares 45 of Unicom common stock that Unicom repurchased in January 2000 upon settlement of certain forward purchase contracts. The $1.0 billion additional share repurchases will be funded from available funds, including funds resulting from the fossil plant sale. See Note 6 of Notes to Financial Statements for additional information. Following the consummation of the merger, it is anticipated that both ComEd and PECO will transfer their generating assets and wholesale power marketing operations to subsidiaries. Following those transfers, these subsidiaries will be transferred to Exelon and ultimately will be combined into a single power generation and marketing company ("Genco"), which will be a direct subsidiary of Exelon. In ComEd's case, the transfer will include its Braidwood, Byron, Dresden, LaSalle and Quad Cities generating stations (nuclear generating stations) representing an aggregate generating capability of 9,566 megawatts, its Zion station, its rights and obligations under various power purchase agreements, the assets constituting its nuclear decommissioning trusts and its wholesale power marketing business. Genco will assume responsibility for the decommissioning of the nuclear generating stations and Zion Station, subject to an obligation of ComEd to continue collecting decommissioning-related charges from its customers. Genco will enter into a power purchase agreement with ComEd in which Genco will undertake to supply ComEd's full requirements for electric energy through 2004 and all of ComEd's requirements up to the available capacity of the nuclear generating stations in 2005 and 2006. The proposed transfer is subject to various regulatory approvals. The Amended and Restated Agreement and Plan of Exchange and Merger, dated as of January 7, 2000, was filed on January 13, 2000 by Unicom with the SEC as an exhibit to a Form 8-K, and reference to that filing is made for more detailed information. Fossil Plant Sale. In December 1999, ComEd completed the sale of its fossil generating assets to EME for a cash purchase price of $4.8 billion. The fossil plant assets represent an aggregate generating capacity of approximately 9,772 megawatts. Just prior to the consummation of the fossil plant sale, ComEd transferred these assets to an affiliate, Unicom Investment. In consideration for the transferred assets, Unicom Investment paid ComEd consideration totalling approximately $4.8 billion in the form of a demand note in the amount of approximately $2.4 billion and an interest-bearing Note with a maturity of twelve years. Unicom Investment immediately sold the fossil plant assets to EME, in consideration of which Unicom Investment received approximately $4.8 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment paid the $2.4 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, including share repurchases. Of the cash received by ComEd, $1.5 billion has been used to pay the costs and taxes associated with the fossil plant sale including ComEd's contribution of $250 million to an environmental trust as required by the 1997 Act. 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 produced an after-tax gain of approximately $1.6 billion, after recognizing commitments associated with certain coal contracts ($350 million), recognizing employee-related costs ($112 million) and contributing to the environmental trust. The coal contract costs include the amortization of the remaining balance of ComEd's regulatory asset for unrecovered coal reserves of $178 million and the recognition of $172 million of settlement payments related to the above-market portion of coal purchase commitments ComEd assigned to EME at market value upon completion of the fossil plant sale. The severance costs included pension and post-retirement welfare benefit curtailment and special termination benefit costs of $51 million and transition, separation and retention payments of $61 46 million. A total of 1,730 fossil station employee positions were eliminated upon completion of the fossil plant sale on December 15, 1999. The employees whose positions were eliminated have been terminated, except for 17 affected employees who remain in an extended transition program. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the sale of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statement of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million. As part of the sale transaction, ComEd entered into transitional, limited term power purchase agreements with the buyer. Such purchase power agreements will increase ComEd's purchased power costs. Liquidity and Capital Resources UTILITY OPERATIONS Construction Program. ComEd has a construction program for the year 2000, which consists principally of improvements to its existing nuclear production, transmission and distribution facilities. The program, as currently approved by ComEd, includes the following estimated expenditures (excluding nuclear fuel expenditures of approximately $260 million). 2000 ------ (Millions of Dollars) Nuclear................................................. $ 215 Transmission and Distribution........................... 650 General................................................. 167 ------ $1,032 ====== The construction program above reflects an evaluation of the expenditures required to support ComEd's intensive efforts to improve the reliability of its transmission and distribution systems following record peak demand levels and system outages experienced during the summer of 1999. ComEd is currently evaluating its construction programs for the years 2001 and 2002. The results of this planning process cannot be determined at this time but expenditures for the transmission and distribution program are expected to trend downward from 2000 expenditure levels. ComEd's forecasts of peak load for its traditional service territory indicate a need for additional resources to meet demand, through generating capacity, equivalent purchased power and/or the development of additional demand-side management resources, in 2000 and each year thereafter for the foreseeable future. ComEd believes that adequate resources, including cost- effective demand-side management resources, nonutility generation resources, power purchases and generation resources from ARES, can be obtained in sufficient quantities to meet such forecasted needs. See "Unregulated Operations," subcaption "Construction Program" below, for additional information. Purchase commitments for ComEd, principally related to construction, nuclear fuel and coal in support of certain power purchase agreements approximated $594 million at March 31, 2000. In addition, ComEd's estimated commitments for expected capacity payments and fixed charges related to power purchase agreements were as follows: 47 Commitments(1) Period ($Millions) ------ -------------- 2000............................... $ 748 2001............................... 616 2002............................... 474 2003-2004.......................... 703 2005-2012.......................... 1,039 ------ $3,580 ====== -------- (1) Capacity payments may be adjusted based on certain conditions. No estimate of future cost escalation has been made. 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, were, as required, used to redeem $1,101 million of long- term debt and $607 million of preference stock in 1999 and reduce ComEd's outstanding short-term debt by $500 million. In 1999, ComEd recorded an extraordinary loss related to the early redemptions of such long-term debt, which reduced net income on common stock by approximately $28 million (after- tax), or $0.13 per common share (diluted). ComEd also recorded $12 million (after-tax), or $0.05 per common share (diluted), for premiums paid in connection with the redemption of preference stock. Unicom has also expended $1,104 million to repurchase its common stock using proceeds it received from ComEd's repurchase of its common stock held by Unicom. The balance of the proceeds were used for the payment of fees and other debt issuance costs totaling $23 million and a $17 million collateral requirement related to the transitional trust notes. In January 2000, Unicom physically settled the forward share repurchase arrangements it had with financial institutions for the repurchase of 26.3 million Unicom common shares. Prior to settlement, the repurchase arrangements were recorded as a receivable on Unicom's Consolidated Balance Sheets based on the aggregate market value of the shares under the arrangements. In 1999, net unrealized losses of $44 million (after-tax), or $0.20 per common share were recorded related to the arrangements. The settlement of the arrangements in January 2000 resulted in a gain of $113 million (after-tax), which was recorded in the first quarter of 2000. The settlement of the arrangements resulted in a reduction in Unicom's outstanding common shares and common stock equity, effective January 2000. Consistent with Unicom's $1 billion share repurchase commitment in the pending merger agreement with PECO, Unicom has entered into repurchase agreements with financial institutions to repurchase shares of its common stock from the open-market. During the first quarter of 2000, Unicom expended $534 million to repurchase 14 million of its common shares pursuant to these agreements of which approximately $153 million was funded with proceeds from the 1998 issuance of transitional trust notes. ComEd forecasts that internal sources will provide approximately three- fourths of the funds required for ComEd's 2000 construction program and other capital requirements, including nuclear fuel expenditures, contributions to nuclear decommissioning funds, sinking fund obligations and scheduled debt maturities. See Notes 9 and 11 of Notes to Financial Statements for the summaries of the annual sinking fund requirements and scheduled maturities for ComEd preference stock and long-term debt, respectively. 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. 48 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. ComEd had total unused bank lines of credit of $800 million at March 31, 2000, which may be borrowed at various interest rates. Of that amount, $500 million expires on December 15, 2000 and $300 million expires on December 17, 2002. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread, which is dependent upon the credit ratings of ComEd's outstanding first mortgage bonds or on a prime interest rate. See Note 12 of Notes to Financial Statements for additional information concerning lines of credit. See the Statements of Consolidated Cash Flows for the construction expenditures and cash flow from operating activities for the three months and twelve months ended March 31, 2000 and 1999. As of May 15, 2000, ComEd has an effective "shelf" registration statement with the SEC for the future sale of up to an additional $280 million of debt securities and cumulative preference stock for general corporate purposes of ComEd, including the discharge or refund of other outstanding securities. ComEd's securities and other securities guaranteed by ComEd are currently rated by three principal securities rating agencies as follows: Standard Duff & Moody's & Poor's Phelps ------- -------- ------ First mortgage and secured pollution control bonds..... Baa1 BBB+ A- Publicly-held debentures and unsecured pollution con- trol obligations...................................... Baa2 BBB BBB+ Convertible preferred stock............................ baa3 BBB- BBB Preference stock....................................... Baa2 BBB- BBB Trust Securities....................................... baa3 BBB- BBB Commercial paper....................................... P-2 A-2 D-1 ComEd Funding Trust's securities are currently rated by three principal securities rating agencies as follows: Standard Duff & Moody's & Poor's Phelps ------- -------- ------ Transitional trust notes.......................... Aaa AAA AAA All three agencies raised their ratings for ComEd in 1999: Duff & Phelps in December, Moody's in September; and S&P in June. Capital Structure. ComEd's ratio of long-term debt to total capitalization has increased to 59.4% at March 31, 2000 from 55.2% at December 31, 1999, primarily due to the repurchase of common stock in the first quarter of 2000. As of March 31, 2000 and December 31, 1999, $837 million and $716 million, respectively, of retained earnings had been appropriated for Unicom's future dividend payments. New Customer Information and Billing system. In July 1998, ComEd began a transition to a new customer information and billing system. The new system was implemented to achieve a number of strategic objectives as the electric industry enters into a more competitive environment. Following the July 1998 initial implementation, ComEd experienced delays in issuing bills on a timely basis to a portion of its commercial and industrial customers. ComEd also temporarily suspended credit activities from late in the third quarter of 1998 until the end of the first quarter of 1999 as a result of system implementation issues. The system stabilized gradually throughout 1999 such that by the fourth quarter of 1999 substantially all customers were being billed on a current basis. Operating results for twelve months ended March 31, 2000 were adversely affected by increased labor and overtime costs incurred to address the billing issues, and by increased charges for uncollectible 49 accounts of approximately $35 million resulting from the billing and collection delays and the temporary suspension of credit activities. Cash flows from operations were adversely affected in twelve months ended March 31, 1999 and positively affected in twelve months ended March 31, 2000 as a result of the billing delays experienced due to implementation. Receivables from customers as of March 31, 2000 and December 31, 1999 include $70 million and $103 million, 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. See "Results of Operations," subcaption "Operation and Maintenance Expenses" below, and Note 1 of Notes to Financial Statements, under "Customer Receivables and Revenues" and "Use of Estimates," for additional information. Year 2000 Conversion. Unicom successfully completed the transition to the Year 2000 as systems performed without interruption during the rollover from December 31, 1999 to January 1, 2000 and the rollover from February 28, 2000 to February 29, 2000. In addition to 12/31/99, other key Year 2000 dates that Unicom has completed without Year 2000 problems are 1/1/99, 4/9/99 (99th day of 1999), 8/21/99 (Global Positioning System rollover), and 9/9/99. Unicom depends upon third parties, including customers, suppliers, government agencies and financial institutions, to reliably deliver its products and services. Unicom completed an analysis of the Year 2000 readiness programs of its critical vendors and obtained 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. Even though mission critical products and services of the Unicom supply chain are Year 2000 ready, contingency plans were developed to prevent or mitigate interruptions caused by Unicom suppliers. Unicom has expended approximately $37 million as of April 30, 2000 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 were expensed as incurred. The foregoing amounts do not include the cost of new software applications installed as a result of strategic replacement projects. Such replacement projects were not accelerated because of Year 2000 issues. Unicom expects to incur minimal expenditures for final project wrap-up activities. Market Risks. ComEd is exposed to market risk due to changes in interest rates and the market price for electricity. Exposure for interest rate changes relates to its long-term debt and preferred equity obligations. Exposure to electricity market price risk relates to forward activities taken to manage effectively the supply of, and demand for, the electric generation capability of ComEd's generating plants. ComEd has implemented an integrated risk management framework to manage such risks. A corporate Risk Management Committee defines the Company's risk tolerance and establishes appropriate position limits, and corporate policies and procedures have been implemented to minimize the exposure to market risk. ComEd does not currently utilize derivative commodity or financial instruments for trading or speculative purposes. See "Energy Risk Management Contracts" in Note 1 of Notes to Financial Statements regarding the accounting for energy risk management contracts. Market Price Exposure. ComEd's energy purchases from other suppliers have increased as a result of reductions in owned generating capability and system load growth. The market price of energy is subject to price volatility associated with changes in supply and demand in the electric supply markets. In the normal course of business, ComEd utilizes contracts for the forward sale and purchase of energy to assure system reliability and manage effectively the utilization of its available generating capability. ComEd also utilizes put and call option contracts and energy swap arrangements to limit the market price risk associated with the forward commodity contracts. The 50 estimated March 31, 2000 fair value of the forward contracts, including options, for the purchase and sale of energy for the years 2000 through 2007, was approximately $(75) million. The estimated fair value is based on the estimated net settlement value of the contracts derived from forward price curves and market quotes, discounted at a 10% rate. A 10% increase in the forward price of electricity would decrease the March 31, 2000 fair value of the forward energy contracts for the years 2000-2007 by approximately $130 million, of which approximately $75 million is for contracts for the period 2000-2002. Likewise, a 10% decrease would increase the fair value of the energy contracts by $130 million. Notwithstanding these price risk management activities, an unexpected loss of generating capability or reduction in demand could increase ComEd's exposure to market price risks and could have a material adverse effect on operating results. Unicom Energy Inc., has entered into gas sales contracts which are hedged with gas supply contracts at lower prices. Unicom Energy Inc.'s margin per therm of gas delivered is not significantly affected by the market price of gas. Unicom Energy Inc. has also entered into electricity contracts for which the mark-to-market at March 31, 2000 is not material. UNREGULATED OPERATIONS Unicom Enterprises is engaged, through subsidiaries, in energy service activities which are not subject to utility regulation by federal or state agencies. One of these subsidiaries, UT Holdings, provides district cooling and related services to offices and other buildings in the central business district of the City 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 Honeywell, Unicom Energy Services is an exclusive distributor for the Parallon 75(TM) TurboGenerator system, which was developed by AlliedSignal to provide customers with on-site electricity production. Unicom Energy Services' exclusive territory for distributing the Parallon 75(TM) system encompasses 12 Midwest states, Ontario, Canada and Puerto Rico. Unicom Power Holdings, another subsidiary of Unicom Enterprises, is developing certain generation and cogeneration projects. Unicom Energy Inc., a subsidiary of Unicom Energy Services, is currently engaged in providing retail gas services to commercial and industrial customers in the Midwest region. Unicom Energy Inc. also provides retail electric services as an unregulated retail energy supplier. Unicom Mechanical Services Inc., a subsidiary of Unicom Enterprises, engages in the design, installation and servicing of heating, ventilation and air conditioning facilities for commercial and industrial customers in the City and the surrounding area through various subsidiaries. Construction Program and Purchase Commitments. Unicom Enterprises has approved construction expenditures of $200 million for its unregulated operations for the year 2000, excluding expenditures for acquisitions contemplated by subsidiaries of Unicom Enterprises. Unicom Enterprises' construction expenditures include $85 million for the expansion of UT Holdings' Chicago district cooling facilities and the related distribution piping and plants in other cities. 51 Unicom Enterprises' construction expenditures also include the purchase of approximately 440 MW of combustion turbine generators and auxiliary equipment by Unicom Power Holdings. Such generators will either be sold or placed into cogeneration or other peaking applications. Unicom Power Holdings is evaluating the costs and economics of such alternatives. Unicom Power Holdings anticipates that the equipment purchases will cost approximately $165 million, of which approximately $134 million has been incurred as of March 31, 2000. Unicom Power Holdings may incur significant additional costs to site and install such power generation equipment. Capital Resources. Unicom expects to obtain funds to invest in its unregulated subsidiaries principally from the fossil plant sale proceeds, 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. Neither the Illinois Public Utilities Act, nor the Illinois Business Corporation Act impose an absolute bar on the payment of dividends. However, when a corporation's retained earnings are negative, the ICC under the Illinois Public Utilities Act has authority to prohibit such payments. The "Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act" provides a mechanism whereby utilities with negative retained earnings balances may pay dividends out of current earnings as long as current earnings have been appropriated. 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 fund share repurchases and to invest in new business opportunities. See "Changes in the Electric Utility Industry" subcaption "Fossil Plant Sale" above, for additional information. Unicom Enterprises has an unused $400 million credit facility which will expire December 15, 2000 of which $77 million was unused as of March 31, 2000. The credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including UT Holdings and Unicom Energy Services, and for general corporate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Enterprises' operations. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime interest rate or a floating rate bank index plus a spread which varies with the credit rating of ComEd's outstanding first mortgage bonds. See Note 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. On December 17, 1999, Duff & Phelps raised its rating on Unicom's senior debt obligation to BBB. S&P's current corporate credit rating for Unicom is BBB. On September 23, 1999, in response to the announced Unicom and PECO merger agreement, S&P placed Unicom on credit watch with positive implications, and Moody's confirmed the first-time issuer rating of Baa3 it had assigned to Unicom on September 15, 1999. 52 Regulation ComEd and Indiana Company are subject to federal and state regulation in the conduct of their respective businesses. Such regulation includes rates, securities issuance, nuclear operations, environmental and other matters. Particularly in the cases of nuclear operations and environmental matters, such regulation can and does affect operational and capital expenditures. Rate Matters. See "Changes in the Electric Utility Industry," subcaption "The 1997 Act" above, for information regarding the effect of the 1997 Act on rate matters. 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 committed 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. The NRC and representatives of ComEd's management have met, and will continue to meet periodically as part of the NRC's normal oversight process, to discuss the overall performance of the ComEd nuclear program. Based on ComEd's most recent study, decommissioning costs are estimated to be $5.6 billion in current-year (2000) dollars, including a contingency allowance. These expenditures are expected to 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. See Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Liabilities, and Decommissioning," for additional information regarding decommissioning costs. 53 Environmental Matters. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. See Note 21 of Notes to Financial Statements for additional information. Results of Operations Unicom's basic and diluted earnings per common share for three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- --------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- Basic Earnings per Common Share....... $ 1.01 $ 0.32 $ 3.28 $ 2.42 ========= ========= ========== ========== Diluted Earnings per Common Share..... $ 1.00 $ 0.32 $ 3.27 $ 2.42 ========= ========= ========== ========== Substantially all of the results of operations for Unicom are the results of operations for ComEd. As such, the following section generally discusses, in more detail, 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 March 31, 2000. The increase in Unicom's net income in the recent three-month period reflects, among other factors, ComEd's increased energy sales, lower operating costs under the structure of the PPAs entered into upon the sale of ComEd's fleet of fossil stations, improved nuclear operating performance, and lower financing costs. Earnings for the quarter were positively impacted by approximately $0.30 per common share due to reduced operation and maintenance, fuel, depreciation and property tax expenses, as a result of the December 1999 sale of the fossil stations, partially offset by costs of related PPAs entered into with Midwest Generation. On an annualized basis, the costs of the PPAs in 2000 are expected to approximate the costs associated with owning and operating the fossil stations in 1999; however, the PPAs shift a significant portion of the costs to the summer months. Two non-operating items, a gain on the settlement of the forward share repurchase arrangements ($113 million, after-tax) and a loss on the sale of uranium-related properties ($22 million, after-tax), were offset by increased regulatory asset amortization. Net Income for the Twelve Months Ended March 31, 2000. The increase in earnings for the twelve-month period was primarily due to increased kilowatthour sales, lower energy costs, the sale of ComEd's fleet of fossil stations, lower taxes other than income taxes, partially offset by the 15% residential base rate reduction which became effective August 1, 1998, increased regulatory asset amortization and higher O&M expenses. 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 station availability and performance. Revenues have also been reduced by a change in presentation for certain utility taxes. The 1997 Act changed the nature of several state and municipal taxes that are collected through customer billings. Before August 1998, the utility taxes were assessed against the utility. Effective August 1998, the utility taxes are assessed on the electric consumer rather than the utility. Accordingly, ComEd records the collections as liabilities and no 54 longer records the taxes collected through billing as revenues and tax expense. The change in presentation for utility taxes did not have an effect on results of operations. See Note 1 of Notes to Financial Statements, under "Use of Estimates" and "Customer Receivables and Revenues", for additional information. ComEd's operating revenues increased $31 million for the three months ended March 31, 2000, compared to the three months ended March 31, 1999, primarily due to an $87 million increase in off-system sales offset by a $56 million reduction in sales to retail customers and other revenues. ComEd's operating revenues decreased $157 million for the twelve months ended March 31, 2000, compared to the twelve months ended March 31, 1999. The decrease is due to various factors, including lower revenues from customers electing to purchase energy from a RES or electing the purchase power option, the approximately $142 million impact of the 15% residential base rate reduction that took effect August 1, 1998 and a reduction in revenue taxes of approximately $112 million principally due to the change in presentation for certain state and municipal taxes, partially offset by an $197 million increase in off-system sales. Unicom's unregulated businesses' operating revenues increased $89 million and $148 million in the three months and twelve months ended March 31, 2000, respectively, compared to the three months and twelve months ended March 31, 1999. The increase is primarily due to increased revenues related to performance contracting and district cooling services and the acquisition of new businesses in 1999. Energy Costs. Energy costs are currently affected primarily by system load, the cost of nuclear fuel consumed, the availability and net generation of ComEd's nuclear generating units, the PPAs ComEd entered into upon the sale of its fossil stations and the availability and cost of power from other utilities. Prior to the sale of ComEd's fossil stations, energy costs were also affected by changes in the cost of fossil fuels consumed and changes in the mix of fuel sources of electric energy generated. Energy costs, electricity available for sale and fuel sources of kilowatthour generation were as follows: Three Months Ended Twelve Months Ended ---------------------------------- ---------------------------------- March 31, 2000 March 31, 1999 March 31, 2000 March 31, 1999 ---------------- ---------------- ---------------- ---------------- Cost Cost Cost Cost Energy per Energy per Energy per Energy per Costs Kwh Costs Kwh Costs Kwh Costs Kwh --------- ----- --------- ----- ---------- ---- ---------- ---- (000's) (000's) (000's) (000's) Cost of energy: Fuel Nuclear................ $ 99,208 0.50c $ 88,535 0.51c $ 391,162 0.51c $ 320,612 0.52c Coal................... -- -- 132,185 2.41 393,711 2.21 631,043 2.60 Oil.................... -- -- 920 3.93 6,934 5.68 8,835 6.65 Natural gas............ -- -- 13,194 3.36 69,829 3.20 109,579 3.07 Purchased power......... 226,733 2.76 71,682 3.67 706,627 3.97 646,306 4.63 --------- --------- ---------- ---------- Total.................. $ 325,941 1.16c $ 306,516 1.22c $1,568,263 1.37c $1,716,375 1.66c ========= ========= ========== ========== Electricity available for sale: (millions of kilowatthours) Generation--net........ 19,810 23,160 96,334 89,135 Purchased power........ 8,203 1,953 17,811 13,972 --------- --------- ---------- ---------- Total available for sale.................. 28,013 25,113 114,145 103,107 ========= ========= ========== ========== Sources of kilowatthour available for sale: Fuel Nuclear................ 71% 69% 67% 59% Coal................... -- 22 15 24 Oil.................... -- -- -- -- Natural gas............ -- 1 2 3 Purchased power......... 29 8 16 14 --------- --------- ---------- ---------- 100% 100% 100% 100% ========= ========= ========== ========== 55 Higher energy costs for the three months ended March 31, 2000 resulted primarily from the effects of the PPAs ComEd entered into upon the sale of its fleet of fossil stations which increase purchased power costs but will be offset by lower depreciation and O&M expenses. Lower energy costs for the twelve months ended March 31, 2000 are primarily due to the continued improvement in ComEd's nuclear operations. The overall nuclear capacity factor was 92% for the twelve months ended March 31, 2000, compared to 74% for the same period ended March 31, 1999. Net generation includes 20,090,296 megawatthours, 5,909,270 megawatthours and 27,995,426 megawatthours for the twelve months ended March 31, 2000, and the three and twelve months ended March 31, 1999, respectively, for ComEd's fossil stations sold in December 1999. See "Regulation," subcaption "Nuclear Matters" above, for information regarding ComEd's nuclear generating stations. For additional information concerning ComEd's purchase power commitments see "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Construction Program," above and Note 21 of Notes to Financial Statements. 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, and the expenses associated with Unicom's unregulated businesses. 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 generating facilities. Generating station expenses are affected by the cost of materials, regulatory requirements and expectations, the age of facilities and cost control efforts. During the three months and twelve months ended March 31, 2000, the aggregate level of O&M expenses decreased 1% and increased 7%, respectively, compared to the same periods ended March 31, 1999. O&M expenses associated with nuclear generating stations decreased $36 million and $105 million during the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The decreases in the recent three-month and twelve-month periods were due to shorter refueling outages and fewer forced outages. O&M expenses associated with ComEd's fossil generating stations sold in December 1999 were $66 million for the three months ended March 31, 1999 and $154 million and $256 million for the twelve months ended March 31, 2000 and March 31, 1999, respectively. O&M expenses associated with ComEd's transmission and distribution system increased $29 million and $95 million for the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The increases for the recent three-month and twelve-month periods were primarily due to ComEd's intensive efforts to improve the reliability of its transmission and distribution systems. O&M expenses associated with customer related activities increased $6 million and $41 million for the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The increase in the recent three-month period was primarily due to increased credit and collection activity. The increase in the recent twelve-month period was primarily due to increased overtime and labor costs incurred to address billing problems encountered following the implementation of a new customer information and billing system beginning in July 1998. 56 O&M expenses for the twelve months ended March 31, 2000 reflect an increase of $68 million in ComEd's estimated environmental liability for the remediation of former manufactured gas plant sites compared to the same period ended March 31, 1999. O&M expenses for the twelve months ended March 31, 2000 also reflect increased charges of $35 million 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. 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 $3 million for the three months ended March 31, 2000 and $12 million and $33 million for the twelve months ended March 31, 2000 and 1999, respectively, other than costs related to the fossil plant sale. Other ComEd employee benefits expenses, excluding the effects of employee separation plans and certain other employee-related costs decreased $4 million and $9 million for the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The decreases for the recent three-month and twelve-month periods was primarily due to a reduction in medical costs for active and retired employees. O&M expenses included a $25 million charge for the three months and twelve months ended March 31, 1999 as a result of a franchise related settlement agreement between ComEd and the City. O&M expenses associated with certain administrative and general costs increased $4 million and $9 million for the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The increases in the recent three-month and twelve-month periods were due to a variety of reasons, including additional expenses incurred in connection with the merger. O&M expenses associated with Unicom's unregulated businesses increased $84 million and $149 million for the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The increase is primarily related to their increased level of operation and the acquisition of new businesses. Depreciation, Amortization and Decommissioning. Depreciation, amortization and decommissioning expense increased $143 million and $61 million for the three months and twelve months ended March 31, 2000, respectively, compared to the same periods ended March 31, 1999. The increased regulatory asset amortization recorded in the recent three-month and twelve-month periods represents amounts calculated in accordance with the earnings cap provisions of the 1997 Act. The increased regulatory asset amortization was primarily recorded as a result of higher net income in the first quarter of 2000, compared to the first quarter of 1999, before reflecting such increased amortization. Amounts for the twelve months ended March 31, 2000 include a reduction of $88 million related to the December 1999 fossil plant sale. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the fossil plant sale of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statements of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million for the twelve months ended March 31, 2000. See Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Liabilities, and Decommissioning," for additional information. 57 Interest on Debt. Changes in interest on long-term debt and notes payable for the years 1999, 1998 and 1997 were due to changes in average interest rates and in the amounts of long-term debt and notes payable outstanding. Changes in interest on ComEd's long-term debt also reflected new issues of debt, the retirement and early redemption of debt, and the retirement and redemption of issues which were refinanced at generally lower rates of interest. See Notes 3 and 6 of Notes to Financial Statements for information regarding the redemptions and repurchases of debt and equity. The average amounts of ComEd's long-term debt and notes payable outstanding and average interest rates thereon were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Long-term debt outstanding: Average amount (millions)......... $ 7,612 $ 8,489 $ 7,885 $ 6,609 Average interest rate............. 6.77% 6.81% 6.76% 7.39% Notes payable outstanding: Average amount (millions)......... $ 62 $ 221 $ 280 $ 346 Average interest rate............. 6.29% 7.25% 5.58% 5.89% 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." In accordance with SFAS No. 34, Capitalization of Interest Cost, ComEd capitalized $16 million and $32 million for the twelve months ended March 31, 2000 and 1999, respectively, of 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 March 31, 2000 and December 31, 1999 were 2.65 and 2.45, respectively. ComEd's ratios of earnings to fixed charges and preferred and preference stock dividend requirements for the twelve months ended March 31, 2000 and December 31, 1999 were 2.59 and 2.32, 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. Foward-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 Notes 1 and 3 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 58 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 Liabilities and 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 and the estimated costs for final project wrap-up activities, (7) statements regarding the use of fossil plant sale proceeds 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, (8) statements regarding estimates of claims resulting from the summer of 1999 outages set forth in Note 21 of Notes to Financial Statements and (9) statements regarding the Merger Agreement in Note 2 of Notes to Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" subcaption "Changes in the Electric Utility Industry--Merger Agreement." 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 wrap-up 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 are also subject to the risk that Year 2000 remediation efforts of other parties with whom Unicom 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 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 resulting from the summer of 1999 outages are subject to the risk that the actual amount of losses suffered by customers and restoration costs may exceed the estimated amounts. The statements regarding the Merger Agreement and the associated repurchase of shares are subject to the risk of a significant delay in the expected completion of, and unexpected consequences resulting from, the transactions contemplated by the Merger Agreement, including the inability to close the transaction, and to changes in the number of shares of outstanding common stock of Unicom and PECO for unforeseen reasons. 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 the Shareholders of Commonwealth Edison Company: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of COMMONWEALTH EDISON COMPANY (an Illinois corporation) and subsidiary companies as of March 31, 2000 and December 31, 1999, and the related statements of consolidated operations, retained earnings, comprehensive income and cash flows for the three-month and twelve- month periods ended March 31, 2000 and 1999. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Edison Company and subsidiary companies as of March 31, 2000 and December 31, 1999, and the results of their operations and their cash flows for the three-month and twelve-month periods ended March 31, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois May 12, 2000 60 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months and twelve months ended March 31, 2000 and 1999 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 Twelve Months Ended March 31 March 31 ---------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (Thousands of Dollars) Electric Operating Reve- nues................... $1,559,815 $1,528,800 $6,797,907 $6,955,066 ---------- ---------- ---------- ---------- Electric Operating Ex- penses and Taxes: Fuel................... $ 99,208 $ 234,834 $ 861,636 $1,070,069 Purchased power........ 226,733 71,682 706,627 646,306 Operation.............. 293,450 321,386 1,513,499 1,434,741 Maintenance............ 159,552 222,587 711,275 791,090 Depreciation and amor- tization.............. 372,016 229,769 978,392 919,614 Taxes (except income).. 136,823 131,618 511,531 621,802 Income taxes-- Current--Federal..... 72,117 95,710 1,443,400 340,747 --State.............. 15,553 20,674 310,592 64,188 Deferred--Federal-- net................. (35,991) (39,019) (1,152,381) (1,242) --State--net......... (7,069) (8,202) (246,861) 4,899 Investment tax cred- its deferred--net... (5,499) (7,021) (24,306) (27,591) ---------- ---------- ---------- ---------- $1,326,893 $1,274,018 $5,613,404 $5,864,623 ---------- ---------- ---------- ---------- Electric Operating In- come................... $ 232,922 $ 254,782 $1,184,503 $1,090,443 ---------- ---------- ---------- ---------- Other Income and (Deduc- tions): Interest on long-term debt, net of interest capitalized........... $ (129,091) $ (138,559) $ (517,282) $ (456,718) Interest on notes pay- able.................. (969) (3,952) (15,619) (20,392) Allowance for funds used during construc- tion.................. 5,619 4,211 23,219 17,515 Income taxes applicable to nonoperating activities............ (6,389) (1,416) 22,110 3,747 Provision for dividends on company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities....... (7,428) (7,428) (29,710) (29,710) Miscellaneous--net..... 114,406 14,269 70,250 39,395 ---------- ---------- ---------- ---------- $ (23,852) $ (132,875) $ (447,032) $ (446,163) ---------- ---------- ---------- ---------- Net Income before Extraordinary Item..... $ 209,070 $ 121,907 $ 737,471 $ 644,280 Extraordinary Loss, less Applicable Income Taxes.................. (2,744) (27,506) (2,817) (27,506) ---------- ---------- ---------- ---------- Net Income.............. $ 206,326 $ 94,401 $ 734,654 $ 616,774 Provision for Dividends on Preferred and Preference Stocks...... 1,222 15,297 9,681 57,634 ---------- ---------- ---------- ---------- Net Income on Common Stock.................. $ 205,104 $ 79,104 $ 724,973 $ 559,140 ========== ========== ========== ========== The accompanying Notes to Financial Statements are an integral part of the above statements. 61 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 2000 1999 ----------- ------------ (Thousands of Dollars) ASSETS ------ Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $740 million and $653 million, respectively)....................... $25,290,040 $25,007,637 Less--Accumulated provision for depreciation....... 13,988,275 13,729,223 ----------- ----------- $11,301,765 $11,278,414 Nuclear fuel, at amortized cost.................... 797,087 843,724 ----------- ----------- $12,098,852 $12,122,138 ----------- ----------- Investments: Nuclear decommissioning funds...................... $ 2,671,305 $ 2,546,540 Subsidiary companies............................... 49,500 77,061 Other investments, at cost......................... 65,398 63,702 ----------- ----------- $ 2,786,203 $ 2,687,303 ----------- ----------- Current Assets: Cash and temporary cash investments................ $ 428,732 $ 1,254,868 Cash held for redemption of securities............. 64,577 285,056 Special deposits................................... 2,506 45,730 Receivables-- Customers........................................ 998,116 1,183,505 Forward share repurchase contract................ -- 813,046 Other............................................ 429,794 422,837 Provisions for uncollectible accounts............ (49,875) (49,344) Coal and fuel oil, at average cost................. 15,843 14,222 Materials and supplies, at average cost............ 231,045 220,398 Deferred income taxes related to current assets and liabilities....................................... 61,400 54,796 Prepayments and other.............................. 22,598 30,539 ----------- ----------- $ 2,204,736 $ 4,275,653 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Note receivable from affiliate..................... $ 2,208,324 $ 2,208,956 Regulatory assets.................................. 1,585,225 1,792,907 Other.............................................. 60,430 73,308 ----------- ----------- $ 3,853,979 $ 4,075,171 ----------- ----------- $20,943,770 $23,160,265 =========== =========== The accompanying Notes to Financial Statements are an integral part of the above statements. 62 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS March 31, December 31, CAPITALIZATION AND LIABILITIES 2000 1999 ------------------------------ ----------- ----------- (Thousands of Dollars) Capitalization (see accompanying statements): Common stock equity............................. $ 4,289,248 $ 5,302,915 Preferred and preference stocks without mandatory redemption requirements.............. 8,655 8,768 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities*.................................... 350,000 350,000 Long-term debt.................................. 6,800,066 6,962,448 ----------- ----------- $11,447,969 $12,624,131 ----------- ----------- Current Liabilities: Notes payable................................... $ 122,000 $ 4,750 Current portion of long-term debt, redeemable preference stock and capitalized lease obligations.................................... 888,028 909,900 Accounts payable................................ 388,136 545,329 Accrued interest................................ 126,473 147,044 Accrued taxes................................... 456,449 1,409,626 Dividends payable............................... 77,376 92,656 Customer deposits............................... 72,102 68,128 Other........................................... 257,821 307,040 ----------- ----------- $ 2,388,385 $ 3,484,473 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes........................... $ 2,433,984 $ 2,456,447 Nuclear decommissioning liability for retired plants......................................... 1,274,900 1,259,700 Accumulated deferred investment tax credits..... 477,065 484,717 Accrued spent nuclear fuel disposal fee and re- lated interest................................. 773,995 763,427 Obligations under capital leases................ 132,099 161,602 Regulatory liabilities.......................... 581,963 596,157 Other........................................... 1,433,410 1,329,611 ----------- ----------- $ 7,107,416 $ 7,051,661 ----------- ----------- Commitments and Contingent Liabilities (Note 21) $20,943,770 $23,160,265 =========== =========== *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 March 31, December 31, 2000 1999 ----------- ---------------- (Thousands of Dollars) Common Stock Equity: Common stock, $12.50 par value per share-- Outstanding--214,241,890 shares and 213,973,810 shares, respectively........... $ 2,678,041 $ 2,677,995 Premium on common stock and other paid-in capital..................................... 2,207,353 2,207,287 Capital stock and warrant expense............ (12,537) (12,537) Retained earnings............................ 564,608 433,001 Other comprehensive income................... 8,569 7,539 Treasury stock--30,497,107 shares and 264,406 shares, respectively........................ (1,156,786) (10,370) ----------- ----------- $ 4,289,248 $ 5,302,915 ----------- ----------- Preferred and Preference Stocks Without Manda- tory Redemption Requirements: Preference stock, non-cumulative, without par value-- Outstanding--1,120 shares and 1,120 shares, respectively................................ $ 6,977 $ 6,978 $1.425 convertible preferred stock, cumula- tive, without par value-- Outstanding--52,753 shares and 56,291 shares, respectively....................... 1,678 1,790 ----------- ----------- $ 8,655 $ 8,768 ----------- ----------- Preference Stock Subject to Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--700,000 shares and 700,000 shares, respectively....................... $ 69,475 $ 69,475 Current redemption requirements for preference stock included in current liabilities................................. (69,475) (69,475) ----------- ----------- $ -- $ -- ----------- ----------- Company-Obligated Mandatorily Redeemable Pre- ferred Securities of Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securi- ties.......................................... $ 350,000 $ 350,000 ----------- ----------- Long-Term Debt: First mortgage bonds: Maturing 2000 through 2004--5.30% to 9 3/8%...................................... $ 656,000 $ 698,245 Maturing 2005 through 2014--4.40% to 8 3/8%...................................... 1,299,400 1,299,400 Maturing 2015 through 2023--6.75% to 9 7/8%...................................... 1,511,000 1,589,443 ----------- ----------- $ 3,466,400 $ 3,587,088 Transitional trust notes, due 2001 through 2008--5.29% to 5.74%........................ 2,975,033 3,070,000 Sinking fund debentures, due 2001 through 2011--2 7/8% to 4.75%....................... 30,857 30,866 Pollution control obligations, due 2007 through 2014--3.85% to 5 7/8%............... 139,200 139,200 Other long-term debt......................... 916,303 916,351 Deposit for retirement of long-term debt..... (4,183) -- Current maturities of long-term debt included in current liabilities...................... (677,691) (732,077) Unamortized net debt discount and premium.... (45,853) (48,980) ----------- ----------- $ 6,800,066 $ 6,962,448 ----------- ----------- $11,447,969 $12,624,131 =========== =========== 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 Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Balance at Beginning of Period...... $ 433,001 $ 176,643 $ 169,578 $ (47,579) Add--Net income..................... 206,326 94,401 734,654 616,774 --------- --------- --------- --------- $ 639,327 $ 271,044 $ 904,232 $ 569,195 --------- --------- --------- --------- Deduct-- Dividends declared on-- Common stock.................... $ 73,497 $ 85,589 $ 330,194 $ 342,672 Preferred and preference stocks. 1,222 3,042 6,711 43,815 Preferred stock redemption premiums........................ -- 9,984 -- 9,984 Other capital stock transactions--net............... -- 2,851 2,719 3,146 --------- --------- --------- --------- $ 74,719 $ 101,466 $ 339,624 $ 399,617 --------- --------- --------- --------- Balance at End of Period (Includes $985 million and $586 million of appropriated retained earnings at March 31, 2000 and 1999, respectively)...................... $ 564,608 $ 169,578 $ 564,608 $ 169,578 ========= ========= ========= ========= COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Net Income.......................... $ 206,326 $ 94,401 $ 734,654 $ 616,774 Other Comprehensive Income Unrealized gains on securities.... $ 1,704 $ -- $ 14,175 $ -- Income taxes on other comprehensive income............. (674) -- (5,606) -- --------- --------- --------- --------- Other comprehensive income, net of tax.............................. $ 1,030 $ -- $ 8,569 $ -- --------- --------- --------- --------- Comprehensive Income................ $ 207,356 $ 94,401 $ 743,223 $ 616,774 ========= ========= ========= ========= 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 Twelve Months Ended March 31 March 31 ------------------------ ------------------------ 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Thousands of Dollars) Cash Flow from Operating Activities: Net income................ $ 206,326 $ 94,401 $ 734,654 $ 616,774 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amorti- zation................. 405,439 244,748 1,069,185 973,175 Deferred income taxes and investment tax credits--net........... (38,790) (55,261) (1,435,440) (16,965) Contribution to environ- mental trust........... -- -- (250,000) -- Recovery of coal reserve regulatory assets...... 19,936 178,038 (10,515) Change in MGP remediation liability.. -- -- 68,078 -- Gain on forward share arrangements........... (113,071) (13,728) (55,370) (13,728) Provisions/(payments) for revenue refunds-- net.................... -- (22,493) (110) (10,856) Equity component of al- lowance for funds used during construction.... (2,751) (1,753) (8,787) (7,128) Provisions/(payments) for liability for sepa- ration costs--net...... (8,889) (8,780) (62,505) (6,448) Net effect on cash flows of changes in: Receivables........... 178,963 203,057 117,084 (330,163) Coal and fuel oil..... (1,621) (18,270) 18,208 3,615 Materials and sup- plies................ (10,647) (4,140) (13,664) 22,118 Accounts payable ex- cluding nuclear fuel lease principal pay- ments and separation costs--net........... (148,304) (137,549) (68,373) (3,610) Accrued interest and taxes................ (971,953) 155,064 113,958 124,138 Other changes in cer- tain current assets and liabilities...... 47,649 27,764 144,310 152,247 Other--net.............. 106,404 87,712 21,842 154,543 ----------- ----------- ----------- ----------- $ (351,245) $ 570,708 $ 571,108 $ 1,647,197 ----------- ----------- ----------- ----------- Cash Flow from Investing Activities: Construction expendi- tures.................... $ (260,619) $ (228,416) $(1,115,601) $ (960,059) Nuclear fuel expendi- tures.................... (29,622) (50,085) (233,019) (155,705) Proceeds from fossil plant sale............... 632 -- 2,435,720 -- Equity component of al- lowance for funds used during construction...... 2,751 1,753 8,787 7,128 Contributions to nuclear decommissioning funds.... (39,400) (39,426) (89,919) (96,120) Other investments and special deposits......... 49,329 (288) 12,410 (602) Plant removal costs--net.. (2,253) (26,679) (59,188) (73,178) ----------- ----------- ----------- ----------- $ (279,182) $ (343,141) $ 959,190 $(1,278,536) ----------- ----------- ----------- ----------- Cash Flow from Financing Activities: Issuance of securities-- Transitional trust notes.................. $ -- $ -- $ -- $ 3,382,629 Other long-term debt.... -- -- -- 222,068 Capital stock........... 112 6 183 117 Retirement, redemption and repurchase of secu- rities-- Transitional trust notes.................. (94,967) -- (424,967) -- Other long-term debt.... (120,743) (1,053,080) (267,646) (1,187,221) Common stock............ (153,164) (3,570) (153,164) (10,370) Preferred stock......... (113) (544,187) (68,189) (578,120) Common stock forward re- purchase arrangements.... (67,135) (678,569) (262,116) (678,569) Cash dividends paid on capital stock............ (97,428) (108,793) (380,526) (427,806) Proceeds from sale/leaseback of nu- clear fuel............... -- -- -- 84,473 Nuclear fuel lease prin- cipal payments........... -- (53,745) (201,657) (277,163) Increase/(decrease) in short-term borrowings.... 117,250 (72,149) (82,207) (175,443) ----------- ----------- ----------- ----------- $ (416,188) $(2,514,087) $(1,840,289) $ 354,595 ----------- ----------- ----------- ----------- Change in Net Cash Balance. $(1,046,615) $(2,286,520) $ (309,991) $ 723,256 Cash, Temporary Cash In- vestments and Cash Held for Redemption of Securities: Balance at Beginning of Period................... 1,539,924 3,089,820 803,300 80,044 ----------- ----------- ----------- ----------- Balance at End of Period.. $ 493,309 $ 803,300 $ 493,309 $ 803,300 =========== =========== =========== =========== The accompanying Notes to Financial Statements are an integral part of the above statements. 66 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies. See Unicom's Note 1 of Notes to Financial Statements for a discussion of significant accounting policies, except for the following specific policies discussed below and the subcaption "Average Common Shares Outstanding" in Unicom's Note 1. Income Taxes. ComEd is included in the consolidated federal and state income tax returns filed by Unicom. Current and deferred income taxes of the consolidated group are allocated to ComEd as if ComEd filed separate tax returns. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book/tax 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 costs incurred on debt, leases and other obligations were $145 million and $163 million for the three months ended March 31, 2000 and 1999, respectively, and $633 million and $561 million for the twelve months ended March 31, 2000 and 1999, respectively. Statements of Consolidated Cash Flows. For purposes of the Statements of Consolidated Cash Flows, temporary cash investments, generally investments maturing within three months at the time of purchase, are considered to be cash equivalents. Supplemental cash flow information for the three months and twelve months ended March 31, 2000 and 1999 was as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- ------------------- 2000 1999 2000 1999 --------- --------- ---------- -------- (Thousands of Dollars) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capital- ized)............................ $ 148,933 $ 158,744 $ 578,591 $462,174 Income taxes (net of refunds)..... $ 950,001 $ (25,921) $1,461,120 $276,368 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obligations incurred.. $ 33 $ 1,162 $ 615 $ 89,537 (2) Merger Agreement. See Unicom's Note 2 of Notes to Financial Statements. (3) Accounting Effects Related to the 1997 Act. See Unicom's Note 3 of Notes to Financial Statements, except for EPS information. (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 March 31, 2000, the authorized shares of capital stock were: common stock--250,000,000 shares; preference stock--7,510,451 shares; $1.425 convertible preferred stock--52,753 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 January 2000, ComEd physically settled the forward share repurchase arrangements it had with Unicom for the repurchase of 26.3 million ComEd common shares. Prior to settlement, the repurchase arrangements were recorded as a receivable on ComEd's Consolidated Balance Sheets based on the aggregate market value of the shares under the arrangements. In 1999, net unrealized losses of $44 million (after-tax), or $0.20 per common share were recorded related to the arrangements. The settlement of the arrangements in January 2000 resulted in a gain of $113 million (after-tax), which was recorded in the first quarter of 2000. The settlement of the arrangements resulted in a reduction in ComEd's outstanding common shares and common stock equity, effective January 2000. During the first quarter of 2000, ComEd used $153 million to repurchase an additional 4 million of its common shares from Unicom with proceeds from the 1998 issurance of transitional trust notes. At March 31, 2000, shares of common stock were reserved for the following purposes: Conversion of $1.425 convertible preferred stock................... 53,808 Conversion of warrants............................................. 25,152 ------ 78,960 ====== Shares of common stock issued/(reacquired) for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- --------------------- 2000 1999 2000 1999 ----------- ------- ----------- -------- Conversion of $1.425 convertible preferred stock.................. 3,602 212 5,344 3,791 Conversion of warrants............ 72 29 152 173 Treasury stock.................... (30,232,701) (85,424) (30,232,701) (264,406) ----------- ------- ----------- -------- (30,229,027) (85,183) (30,227,205) (260,442) =========== ======= =========== ======== As of March 31, 2000 and December 31, 1999, 30,497,107 shares and 264,406 shares, respectively, of ComEd common stock were reacquired and held as treasury stock at a cost of $1,157 million and $10 million, respectively. At March 31, 2000 and December 31, 1999, 75,458 and 75,692, respectively, of common stock purchase warrants were outstanding. The warrants entitle the holders to convert such warrants into common stock at a conversion rate of one share of common stock for three warrants. As of March 31, 2000 and December 31, 1999, $985 million and $852 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. 68 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (10) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securities. See Unicom's Note 10 of Notes to Financial Statements. (11) Long-Term Debt. See Unicom's Note 11 of Notes to Financial Statements, except for the last two paragraphs regarding Unicom Thermal and Northwind Mid Way's guaranteed senior Notes. (12) Lines of Credit. See the first paragraph of Unicom's Note 12 of Notes 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 the 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 March 31, 2000 and December 31, 1999 were as follows: March 31, 2000 December 31, 1999 --------------------------------- --------------------------------- Unrealized Unrealized Carrying Gains/ Carrying Gains/ Value (Losses) Fair Value Value (Losses) Fair Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Preferred and preference stocks................. $ 71,153 $ 75 $ 71,228 $ 71,265 $ 58 $ 71,323 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities........ $ 350,000 $ (15,798) $ 334,202 $ 350,000 $ (10,595) $ 339,405 Transitional trust notes.................. $2,963,030 $(149,007) $2,814,023 $3,057,112 $(163,600) $2,893,512 Long-term debt.......... $4,518,607 $ 13,584 $4,532,191 $4,637,062 $ (22,237) $4,614,825 (15) Pension 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 components of the net deferred income tax liability at March 31, 2000 and December 31, 1999 were as follows: March 31, December 31, 2000 1999 ---------- ------------ (Thousands of Dollars) Deferred income tax liabilities: Accelerated cost recovery and liberalized depreciation, net of removal costs.................. $2,693,513 $2,781,601 Overheads capitalized................................ 157,101 159,836 Repair allowance..................................... 218,674 221,502 Regulatory assets recoverable through future rates... 685,327 688,946 Deferred income tax assets: Postretirement benefits.............................. (377,401) (376,207) Unamortized investment tax credits................... (159,420) (161,756) Regulatory liabilities to be settled through future rates............................................... (581,963) (596,157) Nuclear plant closure................................ (5,454) (5,456) Other--net........................................... (257,793) (310,658) ---------- ---------- Net deferred income tax liability..................... $2,372,584 $2,401,651 ========== ========== The $29 million decrease in the net deferred income tax liability from December 31, 1999 to March 31, 2000 is comprised of a $42 million credit to net deferred income tax expense, a $11 million decrease in regulatory assets net of regulatory liabilities pertaining to income taxes for the period and $2 million related to other items. 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. The components of net income tax expense charged to continuing operations for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 ------------------- --------------------- 2000 1999 2000 1999 -------- --------- ----------- -------- (Thousands of Dollars) Electric operating income: Current income taxes............. $ 87,670 $ 116,384 $ 1,753,992 $404,935 Deferred income taxes............ (43,060) (47,221) (1,399,242) 3,657 Investment tax credits deferred-- net............................. (5,499) (7,021) (24,306) (27,591) Other (income) and deductions: Current income taxes............. (4,952) 2,668 (6,998) (10,496) Deferred income taxes............ 13,632 837 36,839 13,546 Investment tax credits........... (2,153) (1,828) (52,064) (6,463) -------- --------- ----------- -------- Net income taxes charged to continuing operations............ $ 45,638 $ 63,819 $ 308,221 $377,588 ======== ========= =========== ======== Provisions for current and deferred federal and state income taxes and amortization of investment tax credits resulted in the following effective income tax rates for the three months and twelve months ended March 31, 2000 and 1999: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- ---------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- Pre-tax book income (thousands)... $ 254,708 $ 185.726 $1,045,692 $1,021,868 Effective income tax rate......... 17.9% 34.4% 29.5% 37.0% 70 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Concluded The principal differences between net income taxes charged to continuing operations and the amounts computed at the federal statutory rate of 35% for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Federal income taxes computed at statutory rate..................... $ 89,148 $ 65,004 $ 365,992 $ 357,654 Amortization of investment tax credits, net of deferred income taxes.............................. (5,235) (5,711) (47,740) (22,006) State income taxes, net of federal income taxes....................... 5,220 8,465 44,831 45,991 Net gain on forward share repurchase contract........................... (39,575) (4,805) (19,380) (4,805) Earnings on non-tax qualified decommissioning fund............... 406 -- (8,509) -- Differences between book and tax accounting, primarily property- related deductions................. (4,326) 866 (26,973) 754 --------- -------- --------- --------- Net income taxes charged to continuing operations.............. $ 45,638 $ 63,819 $ 308,221 $ 377,588 ========= ======== ========= ========= (18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes, for the three months and twelve months ended March 31, 2000 and 1999 were as follows: Three Months Ended Twelve Months Ended March 31 March 31 -------------------- -------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (Thousands of Dollars) Illinois public utility revenue...... $ (3,685) $ 1,495 $ (4,199) $ 70,295 Illinois electricity distribution tax................................. 25,603 28,337 111,507 111,644 Municipal utility gross receipts..... 27,450 24,758 102,392 138,453 Real estate.......................... 35,782 33,027 117,149 122,027 Municipal compensation............... 22,273 18,471 77,150 79,653 Energy assistance and renewable energy charge....................... 8,799 8,669 34,553 33,841 Other--net........................... 20,601 16,861 72,979 65,889 --------- --------- --------- --------- $ 136,823 $ 131,618 $ 511,531 $ 621,802 ========= ========= ========= ========= The 1997 Act changed the nature of several state and municipal taxes that are collected through customer billings. Before August 1998, the utility taxes were assessed against the utility. Effective August 1998, the utility taxes are assessed on the electric consumer rather than the utility. Accordingly, ComEd records the collections as liabilities and no longer records the taxes collected through billings as revenues and tax expense. The reduction in operating revenues and taxes, except income taxes, due to the change in presentation for such taxes was approximately $82 million for the twelve months ended March 31, 2000, compared to the same period in 1999. This change in the presentation for such taxes did not have an effect on results of operations. 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 March 31, 2000 for operating leases are estimated to aggregate to $245 million, including $20 million in 2000, $23 million in 2001, $23 million in 2002, $21 million in 2003, $20 million in 2004 and $138 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. 71 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in the Electric Utility Industry. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Changes in the Electric Utility Industry," which is incorporated herein by this reference, except for EPS information. Liquidity and Capital Resources. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS," which is incorporated herein by this reference. Regulation. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation," which is incorporated herein by this reference. Results of Operations. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Results of Operations" (other than the first paragraph thereof), which is incorporated herein by this reference, except for EPS information. Forward-Looking Information. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Forward-Looking Information," which is incorporated herein by this reference. 72 PART II. OTHER INFORMATION Item 1. Legal Proceedings. During the first quarter of 2000, no civil penalties were imposed on ComEd for violations of NRC regulations. To ComEd's knowledge, there are no current enforcement issues outstanding 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 on eight 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 amended judgement was issued March 1999, totaled approximately $6 million, including compensatory and punitive damages, interest, and medical monitoring. On February 11, 2000, the Tenth Circuit Court of Appeals agreed with Cotter, found that the trial judge had erred in critical rulings and reversed the jury verdict, remanding the case for new trial. A case involving the next group of plaintiffs is set for trial in federal district court in Denver on October 2, 2000. Although ComEd sold its investment in Cotter in February 2000, ComEd will continue to be liable for any court verdicts in favor of the plaintiffs. The other 1991 cases will necessarily involve the resolution of numerous contested issues of law and fact. It is Unicom and ComEd's assessment that these actions will not have a material impact on their financial position or results of operations. In August 1999, three class action lawsuits were filed against ComEd related to a series of service interruptions during the summer of 1999. The combined effect of these events resulted in over 100,000 customers losing service. On August 12, 1999, service was interrupted to ComEd customers on the near north and near west side of Chicago's central business district. While major commercial customers were affected, all service was restored on the same date. The class action complaints have been consolidated and seek to recover damages for personal injuries and property damage, as well as economic loss for these events. Further, ComEd initiated expedited claim settlements for those with primarily food spoilage claims. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. The lawsuits are pending in the Circuit Court of Cook County. ComEd has filed a motion challenging the legal sufficiency of the consolidated complaints. The plantiff's response is overdue and the motion to dismiss is currently scheduled to be argued on May 23, 2000. ComEd's management believes adequate reserves have been established in connection with these cases. Following the summer 1999 service interruptions, the ICC opened a three- phase investigation of the design and reliability of ComEd's transmission and distribution system. At the conclusion of each phase of the investigation, the ICC will issue reports that will include specific recommendations for ComEd and a timetable for executing the recommendations. Although the recommendations are not legally binding on ComEd, the ICC may enforce the recommendations through litigation. The report on Phase I of the investigation was released the week of January 3, 2000, which focused on the outages of July and August 1999. The first of five reports on Phase II and Phase III, focusing on the transmission and distribution system, is anticipated in late spring. The investigation is expected to conclude by early 2001. 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 73 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, and against ComEd for a declaratory order 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 by Order dated December 1, 1999. On April 14, 2000, the developer of one such facility requested leave to amend its complaint to allege claims for damages against ComEd based on breach by ComEd of an alleged contractual obligation to pay for electricity purchased from that developer at the state-subsidized rate. ComEd has objected to the developer's request for leave to amend, and intends vigorously to contest any assertion by such developer that it is entitled to any payment in excess of ComEd's avoided costs. CERCLA provides for immediate response and removal actions coordinated by the U.S. EPA to releases of hazardous substances into the environment and authorizes the U.S. Government either to clean up sites at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Under CERCLA, generators and transporters of hazardous substances, as well as past and present owners and operators of hazardous waste sites, are made strictly, jointly and severally liable for the cleanup costs of waste at sites, most of which are listed by the U.S. EPA on the NPL. These responsible parties can be ordered to perform a cleanup, can be sued for costs associated with a U.S. EPA directed cleanup, may voluntarily settle with the U.S. Government concerning their liability for cleanup costs, or may voluntarily begin a site investigation and site remediation prior to listing on the NPL under state oversight. Various states, including Illinois, have enacted statutes which contain provisions substantially similar to CERCLA. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. See Note 21 of Notes to Financial Statements for information regarding costs associated with investigating and remediating former MGP sites. From time to time, Unicom and its subsidiaries are, or are claimed to be, in violation of or in default under orders, statutes, rules or regulations relating to environmental controls and other matters, compliance plans imposed upon or agreed to by them or permits issued by various state and federal agencies for the construction or operation of their facilities. Unicom and ComEd do not believe, so far as they now foresee, that such violations or defaults will have a material adverse effect on their future business and operating results, except for events otherwise described in Unicom and ComEd's Annual Reports on Form 10-K for the year ended December 31, 1999 or in these Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 2000, which could have such an effect. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Number Description of Exhibit ------- ------------------------------------------------------------------ (12) Statement computing Commonwealth Edison Company ratios of earnings to fixed charges and ratios of earnings to fixed charges and preferred and preference stock dividend requirements. (23)-1 Consent of independent public accountants applicable to Unicom Corporation. (23)-2 Consent of independent public accountants applicable to Commonwealth Edison Company. (27)-1 Financial data schedule of Unicom Corporation. (27)-2 Financial data schedule of Commonwealth Edison Company. 74 (b) Reports on Form 8-K A Current Report on Form 8-K dated January 7, 2000 was filed by Unicom and ComEd announcing Unicom and PECO's agreement to accelerate the repurchase of stock and to adjust shareholder consideration under their Agreement and Plan of Exchange and Merger, dated as of September 22, 1999. A Current Report on Form 8-K dated January 13, 2000 was filed by Unicom and ComEd providing additional information about the transactions contemplated by the Amended Merger Agreement before Unicom commences repurchases of shares of its common stock. A Current Report on Form 8-K dated March 30, 2000 was filed containing ComEd's consolidated financial statements as of, and for the year ended, December 31, 1999. 75 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 15th day of May 2000. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and its subsidiaries thereof. Unicom Corporation Registrant By Robert E. Berdelle _____________________________________ Robert E. Berdelle Vice President and Comptroller (Chief accounting officer and officer duly authorized to sign on behalf of the registrant) Commonwealth Edison Company Registrant By Robert E. Berdelle _____________________________________ Robert E. Berdelle Vice President and Comptroller (Chief accounting officer and officer duly authorized to sign on behalf of the registrant) 76