Exhibit (99)
Commonwealth Edison Company
Form 8-K File No. 1-1839
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
FORWARD-LOOKING INFORMATION
Except for historical data, the information contained herein constitutes
forward-looking statements. Forward-looking statements are inherently
uncertain and subject to risks. Such statements should be viewed with caution.
Actual results or experience could differ materially from the forward-looking
statements as a result of many factors. Forward-looking statements in this
report include, but are not limited to: (1) statements regarding expectations
of revenue reductions 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" and in Note 2 of Notes to Financial
Statements, (2) statements regarding estimated capital expenditures in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaptions "Liquidity and Capital Resources--Construction
Program," (3) statements regarding the estimated return to service of certain
nuclear generating units and the costs of purchased power in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Regulation--Nuclear Matters," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Results of Operations--Purchased Power," (4) statements regarding the costs
of decommissioning nuclear generating stations in "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Regulation--Nuclear Matters" and in Note 1 of Notes to Financial Statements,
under "Depreciation and Decommissioning", and (5) statements regarding cleanup
costs associated with MGPs and other remediation sites in Note 23 of Notes to
Financial Statements. Management cannot predict the course of future events or
anticipate the interaction of multiple factors beyond management's control and
their effect on revenues, project timing and costs. The statements regarding
revenue reductions are subject to unforeseen developments in the market for
electricity in Illinois resulting from regulatory changes. The statements
regarding estimated capital expenditures, estimated return to service of
nuclear generation units, decommissioning costs and cleanup 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. 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. The statements
regarding the estimated return to service of nuclear generating units are
subject to the concurrence of the NRC with proceeding to power operations.
INDEX
PAGE
-----
Definitions.............................................................. 2
Summary of Selected Consolidated Financial Data.......................... 3
Cash Dividends Paid Per Share of Common Stock............................ 3
1997 Consolidated Revenues and Sales..................................... 3
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 4-19
Report of Independent Public Accountants................................. 20
Consolidated Financial Statements--
Statements of Consolidated Operations for the years 1997, 1996 and
1995.................................................................. 21
Consolidated Balance Sheets--December 31, 1997 and 1996................ 22-23
Statements of Consolidated Capitalization--December 31, 1997 and 1996.. 24
Statements of Consolidated Retained Earnings (Deficit) for the years
1997, 1996 and 1995................................................... 25
Statements of Consolidated Cash Flows for the years 1997, 1996 and
1995.................................................................. 26
Notes to Financial Statements.......................................... 27-51
1
DEFINITIONS
The following terms are used in this document with the following meanings:
TERM MEANING
- ------------------ ------------------------------------------------------------------
1997 Act The Illinois Electric Service Customer Choice and Rate Relief Law
of 1997
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
CERCLA Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended
ComEd Commonwealth Edison Company
Cotter Cotter Corporation, a ComEd subsidiary
CTC Non-bypassable "competitive transition charge"
DOE U.S. Department of Energy
EPS Earnings per Share
ESPP Employee Stock Purchase Plan
FAC Fuel adjustment clause
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
FERC Order FERC Open Access Order No. 888 issued in April 1996
GAAP Generally Accepted Accounting Principles
ICC Illinois Commerce Commission
Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd subsidiary
ISO Independent System Operator
MGP Manufactured gas plant
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NML Nuclear Mutual Limited
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
Rate Order ICC rate order issued in January 1995, as subsequently modified
Remand Order ICC rate order issued in January 1993, as subsequently modified
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
S&P Standard & Poor's
Trusts ComEd Financing I and ComEd Financing II, ComEd subsidiaries
Trust Securities Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely the Company's subordinated debt
securities
Unicom Unicom Corporation
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
U.S. EPA U.S. Environmental Protection Agency
2
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(MILLIONS EXCEPT PER SHARE DATA)
Electric operating
revenues................. $ 7,073 $ 6,935 $ 6,910 $ 6,278 $ 5,260
Net income (loss)......... $ (774)(1) $ 743 $ 717(2) $ 424 $ 112(4)
Net income (loss) on
common stock............. $ (834)(1) $ 679 $ 647(2) $ 359 $ 46(4)
Cash dividends declared
per common share......... $ 1.60 $ 1.60 $ 1.60 $ 1.60(3) $ 1.60
Total assets (at end of
year).................... $22,458 $23,217 $23,119 $23,076 $24,380
Long-term obligations at
end of year excluding
current portion:
Long-term debt,
preference stock and
preferred securities
subject to mandatory
redemption requirements. $ 6,087 $ 6,376 $ 6,950 $ 7,745 $ 7,861
Accrued spent nuclear
fuel disposal fee and
related interest........ $ 693 $ 657 $ 624 $ 590 $ 567
Capital lease
obligations............. $ 438 $ 475 $ 374 $ 431 $ 321
Other long-term
obligations............. $ 3,177 $ 1,983 $ 1,819 $ 1,754 $ 1,718
- --------
(1) Includes an extraordinary loss for the write-off of generation-related net
regulatory assets of $810 million (after-tax), the loss on the early
retirement of Zion nuclear generating station of $523 million (after-tax),
and the positive impact of a cumulative effect of a change in accounting
principle for revenue recognition of $197 million (after-tax).
(2) Includes an extraordinary loss related to the early redemption of long-term
debt of $20 million (after-tax).
(3) Excludes a special dividend (consisting of $40 million cash and the common
stock of Unicom Enterprises) effected on September 1, 1994 in connection
with the holding company corporate restructuring.
(4) Includes the positive impact of a cumulative effect of a change in
accounting for income taxes of $10 million (after-tax).
CASH DIVIDENDS PAID PER SHARE OF COMMON STOCK
1997 (BY QUARTERS) 1996 (BY QUARTERS)
------------------------- -------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------ ----- ------ ----- ------ ----- ------ -----
Cash dividends paid......... 40c 40c 40c 40c 40c 40c 40c 40c
1997 CONSOLIDATED REVENUES AND SALES
ELECTRIC % %
OPERATING INCREASE KILOWATTHOUR INCREASE/ %
REVENUES OVER SALES (DECREASE) INCREASE
(THOUSANDS) 1996 (MILLIONS) OVER 1996 CUSTOMERS OVER 1996
----------- -------- ------------ ---------- --------- ---------
Residential............. $2,552,742 0.4% 22,151 (0.7)% 3,123,364 0.7%
Small commercial and
industrial............. 2,153,113 1.9 25,860 2.9 291,143 0.5
Large commercial and
industrial............. 1,467,574 1.5 24,074 0.7 1,566 1.0
Public authorities...... 505,907 0.6 7,322 (0.2) 12,180 0.3
Electric railroads...... 29,785 0.5 418 (1.4) 2 --
---------- ------ ---------
Ultimate consumers...... $6,709,121 1.1 79,825 0.9 3,428,255 0.7
Provision for revenue
refunds................ (45,470) 100.0 -- -- -- --
---------- ------ ---------
Net ultimate consumers.. $6,663,651 0.4 79,825 0.9 3,428,255 0.7
Sales for resale........ 336,480 43.2 15,679 28.7 51 15.9
Other revenues.......... 72,957 11.3 -- -- -- --
---------- ------ ---------
Total.................. $7,073,088 2.0 95,504 4.6 3,428,306 0.7
========== ====== =========
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN THE ELECTRIC UTILITY INDUSTRY
Unicom and its predominant business, electric energy generation,
transmission and distribution, are in a period of fundamental change in the
manner in which customers obtain, and energy suppliers provide, energy
services. These changes are attributable to changes in technology, the
relaxation of regulatory barriers to utilities' respective service territories
as well as efforts to change the manner in which electric utilities are
regulated. Federal law and regulations have been amended to provide for open
transmission system access, and various states are considering, or have
adopted, new regulatory structures to allow access by some or all customers to
energy suppliers in addition to the local utility.
Electric Utility Industry. The electric utility industry has historically
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serve customers within relatively
defined service territories; and operate under extensive regulation with
respect to rates, operations and other matters. Utilities have operated under
a regulatory compact with the state, with a statutory obligation to serve all
of the electricity needs within their service territory in a nondiscriminatory
manner. Historically, investment and operating decisions have been made based
upon the utilities' respective assessment of the current and projected needs
of their customers. In view of this obligation, regulation has focused on
investment and operating costs, and rates have been based on a recovery of
some or all of such prudently incurred costs plus a return on invested
capital. Such rate regulation, and the ability of utilities to recover
investment and other costs through rates, have provided the basis for
recording certain costs as regulatory assets. These assets represent costs
which are allocated over future periods reflecting related regulatory
treatment, rather than expensed in the current period.
The 1997 Act. On December 16, 1997, the Governor of Illinois signed into law
the 1997 Act, which established a phased-process to introduce competition into
the electric industry in Illinois under a less regulated structure. The 1997
Act, as it applies to ComEd, provides for, among other things, a 15%
residential base rate reduction commencing August 1, 1998, an additional 5%
residential base rate reduction commencing May 1, 2002, and customer access to
other electric suppliers in a phased-in process. Access for commercial and
industrial customers will occur over a period from October 1999 to December
2000, and access for residential customers will occur after May 1, 2002. The
15% residential base rate reduction, commencing on August 1, 1998, is expected
to reduce ComEd's operating revenues by approximately $160 million and $375
million in 1998 and 1999, respectively, compared to 1997 rate levels. ComEd is
engaged in certain pricing experiments contemplated by the 1997 Act, which are
expected to reduce ComEd's operating revenues by approximately $30 million and
$60 million in 1998 and 1999, respectively, compared to 1997 rate levels,
notwithstanding the effects of customer growth.
The 1997 Act also provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006, and can be extended through 2008 with ICC approval if
certain factors are met. The CTC will be established in accordance with a
formula defined in the 1997 Act. The CTC, which will be applied on a cents per
kilowatthour basis, considers the revenue which would have been collected from
a customer under tariffed rates, reduced by 1) the revenue the utility will
receive for providing delivery services to the customer, 2) the market price
for electricity and 3) a defined mitigation factor which represents the
utility's opportunity to develop new revenue sources and achieve costs
savings.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of
4
assets with limited ICC authority. 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, a portion of the excess earnings must be
refunded to customers. A utility may request a rate increase during the rate
freeze period when necessary to ensure the utility's financial viability, but
not before January 1, 2000.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based
regulated rates. The 1997 Act also requires utilities to establish or join an
ISO that will independently manage and control utility transmission systems.
Additionally, the 1997 Act includes the option to eliminate the FAC, the
leveling of certain regulatory requirements to permit operational flexibility,
the leveling of certain regulatory and tax provisions as applied to various
electric suppliers and a new more stringent liability standard applicable to
ComEd in the event of a major outage.
The 1997 Act also allows ComEd to unbundle a portion of its future revenues,
including tariffed and contract rates and CTC revenues, and issue securities
backed by these revenues. The proceeds from such security issuances must
generally be used to refinance outstanding debt or equity or for certain other
limited purposes. The total amount of ComEd's revenues securitized cannot
exceed $6.5 billion; approximately one-half of that amount can be issued in
the twelve-month period commencing on August 1, 1998.
As a result of the 1997 Act, prices for the supply of electric generation
are expected to transition from cost-based, regulated rates to rates
determined by competitive market forces. The CTC allows ComEd to recover a
portion of any 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
include costs control efforts and developing new sources of revenue.
Accounting Effects Related to the 1997 Act. ComEd's financial statements
reflect the application of SFAS No. 71, Accounting for the Effects of Certain
Types of Regulation. This statement allows ComEd to record certain regulatory
assets and liabilities, which are expected to be recovered or settled in
future rates and would not be recorded under GAAP for non-regulated entities.
Because the 1997 Act is expected ultimately to lead to market-based pricing
of electric generation services, ComEd discontinued SFAS No. 71 regulatory
accounting practices for the generation portion of its business in December
1997. ComEd evaluated the regulatory assets and liabilities related to the
generation portion of its business and determined that it is not probable that
such costs will be recovered through the cash flows from the regulated portion
of its business. Accordingly, the generation-related regulatory assets and
liabilities were written off in the fourth quarter of 1997, resulting in a
charge of $810 million (after-tax). These costs relate principally to
previously incurred costs originally expected to be collected through future
revenues, including income tax benefits previously flowed through to
customers, deferred carrying charges on Byron Unit 2 and Braidwood Units 1 and
2 nuclear generating plants, generation-related unamortized loss on reacquired
debt and other miscellaneous generation-related costs. The regulatory asset
for the unrecovered nuclear decommissioning costs of currently retired nuclear
plants was not written off, as the 1997 Act provides for the ongoing recovery
of decommissioning costs through regulated rates. See "Regulatory Assets and
Liabilities" and "Depreciation and Decommissioning" in Note 1 of Notes to
Financial Statements.
In addition, ComEd has evaluated whether the recoverability of the costs of
its generating stations has been impaired as defined in SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. This evaluation was conducted to determine whether future
revenues expected to be recovered from electric supply services will be
sufficient to cover the
5
costs of its generating assets. Notwithstanding the retirement and write-off of
Zion Station, as discussed below, ComEd has concluded, as a result of these
studies, that impairment, as defined in SFAS No. 121, does not currently exist
and that asset write downs are not necessary at this time. However, ComEd is
engaged in an ongoing examination of its assets and operations. If ComEd
retires or closes one or more additional generating plants prior to expected
retirement dates, further write-offs will be required.
Pursuant to an option contained in the 1997 Act, ComEd filed a tariff on
December 16, 1997 to eliminate its FAC as of January 1, 1997. Under ComEd's
current regulated rates, the FAC provided for the recovery of changes in fossil
and nuclear fuel costs and the energy portion of purchased power costs as
compared to the fuel and purchased energy costs included in ComEd's base rates.
Elimination of the FAC requires ComEd to refund to customers any net FAC
charges billed from January 1, 1997 through December 31, 1997. Such FAC charges
were $25 million (after-tax). These costs, as well as deferred underrecovered
energy costs of $19 million (after-tax) which ComEd would have been entitled to
recover if the FAC had remained in effect, were recorded as a reduction to
operating results in 1997. Additionally, the elimination of the FAC and a
transition to market-based pricing for generation-related costs required ComEd
to write down its investment in uranium-related properties. Current projections
of the market price for uranium indicate that the expected incremental costs of
mining and milling uranium at such properties will exceed the expected market
price for uranium. Such costs are not expected to be recoverable in a
competitive market. A write down of ComEd's investment in uranium-related
properties to realizable value resulted in a charge in December 1997 of $60
million (after-tax).
Federal Regulation. The Federal Energy Policy Act of 1992, among other
things, empowered FERC to introduce a greater level of competition into the
wholesale marketplace for electric energy. In April 1996, the FERC Order was
issued requiring utilities to file open access tariffs with regard to their
transmission systems. These tariffs set forth the terms, including prices,
under which other parties and the utility's wholesale marketing function may
use the utility's transmission system. ComEd has an approved open access tariff
with the FERC. The FERC Order requires the separation of the transmission
operations and wholesale marketing functions so as to ensure that unaffiliated
third parties have access to the same information as to system availability and
other requirements. The FERC Order further requires utilities to operate an
electronic bulletin board to make transmission price and access data available
to all potential users. A key feature of the FERC Order is that it contemplates
full recovery of a utility's costs "stranded" by competition. These costs are
"stranded" or "strandable" to the extent market-based rates would be
insufficient to allow for their full recovery. To recover stranded costs, the
utility must show that it had a reasonable expectation that it would continue
to serve the customer in question under its regulatory compact. In addition,
some governmental entities, such as cities, may elect to "municipalize" a
utility's distribution facilities through condemnation proceedings. Such
municipalities would then be able to purchase electric power on a wholesale
basis and resell it to customers over the newly acquired facilities. The FERC
Order provides for the recovery of a utility's investment stranded by
municipalization.
ComEd's Response to Regulatory Changes. ComEd is responding, and is
undertaking a significant planning effort to respond further, to the
developments within the utility industry and the 1997 Act and its potential for
strandable investment. During the past several years, such efforts have focused
on cost reductions, including personnel reductions, efficiencies in purchasing
and inventory management, and an incentive compensation system keyed to cost
control and improvement in shareholder value. Notwithstanding these efforts,
ComEd's costs remain high in comparison to its neighboring utilities. Although
ComEd's operating results and financial condition have historically been
affected by various rate proceedings, ComEd expects that the changes in the
national and Illinois electric energy marketplace, and ComEd's activities
anticipating or responding to them, will directly impact its operating results
and financial condition over the next several years.
6
ComEd anticipates that the 1997 Act, and the resultant increasing
competition to supply energy in Illinois and elsewhere, will have significant
effects upon its revenues and assets as it takes steps to adjust its
operations and services to meet the changing market for electric energy. ComEd
has been examining methods of positioning itself and its affiliates to deal
with those effects and to address the developing opportunities and challenges.
ComEd has been engaged in a broad-based examination of its assets and
operations, particularly nuclear and fossil generation and generation-related
(i.e., fuel and inventory) assets, with a view toward rationalizing their
investment and operating costs against their ability to contribute to the
revenues of ComEd under various market scenarios. Such an assessment involves
the consideration of numerous factors, including revenue contribution,
operating costs, impacts on ComEd's service obligations, purchase commitments
and the impact of various options. Such options include continued operation
with accelerated depreciation, indefinite suspension from operation, sale to a
third party and retirement or closure. As discussed below, ComEd recently
ceased nuclear generation operations and retired facilities at its Zion
Station. If ComEd retired or closed one or more additional generating plants,
particularly a nuclear plant, such retirement would have a material impact on
Unicom and ComEd's financial position and results of operations.
On January 14, 1998, the Boards of Directors of Unicom and ComEd authorized
the permanent cessation of nuclear generation operations and retirement of
facilities at ComEd's 2,080 megawatt Zion nuclear generating station. Such
retirement resulted in a charge for 1997 of $523 million (after-tax). The
decision to close Zion Station was a result of an ongoing analysis, which
ComEd performed regarding the economic value of its generating assets in light
of the expected changes in the manner in which electric energy is marketed and
sold. The passage of the 1997 Act provided a clearer basis for evaluating the
costs and benefits of alternative courses of action. In reaching the decision
to cease nuclear generation operations at Zion Station, the Boards also
considered the significant uncertainty associated with continued operation of
the station due to the degradation of the steam generators, and the expected
operating costs associated with continued station operation.
Notwithstanding the closure of Zion Station as a nuclear generating
facility, a portion of the station will continue to be used to provide voltage
support in the transmission system that serves ComEd's northern region. Such
support will require capital expenditures at the station as well as upgrades
to the transmission system at various points, in order to improve the ability
to import and transport power through the system. See Note 5 of Notes to
Financial Statements for additional information.
In April 1996, ComEd announced that it had finalized agreements to sell two
of its coal-fired generating stations, representing 1,600 megawatts of
generating capacity. Under the agreements, State Line and Kincaid stations are
expected to be sold for a total of $250 million, which approximates the book
value of the stations. The net proceeds are expected to be approximately $200
million (after-tax), which will be used to retire or redeem existing debt.
Under the terms of the sales, ComEd will enter into exclusive 15-year
purchased power agreements for the output of the plants. On March 31, 1997,
the ICC issued an order approving the agreements. A subsequent appeal has been
dropped by the intervening parties. The sale of State Line Station for its
approximate book value was finalized in December 1997. The net proceeds of the
sale, after income tax effects and closing costs, were approximately $56
million. The Kincaid Station sale is expected to be finalized during the first
quarter of 1998.
ComEd joined with eight Midwestern utilities in the formation of a regional
Midwest ISO in January 1998. The Midwest ISO is a key element in accommodating
the restructuring of the electric industry and will promote enhanced
reliability of the transmission system, equal access to the transmission
system and increased competition. The Midwest ISO will establish an
independent body that will ultimately take over direction of the management of
the transmission system for the utilities involved. ComEd will retain
ownership of its transmission lines. The formation of the Midwest ISO is
subject to FERC approval.
7
LIQUIDITY AND CAPITAL RESOURCES
Construction Program. ComEd has a construction program for the year 1998,
which consists principally of improvements to its existing nuclear and other
electric production, transmission and distribution facilities. It does not
include funds to add new generating capacity to ComEd's system. The program,
as currently approved by ComEd, includes the following estimated expenditures
(excluding nuclear fuel expenditures of approximately $160 million):
1998
------------
(MILLIONS OF
DOLLARS)
Production...................................................... $425
Transmission and Distribution................................... 415
General......................................................... 90
----
$930
====
Such estimated expenditures include $130 million toward the replacement of
the steam generators at ComEd's Braidwood Unit 1 and Byron Unit 1 nuclear
generating units by year-end 1998. The total replacement cost is estimated to
be $455 million, of which approximately $295 million has been incurred through
December 31, 1997 and $30 million will be incurred in 1999.
ComEd's forecasts of peak load indicate a need for additional resources to
meet demand, either through generating capacity, equivalent purchased power or
the development of additional demand-side management resources, in 1998 and
each year thereafter. However, ComEd believes that adequate resources,
including cost-effective demand-side management resources, non-utility
generation resources and other-utility power purchases, could be obtained in
sufficient quantities to meet such forecasted needs.
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $286 million at December 31, 1997. In addition,
ComEd's estimated commitments for the purchase of coal are as follows:
CONTRACT PERIOD COMMITMENT (1)
-------------- --------- --------------
Black Butte Coal Co................................ 1998-2000 $ 679
Decker Coal Co..................................... 1998-2014 427
Other commitments.................................. 1998 25
------
$1,131
======
--------
(1) In millions of dollars, excluding transportation costs. No estimate of
future cost escalation has been made.
For additional information concerning these coal contracts and ComEd's fuel
supply, see "Results of Operations" below and Notes 1 and 23 of Notes to
Financial Statements.
Capital Resources. ComEd forecasts that internal sources will provide
approximately three-fourths of the funds required for ComEd's 1998
construction program and other capital requirements, including nuclear fuel
expenditures, contributions to nuclear decommissioning funds, sinking fund
obligations and refinancing of scheduled debt maturities. See Notes 10 and 12
of Notes to Financial Statements for the summaries of the annual sinking fund
requirements and scheduled maturities for ComEd preference stock and long-term
debt, respectively. The forecast takes into consideration the 1997 Act. See
"Changes in the Electric Utility Industry" above and "Regulation," subcaption
"Rate Matters" below for additional information.
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of ComEd at the time of such
financing. A portion of ComEd's financing is expected to be provided through
the continued sale and leaseback of nuclear fuel through ComEd's existing
nuclear fuel lease facility. See Note 21 of Notes to Financial Statements for
additional
8
information concerning ComEd's nuclear fuel lease facility. ComEd has $758
million of unused bank lines of credit at December 31, 1997, which may be
borrowed at various interest rates and may be secured or unsecured. The
interest rate is set at the time of a borrowing and is based on several
floating rate bank indices plus a spread, which is dependent upon the credit
ratings of ComEd's outstanding first mortgage bonds or on a prime interest
rate. Collateral, if required for the borrowings, would consist of first
mortgage bonds issued under and in accordance with the provisions of ComEd's
mortgage. See Note 13 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 years 1997, 1996 and 1995.
During 1997, ComEd sold and leased back $150 million of nuclear fuel through
its existing nuclear fuel lease facility. In 1997, ComEd issued $150 million
principal amount of 7.375% Notes due January 15, 2004, $150 million principal
amount of 7.625% Notes due January 15, 2007 and $150 million principal amount
of 8.50% Trust Securities due January 15, 2027, the proceeds of which were
used to discharge current maturities of long-term debt and to redeem $200
million principal amount of first mortgage bonds. See the Statements of
Consolidated Cash Flows and Note 7 of Notes to Financial Statements for
information regarding common stock activity.
As of January 30, 1998, ComEd has an effective "shelf" registration
statement with the SEC for the future sale of up to an additional $505 million
of debt securities and cumulative preference stock for general corporate
purposes of ComEd, including the discharge or refund of other outstanding
securities.
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........................................... Baa2 BBB BBB
Publicly-held debentures and unsecured pollution
control obligations............................. Baa3 BBB- BBB-
Convertible preferred stock...................... baa3 BBB- BBB-
Preference stock................................. baa3 BBB- BBB-
Trust Securities................................. baa3 BBB- BBB-
Commercial paper................................. P-2 A-2 D-2
In January 1997, Moody's changed the rating outlook on ComEd's securities
from "stable" to "negative" and Duff & Phelps added ComEd's securities to
"Rating Watch-Down." As of January 1998, S&P's rating outlook on ComEd
remained "stable."
Capital Structure. The ratio of long-term debt to total capitalization has
increased to 48.5% at December 31, 1997 from 46.1% at December 31, 1996. This
increase is related primarily to the write-offs recorded in the fourth quarter
of 1997 due to the discontinuance of regulatory accounting practices for
generation-related assets and the closure of Zion Station. Also as a result of
such write-offs, ComEd's retained earnings account had a deficit balance of
$19.2 million at December 31, 1997. As of December 31, 1997, $384 million of
retained earnings had been appropriated for future dividend payments.
Year 2000 Conversion. ComEd uses various software, systems and technology
throughout its businesses that will be affected by the date change in the Year
2000 and any failure to address Year 2000 issues in a timely manner could
result in a material operational or financial risk. ComEd's approach to
addressing Year 2000 compliance issues is to upgrade or remediate software,
systems and technology that are not Year 2000 compliant and that are not
otherwise being replaced in accordance with ComEd's business plans. ComEd is
in the process of replacing certain of its financial, human resources,
payroll, and customer service and billing software with new software that is
Year 2000 compliant. In other cases, ComEd is upgrading existing software to
versions that are Year 2000
9
compliant where such upgrades are available. In cases where ComEd has
determined that it is not appropriate to replace existing software that is not
Year 2000 compliant, and that Year 2000-compliant upgrades are not available,
ComEd is remediating the software to make it Year 2000 compliant. Accordingly,
ComEd is upgrading or remediating certain software and systems in its nuclear
and fossil electricity generation business units and in its transmission and
distribution and supply management business units. ComEd is also in the
process of evaluating whether Year 2000 compliance issues will affect any of
its key suppliers. The schedule for the implementation of new Year 2000-
compliant software and upgraded versions of existing software, and the
remediation of software not being replaced or upgraded, contemplates that such
efforts will be completed by the end of 1998, except in the nuclear generation
business unit, where completion is scheduled for the third quarter of 1999.
The total cost of remediating or upgrading software, that is not being
replaced or upgraded in accordance with business plans, is currently estimated
to be approximately $20 million.
Market Risks. ComEd is exposed to market risk due to changes in interest
rates and changes in the market price for electricity. Exposure for interest
rate changes relates to its long-term debt and preferred equity obligations.
Exposure to electricity market price risk relates to forward activities taken
to effectively manage the supply of, and demand for, the electric generation
capability of ComEd's generating plants. ComEd does not currently utilize
derivative commodity or financial instruments for trading or speculative
purposes.
Interest Rate Exposure. The table below provides the fair value and average
interest, or fixed dividend rate, of ComEd's outstanding debt and preferred
stock equity instruments at December 31, 1997.
EXPECTED MATURITY DATE FAIR VALUE
COMED AND SUBSIDIARY ---------------------------------------- AS OF
COMPANIES (MILLIONS) 1998 1999 2000 2001 2002 THEREAFTER TOTAL 12/31/97
- -------------------- ---- ---- ---- ---- ---- ---------- ------ ----------
Long-Term Debt--
Fixed Rate............. $353 $150 $462 $108 $305 $4,291 $5,669 $6,003
Average Interest Rate.. 6.6% 8.8% 7.2% 7.3% 7.9% 8.0%
Variable Rate.......... $150 $ -- $ -- $ -- $ -- $ 292 $ 442 $ 442
Average Interest Rate.. 6.5% 3.7%
Preferred and Preference
Stock--
Subject to Mandatory
Redemption............ $ 31 $ 18 $ 88 $ 18 $ 18 $ 33 $ 206 $ 209
Average Dividend Rate.. 8.9% 8.8% 7.3% 8.8% 8.8% 8.8%
Not Subject to Manda-
tory Redemption....... $ -- $ -- $ -- $ -- $ -- $ 507 $ 507 $ 515
Average Dividend Rate.. 8.2%
Trust Securities........ $ -- $ -- $ -- $ -- $ -- $ 350 $ 350 $ 372
Average Dividend Rate.. 8.5%
Market Price Exposure. In the normal course of business, ComEd utilizes
contracts for the forward sale and purchase of electricity to effectively
manage the utilization of its available generating capability. Such contracts
include forward contracts for wholesale sales of generating capability, during
periods when ComEd's available generating capability is expected to exceed the
demands of its retail, or native load, customers. Such contracts may also
include forward contracts for the purchase of generating capability during
periods when the expected market price for electricity is below ComEd's
expected incremental cost of generation. A sensitivity analysis has been
performed which concluded that the market price risk exposure of these
transactions is not material.
The market price of electricity is subject to price volatility associated
with changes in supply and demand in the electric supply markets. To limit the
market price risk associated with the forward commodity contracts described in
the preceding paragraph, ComEd has utilized energy put and call option
contracts and energy swap arrangements. A sensitivity analysis has been
performed which indicates that the market price risk exposure of these
financial instruments is not material.
10
REGULATION
ComEd and the Indiana Company are subject to state and federal regulation in
the conduct of their respective businesses, including the operations of
Cotter. Such regulation includes rates, securities issuance, nuclear
operations, environmental and other matters. Particularly in the cases of
nuclear operations and environmental matters, such regulation can and does
affect operational and capital expenditures.
Rate Matters. In January 1995, the ICC issued its Rate Order in the
proceedings relating to ComEd's February 1994 rate increase request. The Rate
Order provided, among other things, for an increase in ComEd's total revenues
of approximately $302 million (excluding add-on revenue taxes) on an annual
basis. The rates provided in the Rate Order became effective on January 14,
1995; however, they are being collected subject to refund as a result of
subsequent judicial action. The Rate Order was appealed by intervenors and
ComEd to the Illinois Appellate Court, which issued a decision on May 30, 1997
affirming the Rate Order in all respects with the exception of two issues,
which it remanded to the ICC for the purpose of providing further analysis.
Those issues relate to: (i) the manner in which certain costs are recovered
and which customers should pay those costs, and (ii) the proper rate of return
on common equity for ComEd. ComEd believes that the ICC can satisfy the
Appellate Court's remand directions on the basis of the existing record from
the ICC proceedings which led to the Rate Order. The Appellate Court's
decision was not appealed and the matter was returned to the ICC, where a
decision is expected early in the second quarter of 1998.
With respect to the first issue remanded to the ICC, ComEd does not believe
it will have any effect on the overall level of rates. With respect to the
rate of return on common equity issue, the ICC had determined in the Rate
Order that ComEd's cost of common equity was 12.28%. Intervenors had submitted
testimony recommending a return on common equity of 11.50%. The Appellate
Court decision requires the ICC to clarify the basis for certain of its
findings relating to its rejection of the intervenors' recommendation and to
analyze further how it arrived at its conclusions. The Appellate Court stated
that after reanalyzing these bases the ICC can determine whether or not the
cost of common equity determination it adopted should still be followed. Each
tenth of one percent change in the rate of return on common equity has
approximately an $8 million effect on the level of annual revenues. The
Appellate Court's decision does not have any immediate effect on ComEd's rates
or require any refunds. In connection with the initiation of the appeal, ComEd
committed to make refunds "in the event that a final, non-appealable order is
entered reversing the ICC's Rate Order." Revenues of approximately $195
million would be subject to refund if the ICC were to adopt the lower rate of
return on common equity recommended by intervenors. An ICC Hearing Examiner
issued a proposed order in January 1998, which if adopted by the ICC, would
uphold the Rate Order and the associated $302 million revenue increase on an
annual basis.
See "Changes in the Electric Utility Industry" above for information
regarding the 1997 Act.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd--given the impact of such operations on overall O&M
expenditures and the ability of nuclear power plants to produce electric
energy at a relatively low marginal cost. ComEd operates a large number of
nuclear plants, ranging from the older Dresden and Quad Cities stations to the
more recently completed LaSalle, Byron and Braidwood stations, and is intent
upon safe, reliable and efficient operation. These plants were constructed
over a period of time in which technology, construction procedures and
regulatory initiatives and oversight have evolved, with the result that older
plants generally require greater attention and resources to meet regulatory
requirements and expectations as well as to maintain operational reliability.
As discussed in "Changes in the Electric Utility Industry" above, ComEd is
closing its Zion Station.
ComEd's Dresden, Zion and LaSalle nuclear generating stations are currently
on the NRC's list of plants to be monitored closely. Dresden Station has been
on the list since 1992 and LaSalle and Zion
11
stations were added in January 1997. On January 21, 1998, the NRC stated that
although Dresden Station has demonstrated sustained improved performance that
would warrant removal from the list, continued evidence of cyclical
performance at ComEd's other nuclear generating stations indicated Dresden
Station did not meet all the criteria for removal from the list. At its
January 21, 1998 meeting, the NRC acknowledged improvements at LaSalle Station
but concluded that a substantial amount of work remains and the plant should
remain on the list. The NRC also stated that, based on a determination made
prior to the announcement of the cessation of power operations, at the
station, Zion should remain on the list. The listing of the plants does not
prevent ComEd from operating the generating units; however, it does mean that
the NRC will devote additional resources to monitoring ComEd's operating
performance and that ComEd will need to work to demonstrate to the NRC the
sustainability of improvements which it believes it has undertaken and is
continuing to implement. Also at the meeting, the NRC noted a declining
performance trend at Quad Cities Station. The NRC stated that although
operations performance at Quad Cities Station was generally good, weaknesses
were observed with respect to certain maintenance and engineering activities.
The NRC has indicated that it is monitoring ComEd's ability to manage its
nuclear operations in their entirety and that the performance at any one
facility will be viewed by the NRC in context with the performance of ComEd's
nuclear generating group as a whole.
In January 1997, the NRC also took the unusual additional step of requiring
ComEd to submit information to allow the NRC to determine what actions, if
any, should be taken to assure that ComEd can safely operate its six nuclear
generating stations while sustaining performance improvement at each site. The
request also required ComEd to submit information regarding the criteria that
it has established, or planned to establish, to measure performance and to
explain ComEd's proposed actions if the criteria were not met. The request
stated the NRC staff's concerns with the "cyclical safety performance of ComEd
nuclear stations," noting the presence on the list of plants to be monitored
closely of Dresden, LaSalle and Zion stations at various times during the past
10 years. It also noted concerns regarding "ComEd's ability to establish
lasting and effective programs that result in sustained performance
improvement." The problems identified by the NRC are consistent with
weaknesses that have been identified in station self-assessments initiated by
ComEd, and management had already undertaken to develop and implement programs
designed to address these issues. ComEd submitted a response to the NRC on
March 28, 1997 and the NRC indicated in an April 25, 1997 public meeting with
representatives of ComEd management that ComEd's response was generally
adequate to demonstrate ComEd's ability to operate its nuclear generating
stations while sustaining performance improvements. In a November 4, 1997
meeting with the NRC staff, the NRC indicated that it believes ComEd's nuclear
performance has shown improvement, but that it is too early to conclude that
lasting improvement has been achieved. The NRC noted, as an exception to
ComEd's general improving and sustained performance in its nuclear operations,
concerns regarding ComEd's engineering efforts to resolve the longstanding
fire protection issues at the Quad Cities Station. The NRC and representatives
of ComEd's management have met and will continue to meet periodically in the
future, to follow-up on these matters.
ComEd has devoted, and intends to continue to devote, significant resources
to the management and operations of its nuclear generating stations. Over the
past several years, it has increased and reinforced station management with
managers drawn from other utilities which have resolved similar operational
and performance issues, including the appointment of a new Chief Nuclear
Officer in late 1997. It has also sought to identify, anticipate and address
operating and performance issues in a safe, cost-effective manner, while
seeking to improve the availability and capacity factors of its nuclear
generating units.
ComEd's activities, with respect to its nuclear generating stations, have
included improvements in operating and personnel procedures and repair and
replacement of equipment and can result in longer unit outages. LaSalle Units
1 and 2 and Quad Cities Units 1 and 2 are currently not operating. ComEd
12
is developing an integrated schedule for restarting the units at LaSalle
Station. It currently is expected that LaSalle Unit 1 will restart in the
third quarter of 1998 and LaSalle Unit 2 is expected to restart approximately
six months later. Both units at Quad Cities Station are expected to return to
service in the Spring of 1998.
The LaSalle outage and an outage at Zion were part of several outages of
nuclear and fossil generating stations that several utilities operating in the
Midwestern power grid (including ComEd) were expecting and experienced during
1997. Although ComEd met its customers' electricity demands, the expectation
of the NERC, prior to the beginning of the summer, had been that there could
have been electric energy shortages during summer peak demand periods due to
generating station outages in the Midwestern power grid and transmission
limitations on delivering power from neighboring systems. In response to these
regional circumstances and expectations, ComEd increased the availability of
its remaining nuclear and fossil generating capacity, reinforced transmission
capacity, negotiated the purchase of power and related transmission service
from third parties, and worked with a number of customers to manage the use
and demand for power. The NERC will be analyzing electric reliability for the
summer of 1998 in light of the potential for continued outages of nuclear
plants operated by several utilities in the Midwestern power grid.
Generating station availability and performance during a year may be issues
in fuel reconciliation proceedings in assessing the prudence of fuel and power
purchases during such year. Final ICC orders have been issued in fuel
reconciliation proceedings for years prior to 1994 and for the year 1995. In
1996, an intervenor filed testimony in the fuel reconciliation proceeding for
1994 seeking a refund of approximately $90 million relating to nuclear station
performance. The 1997 Act provides that the fuel reconciliation proceedings
for 1994 and 1996 must be concluded by the end of 1998. If refunds are
required in these proceedings, the refunds could have a material effect on
results of operations. The 1997 Act also provides that, because ComEd
eliminated its FAC effective January 1, 1997, the ICC shall not conduct a fuel
reconciliation proceeding for the year 1997 and subsequent years. See "Changes
in the Electric Utility Industry" above for information regarding the
elimination of ComEd's FAC.
Based on ComEd's most recent study, decommissioning costs, including the
cost of decontamination and dismantling, are estimated to aggregate $4.8
billion in current-year (1998) dollars, including a contingency allowance.
ComEd estimates it will expend approximately $12.9 billion, including a
contingency allowance, for decommissioning costs primarily during the period
from 2007 through 2032. Such costs are expected to be funded by external
decommissioning trusts which ComEd established in compliance with Illinois law
and into which ComEd has been making annual contributions. Future
decommissioning cost estimates may be significantly affected by the adoption
of or changes to NRC regulations as well as changes in the assumptions used in
making such estimates, including changes in technology, available alternatives
for the disposal of nuclear waste, and inflation. See Note 1 of Notes to
Financial Statements under "Depreciation and Decommissioning" for additional
information.
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 23 of Notes to Financial Statements.
RESULTS OF OPERATIONS
Net Income (Loss) on Common Stock. The loss for 1997 was primarily due to
ComEd's discontinuation of regulatory accounting practices for the generation
portion of its business and other charges recorded as a result of the 1997
Act. The 1997 results also include the write-off for the closure of Zion
nuclear generating station.
13
ComEd discontinued regulatory accounting practices for the generation
portion of its business in the fourth quarter of 1997 due to the 1997 Act.
Accordingly, ComEd's generation-related net regulatory assets (which represent
assets and liabilities properly recorded under regulatory accounting practices
but which would not be recorded under GAAP for non-regulated entities) were
written off, resulting in an extraordinary charge of $810 million (after-tax).
In addition, as permitted under the 1997 Act, ComEd elected to eliminate its
FAC in December 1997, which resulted in a charge of $44 million (after-tax).
The reduction includes $25 million (after-tax) in net FAC charges billed to
its customers in 1997, which will be refunded to customers in 1998. The
reduction also includes a write-off of $19 million (after-tax) in
underrecovered energy costs that ComEd would have been entitled to recover if
the FAC had remained in effect.
Also, 1997 results include the write down of ComEd's investment in uranium-
related properties to reflect costs which are not expected to be recovered in
a competitive market. The write down resulted in a charge of $60 million
(after-tax).
Partially offsetting the charges to operations for 1997 was a change in the
accounting method for revenue recognition to record ComEd's revenues
associated with service which has been provided to customers but has not yet
been billed at the end of each accounting period, retroactive to January 1,
1997. This change in accounting method had a positive impact of $170 million
(after-tax), consisting of a one-time cumulative effect of the change for
years prior to 1997 of $197 million (after-tax), less the impact of the change
on 1997 results of $27 million (after-tax).
On January 14, 1998, the Boards of Directors of Unicom and ComEd authorized
the cessation of nuclear generation operations at ComEd's Zion Station. The
closure resulted in a charge for 1997 of $523 million (after-tax), reflecting
the write-off of the unrecoverable portion of the cost of plant and
inventories and a liability for future closing costs.
ComEd's kilowatthour sales, including sales to wholesale customers,
increased 5% during 1997 compared to 1996, as discussed below. In 1997 O&M
expenses increased by 12%, as discussed below.
Also reducing 1997 operating results were increased fuel and purchased power
costs of $336 million, as discussed below. In addition, a 4% increase in
depreciation expense, primarily due to an increase in certain nuclear plant
depreciation resulted in a charge of $23 million (after-tax).
The 1996 results reflect, among other factors, a 1% decrease in overall O&M
expenses as compared to 1995 and the positive effects of an income tax refund
related to prior years with an increase in operating results of $26 million
(after-tax) and a reduction in real estate taxes with an increase in operating
results of $28 million (after-tax). Approximately half of the reduction in
real estate taxes is related to the year 1995. The real estate tax reduction
results primarily from ongoing challenges by ComEd of the methodology used by
local taxing authorities to assess the value of ComEd's nuclear generating
stations. The 1996 results also reflect a 9% reduction in the total of
interest expense on debt and dividend requirements on preferred and preference
stocks compared to 1995, largely due to the early retirement of debt at the
end of 1995. In September 1996, the ICC approved ComEd's request to increase
depreciation charges on its nuclear generating units by $30 million for the
year 1996, resulting in a charge of $20 million (after-tax).
The 1995 results reflect higher revenues, primarily as a result of higher
kilowatthour sales, and the higher rate levels, which became effective in
January 1995 under the Rate Order. The higher kilowatthour sales reflect the
unusually hot summer weather in 1995. The 1995 results were also affected by
higher O&M expenses, which reflect a charge of $59 million (after-tax) for a
voluntary employee separation offer to certain ComEd employees. ComEd also
recorded a charge of $20 million (after-tax) related to the early redemption
of $645 million of long-term debt.
14
Operating Revenues. ComEd's electric operating revenues reflect revenues
from sales to ultimate consumers (including residential, commercial and
industrial customers within its service territory), revenues from sales for
resale (i.e., sales to wholesale customers, principally other electric
utilities), and revenues from collections under its FAC for years prior to
1997 (which was intended to recover variations in ComEd's fuel cost for
generating electric energy and the energy portion of purchased power cost in
relation to the amount included in ComEd's base rates). Operating revenues are
affected by kilowatthour sales, rates and FAC recoveries. Kilowatthour sales,
in turn, are affected by weather, the level of economic activity within
ComEd's service area, and off-system or wholesale sales to other utilities.
Off-system sales opportunities are affected by a number of factors, including
nuclear generating availability and performance.
During 1997, electric operating revenues increased $139 million, primarily
due to a 29% increase in kilowatthour sales to wholesale customers.
Kilowatthour sales to ultimate consumers during 1997 increased 1% compared to
1996, reflecting continued economic growth in ComEd's service territory.
Operating revenues in 1997 were reduced by the provision for revenue refunds
of $45 million, including revenue taxes, related to the elimination of the
FAC. Operating revenues increased $25 million in the year 1996, as compared to
the year 1995, principally reflecting increased sales for resale and increased
energy cost recoveries under ComEd's then effective FAC, although kilowatthour
sales to ultimate consumers were down 1% from the prior year due to the cooler
summer weather compared to the exceptionally hot summer in 1995. Operating
revenues increased $632 million in the year 1995, as compared to the year
1994, primarily due to an increase of 5% in kilowatthour sales to ultimate
consumers attributable to the hot summer weather, as well as a rate increase
that became effective in January 1995.
Fuel Costs. Changes in fuel expense for the years 1997, 1996 and 1995
primarily resulted from changes in the average cost of fuel consumed, changes
in the mix of fuel sources of electric energy generated and changes in net
generation of electric energy. Fuel mix is determined primarily by system
load, the costs of fuel consumed and the availability of nuclear generating
units. The cost of fuel consumed, net generation of electric energy and fuel
sources of kilowatthour generation were as follows:
1997 1996 1995
------ ------ ------
Cost of fuel consumed (per million Btu):
Nuclear........................................... $0.57 $0.53 $0.52
Coal.............................................. $2.28 $2.41 $2.43
Oil............................................... $3.90 $3.41 $3.06
Natural gas....................................... $2.69 $2.75 $1.85
Average all fuels................................. $1.33 $1.17 $1.05
Net generation of electric energy (millions of
kilowatthours).................................... 85,861 93,048 96,608
Fuel sources of kilowatthour generation:
Nuclear........................................... 57% 67% 73%
Coal.............................................. 39 30 24
Oil............................................... -- 1 --
Natural gas....................................... 4 2 3
------ ------ ------
100% 100% 100%
====== ====== ======
The decrease in nuclear generation as a percentage of total generation for
1997 compared to the prior years is primarily due to outages at certain of
ComEd's nuclear generating stations. See "Regulation," subcaption "Nuclear
Matters" above for information regarding outages at certain of ComEd's nuclear
generating stations.
Under the Energy Policy Act of 1992, investor-owned electric utilities that
have purchased enrichment services from the DOE are being assessed amounts to
fund a portion of the cost for the decontamination and decommissioning of
uranium enrichment facilities owned and previously operated by the DOE.
ComEd's portion of such assessments is estimated to be approximately $15
million per
15
year (to be adjusted annually for inflation) to year 2007. The Act provides
that such assessments are to be treated as a cost of fuel. See Note 1 of Notes
to Financial Statements under "Nuclear Fuel," for information related to the
accounting for such costs.
Fuel Supply. Compared to other utilities, ComEd has relatively low average
fuel costs as a result of its reliance predominantly on lower cost nuclear
fuel. ComEd's coal costs, however, are high compared to those of other
utilities. ComEd's western coal contracts and its rail contracts for delivery
of the western coal provide for the purchase of certain coal at prices
substantially above currently prevailing market prices, and ComEd has
significant purchase commitments under its contracts. In addition, as of
December 31, 1997, ComEd had coal reserves of $282 million. In prior years,
ComEd's commitments for the purchase of coal exceeded its requirements. Rather
than take all the coal it was required to take, ComEd agreed to purchase the
coal in place in the form of coal reserves. For additional information
concerning ComEd's coal purchase commitments, fuel reconciliation proceedings
and coal reserves, see "Liquidity and Capital Resources" above and "Coal
Reserves" in Note 1 of Notes to Financial Statements.
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of ComEd and the Indiana Company's generating units and
the availability and cost of power from other utilities. Purchased power costs
increased $255 million in 1997 compared to 1996, primarily due to outages at
certain of ComEd's nuclear generating stations. See "Regulation," subcaption
"Nuclear Matters" above, for information regarding outages at certain of
ComEd's nuclear generating stations.
The number and average cost of kilowatthours purchased were as follows:
1997 1996 1995
------ ----- -----
Kilowatthours (millions)............................... 16,672 6,129 2,475
Cost per kilowatthour.................................. 2.40c 2.37c 2.60c
Purchased power is expected to increase in the year 1998 compared to the
year 1997 due to expected increased kilowatthour sales, lower nuclear
generation and higher costs for power purchased from other utilities.
Deferred Under or Overrecovered Energy Costs--Net. Operating expenses for
the years 1997, 1996 and 1995 include the net change in under or overrecovered
allowable energy costs under ComEd's FAC. Operating expenses in 1997 also
reflect the write-off of the unrecoverable energy costs related to the
elimination of ComEd's FAC. See "Changes in the Electric Utility Industry,"
"Fuel Costs" and "Fuel Supply" above and Note 1 of Notes to Financial
Statements under "Fuel Adjustment Clause."
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 customer service, administrative overhead and
support. Given the variety of expense categories covered, there are a number
of factors which affect the level of such expenses within any given year. Two
major components of such expenses, however, are the costs associated with
operating and maintaining ComEd's nuclear and fossil generating facilities.
Generating station expenses are affected by the cost of materials, regulatory
requirements and expectations, the age of facilities as well as cost control
efforts.
During the three years presented in the financial statements, the aggregate
level of O&M expenses increased 12% in 1997 compared to 1996, decreased 1% in
1996 compared to 1995, and increased 4% in 1995 compared to 1994. All three
years include increases in the level of generating station expenses, as
discussed below. The year to year variations reflect efforts in 1996 and 1997
to improve nuclear generating station availability as well as to meet
regulatory requirements and
16
expectations, and the impact in 1995 of an early separation program offered to
ComEd's employees, which resulted in a $97 million charge. Additional factors
in each year also affected the level of O&M expenses.
O&M expenses associated with nuclear generating stations increased $122
million, $88 million and $32 million for the years 1997, 1996 and 1995,
respectively, as a result of activities associated with the repair,
replacement and improvement of nuclear generating facility equipment. Since
1995, ComEd has increased the number and scope of maintenance activities
associated with its nuclear generating stations. Such efforts are the result
of station performance evaluations performed to identify the sources and
causes of unplanned equipment repairs. The goal of such efforts is to design
and implement cost effective repairs and improvements to increase station
availability. The efforts begun in 1995 are expected to continue through 1998.
The increase in O&M expenses associated with nuclear generating stations has
been driven by ComEd's objective to improve station availability, as well as
to meet regulatory requirements and expectations. ComEd is pursuing a program
to improve the quality of nuclear operations, including safety and efficiency,
which is also expected to achieve a longer term goal of improved availability
and to be positioned to take advantage of opportunities in a more competitive
market. During the three years presented in the financial statements, ComEd
increased and reinforced station management with managers drawn from other
utilities which have resolved similar operating issues. It has also sought to
identify, anticipate and address nuclear station operating and performance
issues in a safe, cost-effective manner, while seeking to improve the
availability and capacity factors of its nuclear generating units. Such
activities have included improvements in operating and personnel procedures
and repair and replacement of equipment, and can result in longer unit
outages. Such activities have involved increased maintenance and repair
expenses in recent years.
O&M expenses associated with fossil generating stations increased $31
million, $4 million and $3 million for the years 1997, 1996 and 1995,
respectively. The increase related to fossil generating stations in 1997 is
primarily due to an increase in the repair and improvement of fossil
generating facility equipment in order to increase their general availability,
and to ensure their availability during the Summer of 1997. That increase was
partially offset by a reduction in personnel.
O&M expenses associated with transmission and distribution facilities
increased $15 million and $11 million for the years 1997 and 1996,
respectively, and decreased $3 million for the year 1995. The 1997 increase is
primarily due to increased emergency restoration of electric service and tree
trimming costs. The 1996 increase reflects higher maintenance expenses. The
decrease in 1995 reflects cost control efforts. O&M expenses associated with
customer-related activities increased $11 million, $17 million and $10 million
for the years 1997, 1996 and 1995, respectively. The increase in 1997 is
primarily due to an increase in uncollectible accounts.
O&M expenses also include compensation and benefits expenses. Since 1995,
ComEd has reduced the size of its workforce by offering incentives for
employees to leave the company voluntarily. Such incentives included both
current payments and earlier eligibility for post-retirement health care
benefits, resulting in charges of $39 million, $12 million and $97 million for
the years 1997, 1996 and 1995, respectively.
Other compensation and benefits expenses, excluding the effects of employee
separation plans, decreased $14 million, $20 million and $65 million for the
years 1997, 1996 and 1995, respectively. The decrease in 1997 is primarily due
to a reduction in medical costs for active employees. The decreases in 1996
and 1995 are primarily related to a reduction of post-retirement health care
benefits costs, primarily as a result of a plan amendment effected in mid-1995
which required retired employee contributions to the plan for the first time.
Favorable experience also allowed the use of lower health care cost trend
rates, producing a lower charge in 1996 and 1995. O&M expenses also reflect
17
$41 million, $38 million and $65 million for employee incentive compensation
plan costs for the years 1997, 1996 and 1995, respectively. The payments,
which were made partly in cash and partly in shares of Unicom common stock,
were made under Unicom's Incentive Plans as the result of the achievement
during the indicated years of specified financial performance, operating
performance and increased shareholder value. The effects of inflation have
also increased O&M expenses during the years and are also reflected in the
increases and decreases discussed herein.
O&M expenses in 1997 also include $25 million for the additional write-off
of obsolete materials and supplies compared to 1996. O&M expenses associated
with certain administrative and general costs increased $35 million for the
year 1997. This increase was due to a variety of reasons including an increase
in the provision for vacation pay liability.
Depreciation. Depreciation expense increased for the years 1997, 1996 and
1995 as a result of additional nuclear plant depreciation and additions to
plant in service. The additional depreciation on ComEd's nuclear generating
units includes depreciation recorded for the year 1997 related to its steam
generators at Byron Unit 1 and Braidwood Unit 1 of $59 million, which are
expected to be replaced prior to year-end 1998, and the 1996 additional
depreciation initiative of $30 million. See "Depreciation and Decommissioning"
in Note 1 of Notes to Financial Statements.
Interest on Debt. Changes in interest on long-term debt and notes payable
for the years 1997, 1996 and 1995 were due to changes in average interest
rates and in the amounts of long-term debt and notes payable outstanding.
Changes in interest on long-term debt also reflected new issues of debt, the
retirement and early redemption of debt, and the retirement and redemption of
issues which were refinanced at generally lower rates of interest. The average
amounts of long-term debt and notes payable outstanding and average interest
rates thereon were as follows:
1997 1996 1995
------ ------ ------
Long-term debt outstanding:
Average amount (millions).......................... $6,256 $6,644 $7,528
Average interest rate.............................. 7.65% 7.67% 7.78%
Notes payable outstanding:
Average amount (millions).......................... $ 153 $ 230 $ 51
Average interest rate.............................. 5.95% 5.79% 6.40%
Decommissioning. The staff of the SEC has questioned certain of the current
accounting practices of the electric utility industry, including ComEd,
regarding the recognition, measurement and classification of decommissioning
costs for nuclear generating stations in financial statements of electric
utilities. In response to these questions, the FASB is reviewing the
accounting for nuclear decommissioning costs and issued an exposure draft in
February 1996 requesting written comment. If current electric utility industry
accounting practices for such decommissioning costs are changed, annual
provisions for decommissioning could increase and the estimated cost for the
decommissioning of operating nuclear plants after retirement could be recorded
as a liability rather than as accumulated depreciation. Decommissioning costs
of currently retired nuclear plants are recorded as a liability. ComEd does
not believe that such changes, if required, would have an adverse effect on
the results of operations due to its ability to recover decommissioning costs
through rates.
Other Items. The amounts of AFUDC reflect changes in the average levels of
investment subject to AFUDC and changes in the average annual capitalization
rates as discussed in Note 1 of Notes to Financial Statements under "AFUDC."
AFUDC does not contribute to the current cash flow of ComEd. ComEd
discontinued SFAS No. 71 regulatory accounting practices in December 1997 for
the generation-related portion of its business. As a result, ComEd will not
record AFUDC, but will capitalize interest costs on its generation-related
construction work in progress and nuclear fuel in process beginning in 1998.
The ratios of earnings to fixed charges for the years 1997, 1996 and 1995
were 0.58, 2.90 and 2.79, respectively. The ratios of earnings to fixed
charges and preferred and preference stock dividend
18
requirements for the years 1997, 1996 and 1995 were 0.49, 2.48 and 2.39,
respectively. Earnings for 1997 were inadequate to cover fixed charges and
fixed charges and preferred and preference stock dividend requirements by
approximately $259 million and $359 million, respectively. The deficiency is
principally attributable to the earnings impact of the closure of Zion
Station.
Business corporations, in general, have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate
to replace, at increased costs, the productive assets consumed. Electric
utilities, in particular, have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental requirements. Because the
regulatory process limits the amount of depreciation expense included in
ComEd's revenue allowance to the original cost of utility plant investment,
the resulting cash flows are inadequate to provide for replacement of that
investment in future years or preserve the purchasing power of common equity
capital previously invested.
19
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 December 31, 1997 and 1996, and
the related statements of consolidated operations, retained earnings (deficit)
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commonwealth Edison
Company and subsidiary companies as ofDecember 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
As discussed in Note 3, effective January 1, 1997, the Company changed its
method of accounting for revenue recognition.
Arthur Andersen LLP
Chicago, Illinois
January 30, 1998
20
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the years 1997, 1996
and 1995 reflect the results of past operations and are not intended as any
representation as to results of operations for any future period. Future
operations will necessarily be affected by various and diverse factors and
developments, including changes in electric rates, regulation, population,
business activity, competition, taxes, environmental control, energy use,
fuel, cost of labor, purchased power and other matters, the nature and effect
of which cannot now be determined.
1997 1996 1995
----------- ---------- ----------
(THOUSANDS EXCEPT PER SHARE DATA)
Electric Operating Revenues............... $ 7,073,088 $6,934,547 $6,909,786
----------- ---------- ----------
Electric Operating Expenses and Taxes:
Fuel..................................... $ 1,223,210 $1,167,039 $1,089,841
Purchased power.......................... 400,055 145,299 64,378
Deferred (under)/overrecovered energy
costs--net.............................. 16,228 (9,184) (2,732)
Operation................................ 1,714,460 1,496,175 1,597,964
Maintenance.............................. 689,729 652,495 566,749
Depreciation............................. 985,877 951,865 897,305
Recovery of regulatory assets............ 15,272 15,272 15,272
Taxes (except income).................... 799,167 782,668 832,026
Income taxes--
Current--Federal....................... 214,349 265,325 257,083
--State................................ 65,287 74,192 87,138
Deferred--Federal--net................. 56,111 140,122 172,403
--State--net........................... 2,544 16,139 15,605
Investment tax credits deferred--net..... (31,015) (33,378) (28,710)
----------- ---------- ----------
$ 6,151,274 $5,664,029 $5,564,322
----------- ---------- ----------
Electric Operating Income................. $ 921,814 $1,270,518 $1,345,464
----------- ---------- ----------
Other Income and (Deductions):
Interest on long-term debt............... $ (478,530) $ (509,898) $ (585,806)
Interest on notes payable................ (9,134) (13,308) (3,280)
Allowance for funds used during
construction--
Borrowed funds......................... 18,555 19,426 11,137
Equity funds........................... 23,770 20,776 13,129
Income taxes applicable to nonoperating
activities.............................. 11,230 7,812 5,085
Provision for dividends on company-
obligated mandatorily redeemable
preferred securities of subsidiary
trusts holding solely the Company's
subordinated debt securities............ (28,860) (16,960) (4,428)
Loss of nuclear plant closure............ (885,611) -- --
Income tax effect of nuclear plant
closure................................. 362,952 -- --
Miscellaneous--net....................... (96,324) (34,998) (44,125)
----------- ---------- ----------
$(1,081,952) $ (527,150) $ (608,288)
----------- ---------- ----------
Net Income (Loss) Before Extraordinary
Items and Cumulative Effect of Change in
Accounting Principle..................... $ (160,138) $ 743,368 $ 737,176
Extraordinary Losses Less Applicable
Income Taxes............................. (810,335) -- (20,022)
Cumulative Effect of Change in Accounting
Principle................................ 196,700 -- --
----------- ---------- ----------
Net Income (Loss)......................... $ (773,773) $ 743,368 $ 717,154
Provision for Dividends on Preferred and
Preference Stocks........................ 60,486 64,424 69,961
----------- ---------- ----------
Net Income (Loss) on Common Stock......... $ (834,259) $ 678,944 $ 647,193
=========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
21
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------------
ASSETS 1997 1996
------ ----------- -----------
(THOUSANDS OF DOLLARS)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $1,131 million
and $1,034 million, respectively)................. $27,518,690 $27,900,632
Less--Accumulated provision for depreciation....... 11,646,445 11,479,991
----------- -----------
$15,872,245 $16,420,641
Nuclear fuel, at amortized cost.................... 906,043 973,961
----------- -----------
$16,778,288 $17,394,602
----------- -----------
Investments:
Nuclear decommissioning funds...................... $ 1,855,697 $ 1,456,360
Subsidiary companies............................... 48,605 118,188
Other investments, at cost......................... 39,002 14,903
----------- -----------
$ 1,943,304 $ 1,589,451
----------- -----------
Current Assets:
Cash............................................... $ -- $ 89
Temporary cash investments......................... 72,634 28,801
Special deposits................................... 271 1,610
Receivables--
Customers........................................ 873,418 568,155
Other............................................ 130,537 103,243
Provisions for uncollectible accounts............ (17,544) (12,893)
Coal and fuel oil, at average cost................. 120,664 140,362
Materials and supplies, at average cost............ 255,338 324,485
Deferred unrecovered energy costs.................. -- 16,228
Deferred income taxes related to current assets and
liabilities....................................... 179,493 119,917
Prepayments and other.............................. 125,507 108,086
----------- -----------
$ 1,740,318 $ 1,398,083
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 1,685,235 $ 2,434,807
Coal reserves...................................... 194,769 291,324
Other.............................................. 116,489 108,833
----------- -----------
$ 1,996,493 $ 2,834,964
----------- -----------
$22,458,403 $23,217,100
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
22
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
-----------------------
CAPITALIZATION AND LIABILITIES 1997 1996
------------------------------ ----------- -----------
(THOUSANDS OF DOLLARS)
Capitalization (see accompanying statements):
Common stock equity.................................. $ 4,866,438 $ 6,043,093
Preferred and preference stocks without mandatory
redemption requirements............................. 507,053 507,342
Preference stock subject to mandatory redemption re-
quirements.......................................... 174,328 217,901
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the
Company's subordinated debt securities*............. 350,000 200,000
Long-term debt....................................... 5,562,883 5,957,604
----------- -----------
$11,460,702 $12,925,940
----------- -----------
Current Liabilities:
Notes payable--
Commercial paper.................................... $ 150,000 $ 121,000
Bank loans.......................................... 8,150 7,750
Current portion of long-term debt, redeemable prefer-
ence stock and capitalized lease obligations........ 772,831 781,782
Accounts payable..................................... 490,124 440,622
Accrued interest..................................... 167,807 166,862
Accrued taxes........................................ 198,556 182,366
Dividends payable.................................... 106,083 101,217
Customer deposits.................................... 55,214 51,585
Accrued plant closing costs.......................... 135,000 --
Other................................................ 164,897 98,443
----------- -----------
$ 2,248,662 $ 1,951,627
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes................................ $ 3,839,607 $ 4,568,832
Nuclear decommissioning liability for retired plants. 1,301,000 275,700
Accumulated deferred investment tax credits.......... 602,122 655,662
Accrued spent nuclear fuel disposal fee and related
interest............................................ 692,673 657,448
Obligations under capital leases..................... 437,950 474,841
Regulatory liabilities............................... 698,750 668,301
Other................................................ 1,176,937 1,038,749
----------- -----------
$ 8,749,039 $ 8,339,533
----------- -----------
Commitments and Contingent Liabilities (Note 23)
$22,458,403 $23,217,100
=========== ===========
*As described in Note 11 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
23
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
DECEMBER 31
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
Common Stock Equity:
Common stock, $12.50 par value per share--
Outstanding--214,228,077 shares and
214,218,454 shares, respectively........ $ 2,677,851 $ 2,677,731
Premium on common stock and other paid-in
capital.................................. 2,223,564 2,223,396
Capital stock and warrant expense......... (15,805) (15,990)
Retained earnings (deficit)............... (19,172) 1,157,956
----------- -----------
$ 4,866,438 $ 6,043,093
----------- -----------
Preferred and Preference Stocks Without
Mandatory Redemption Requirements:
Preference stock, cumulative, without par
value--
Outstanding--13,499,549 shares........... $ 504,957 $ 504,957
$1.425 convertible preferred stock,
cumulative, without par value--
Outstanding--65,912 shares and 75,003
shares, respectively.................... 2,096 2,385
Prior preferred stock, cumulative, $100
par value per share--
No shares outstanding.................... -- --
----------- -----------
$ 507,053 $ 507,342
----------- -----------
Preference Stock Subject to Mandatory Redemption
Requirements:
Preference stock, cumulative, without par
value--
Outstanding--2,058,560 shares and
2,496,775 shares, respectively.......... $ 205,016 $ 248,589
Current redemption requirements for
preference stock included in current
liabilities.............................. (30,688) (30,688)
----------- -----------
$ 174,328 $ 217,901
----------- -----------
Company-Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts
Holding Solely the Company's Subordinated
Debt Securities............................ $ 350,000 $ 200,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1997 through 2002--5 3/8% to 9
3/8%................................... $ 1,060,000 $ 1,320,000
Maturing 2003 through 2012--3.70% to 8
3/8%................................... 1,440,400 1,440,400
Maturing 2013 through 2022--5.85% to 9
7/8%................................... 1,791,000 1,991,000
Maturing 2023--7 3/4% to 8 3/8%......... 560,000 560,000
----------- -----------
$ 4,851,400 $ 5,311,400
Sinking fund debentures, due 1999 through
2011--2 3/4% to 7 5/8%................... 100,298 105,164
Pollution control obligations, due 2007
through 2014--3.70% to 5 7/8%............ 142,200 142,200
Other long-term debt...................... 1,016,889 986,932
Current maturities of long-term debt
included in current liabilities.......... (501,445) (538,534)
Unamortized net debt discount and premium. (46,459) (49,558)
----------- -----------
$ 5,562,883 $ 5,957,604
----------- -----------
$11,460,702 $12,925,940
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
24
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
1997 1996 1995
---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Balance at Beginning of Year................ $1,157,956 $ 821,848 $ 517,335
Add--Net income (loss)...................... (773,773) 743,368 717,154
---------- ---------- ----------
$ 384,183 $1,565,216 $1,234,489
---------- ---------- ----------
Deduct--
Dividends declared on--
Common stock............................ $ 342,763 $ 342,732 $ 342,710
Preferred and preference stocks......... 60,159 64,095 66,855
Other capital stock transactions--net..... 433 433 3,076
---------- ---------- ----------
$ 403,355 $ 407,260 $ 412,641
---------- ---------- ----------
Balance at End of Year (Includes $384 mil-
lion of appropriated retained earnings at
December 31, 1997)......................... $ (19,172) $1,157,956 $ 821,848
========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
25
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
1997 1996 1995
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
Cash Flow From Operating Activities:
Net income (loss)...................... $ (773,773) $ 743,368 $ 717,154
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization........ 1,032,331 988,944 948,683
Deferred income taxes and investment
tax credits--net.................... (348,889) 124,857 158,296
Extraordinary loss related to early
redemption of long-term debt........ -- -- 33,158
Extraordinary loss related to write-
off of certain net regulatory as-
sets................................ 810,335 -- --
Cumulative effect of a change in ac-
counting principle.................. (196,700) -- --
Loss on nuclear plant closure........ 885,611 -- --
Provisions for revenue refunds....... 45,470 -- --
Equity component of allowance for
funds used during construction...... (23,770) (20,776) (13,129)
Recovery of regulatory assets........ 15,272 15,272 15,272
Provisions/(payments) for liability
for separation costs--net........... 15,986 (29,888) 60,713
Net effect on cash flows of changes
in:
Receivables........................ 21,194 67,888 (169,211)
Coal and fuel oil.................. 19,698 (11,186) (20,304)
Materials and supplies............. 41,659 9,053 51,073
Accounts payable excluding nuclear
fuel lease principal payments and
separation costs--net............. 233,360 110,437 465,475
Accrued interest and taxes......... (6,465) (37,021) (5,765)
Other changes in certain current
assets and liabilities............ 38,873 13,765 26,555
Other--net........................... 177,918 105,543 160,726
----------- ----------- -----------
$ 1,988,110 $ 2,080,256 $ 2,428,696
----------- ----------- -----------
Cash Flow From Investing Activities:
Construction expenditures.............. $ (969,626) $ (949,871) $ (899,366)
Nuclear fuel expenditures.............. (185,373) (281,833) (289,118)
Sale of generating plant............... 60,791 -- --
Equity component of allowance for
funds used during construction........ 23,770 20,776 13,129
Contributions to nuclear
decommissioning funds................. (114,825) (119,281) (132,653)
Other investments and special depos-
its................................... (4,703) (52) 19,599
----------- ----------- -----------
$(1,189,966) $(1,330,261) $(1,288,409)
----------- ----------- -----------
Cash Flow From Financing Activities:
Issuance of securities--
Long-term debt....................... $ 297,663 $ 198,902 $ --
Company-obligated mandatorily redeem-
able preferred securities of
subsidiary trusts holding solely the
Company's subordinated debt
securities.......................... 150,000 -- 200,000
Capital stock........................ 288 669 112
Retirement and redemption of securi-
ties--
Long-term debt....................... (734,768) (431,985) (1,137,272)
Capital stock........................ (44,111) (44,513) (17,935)
Deposits and securities held for re-
tirement and redemption of securi-
ties.................................. -- -- 106
Premium paid on early redemption of
long-term debt........................ (9,500) -- (25,823)
Cash dividends paid on capital stock... (426,916) (424,764) (414,385)
Proceeds from sale/leaseback of nu-
clear fuel............................ 149,955 316,617 193,215
Nuclear fuel lease principal payments.. (166,411) (211,741) (237,845)
Increase (Decrease) in short-term
borrowings............................ 29,400 (139,400) 261,000
----------- ----------- -----------
$ (754,400) $ (736,215) $(1,178,827)
----------- ----------- -----------
Increase (Decrease) in Cash and Tempo-
rary Cash Investments.................. $ 43,744 $ 13,780 $ (38,540)
Cash and Temporary Cash Investments at
Beginning of Year...................... 28,890 15,110 53,650
----------- ----------- -----------
Cash and Temporary Cash Investments at
End of Year............................ $ 72,634 $ 28,890 $ 15,110
=========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
26
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Corporate Structure. Unicom is the parent holding company of ComEd and other
unregulated subsidiaries.
Principles of Consolidation. The consolidated financial statements include
the accounts of ComEd, the Indiana Company and the Trusts. All significant
intercompany transactions have been eliminated. ComEd's investments in other
subsidiary companies, which are not material in relation to ComEd's financial
position or results of operations, are accounted for in accordance with the
equity method of accounting.
Use of Estimates. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Regulation. ComEd is subject to regulation as to accounting and ratemaking
policies and practices by the ICC and FERC. ComEd's accounting policies and
the accompanying consolidated financial statements conform to GAAP applicable
to rate-regulated enterprises for the non-generation portion of its business,
including the effects of the ratemaking process in accordance with SFAS No.
71, Accounting for the Effects of Certain Types of Regulation. Such effects on
the non-generation portion of its business concern mainly the time at which
various items enter into the determination of operating results in order to
follow the principle of matching costs with the applicable revenues collected
from or refunded to customers through future rates. See Note 2 for information
regarding the write-off of generation-related regulatory assets and
liabilities in December 1997.
ComEd's investment in generation-related net utility plant, including
construction work in progress and nuclear fuel and excluding the
decommissioning costs included in the accumulated provision for depreciation,
not subject to cost-based rate regulation, was $12.4 billion and $13.1 billion
at December 31, 1997 and 1996, respectively.
27
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Regulatory Assets and Liabilities. Regulatory assets are incurred costs
which have been deferred and are amortized for ratemaking and accounting
purposes. Regulatory liabilities represent amounts to be settled with
customers through future rates. Regulatory assets and liabilities reflected on
the Consolidated Balance Sheets at December 31, 1997 and 1996 were as follows:
DECEMBER 31
---------------------
1997 1996
---------- ----------
(THOUSANDS OF
DOLLARS)
Regulatory assets:
Deferred income taxes (1)............................... $ 785,354 $1,649,037
Deferred carrying charges (2)........................... -- 396,879
Nuclear decommissioning costs--Dresden Unit 1 (3)....... 268,369 174,621
Nuclear decommissioning costs--Zion Units 1 and 2 (4)... 579,777 --
Unamortized loss on reacquired debt (5)................. 51,735 148,380
Other................................................... -- 65,890
---------- ----------
$1,685,235 $2,434,807
========== ==========
Regulatory liabilities:
Deferred income taxes (1)............................... $ 698,750 $ 668,301
========== ==========
- --------
(1) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes.
(2) Recorded as authorized in the Remand Order.
(3) Amortized over the remaining current NRC license life of Dresden Station.
See "Depreciation and Decommissioning" below for additional information.
(4) Amortized over the remaining current NRC license life of Zion Station. See
"Depreciation and Decommissioning" below for additional information.
(5) Amortized over the remaining lives of the long-term debt issued to finance
the reacquisition. See "Loss on Reacquired Debt" below for additional
information.
The 1997 regulatory assets and liabilities' balances reflect the write-off
of generation-related regulatory assets and liabilities and the recording of
nuclear decommissioning costs for Zion Station. See "Depreciation and
Decommissioning" below and Note 2 for additional information.
Fuel Adjustment Clause. The FAC adopted by the ICC provided for the recovery
of changes in fossil and nuclear fuel costs and the energy portion of
purchased power costs as compared to the fuel and purchased energy costs
included in ComEd's base rates. As authorized by the ICC, ComEd had recorded
under or overrecoveries of allowable fuel and energy costs which, under the
clause, were recoverable or refundable in subsequent months. Pursuant to an
option contained in the 1997 Act, ComEd filed a tariff on December 16, 1997 to
eliminate its FAC as of January 1, 1997. See Note 2 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 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 current interest on the one-time fee are presently being recovered through
base rates. See Note 14 for additional information concerning the disposal of
spent nuclear fuel, the one-time fee and the interest accrual on the one-time
fee. Nuclear fuel expenses, including leased fuel costs and provisions for
spent nuclear fuel disposal costs, were $298 million, $354 million and $391
million for the years 1997, 1996 and 1995, respectively.
28
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The balance of nuclear fuel, at amortized cost, on the Consolidated Balance
Sheets includes amounts to be recovered for assessments by the DOE to fund a
portion of the cost for the decontamination and decommissioning of uranium
enrichment facilities owned and previously operated by the DOE. As of December
31, 1997 and 1996, an asset related to the assessments of $156 million and
$168 million, respectively, was recorded. As of December 31, 1997 and 1996, a
corresponding liability of $144 million and $157 million, respectively, was
recorded, of which $16 million was included in other current liabilities on
the Consolidated Balance Sheets.
Coal Reserves. At December 31, 1997 and 1996, ComEd had coal reserves of
$282 million and $364 million, respectively. In prior years, ComEd's
commitments for the purchase of coal exceeded its requirements. Rather than
take all the coal it was required to take, ComEd agreed to purchase the coal
in place in the form of coal reserves. ComEd expects to recover from its
customers the costs of the coal reserves, as coal is used for the generation
of electricity, through base rates. Such fuel costs expected to be recovered
within one year, amounting to $87 million and $73 million at December 31, 1997
and 1996, respectively, have been included in current assets as prepayments
and other on the Consolidated Balance Sheets. ComEd expects to fully recover
the costs of the coal reserves before the year 2001. See Note 23 for
additional information concerning ComEd's coal commitments.
Customer Receivables and Revenues. ComEd is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of residential, commercial, industrial and wholesale customers.
ComEd's electric service territory has an area of approximately 11,300 square
miles and an estimated population of approximately 8 million as of December
31, 1997. It includes the city of Chicago, an area of about 225 square miles
with an estimated population of approximately 3 million from which ComEd
derived approximately one-third of its ultimate consumer revenues in 1997.
ComEd had 3.4 million electric customers at December 31, 1997.
In 1997, ComEd changed its accounting method for revenue recognition to
record ComEd's revenues associated with service which has been provided to
customers but has not yet been billed at the end of each accounting period,
retroactive to January 1, 1997. See Note 3 for information regarding the
cumulative effect of a change in accounting principle on prior years and the
effect on the current year. See Note 2 for information regarding the expected
effects of the August 1, 1998 rate reduction and certain pricing experiments.
Depreciation and Decommissioning. Depreciation is provided on the straight-
line basis by amortizing the cost of depreciable plant and equipment over
estimated composite service lives. Non-nuclear plant and equipment is
depreciated at annual rates developed for each class of plant based on their
composite service lives. Provisions for depreciation were at average annual
rates of 3.36%, 3.25% and 3.14% for the years 1997, 1996 and 1995,
respectively, of average depreciable utility plant and equipment, including
the effects of additional depreciation on ComEd's nuclear generating units.
The annual rate for nuclear plant and equipment, excluding separately
collected decommissioning costs and additional depreciation, is 2.88%. The
additional depreciation on ComEd's nuclear generating units includes
depreciation recorded for the year 1997 related to its steam generators at
Byron Unit 1 and Braidwood Unit 1 of $59 million, which are expected to be
replaced prior to year-end 1998, and the 1996 additional depreciation
initiative of $30 million. See Note 4 for additional information on the 1996
additional depreciation initiative.
Nuclear plant decommissioning costs are accrued over the current NRC license
lives of the related nuclear generating units. The accrual is based on an
annual levelized cost of the unrecovered portion
29
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
of estimated decommissioning costs, which are escalated for expected inflation
to the expected time of decommissioning and are net of expected earnings on the
trust funds. See "Decommissioning" under "Management's Discussion and Analysis
of Financial Condition and Results of Operations," subcaption "Results of
Operations," for a discussion of questions raised by the staff of the SEC and a
FASB review regarding the electric utility industry's method of accounting for
decommissioning costs. Dismantling is expected to occur relatively soon after
the end of the current NRC license life of each related generating station. The
accrual for decommissioning is based on the prompt removal method authorized by
NRC guidelines. ComEd's 10 operating units have remaining current NRC license
lives ranging from 8 to 30 years. ComEd's Zion Station and its first nuclear
unit, Dresden Unit 1, are retired and are expected to be dismantled at the end
of the current NRC license life of the last unit at each of those stations,
which is consistent with the regulatory treatment for the related
decommissioning costs.
Based on ComEd's most recent study, decommissioning costs, including the cost
of decontamination and dismantling, are estimated to aggregate $4.8 billion in
current-year (1998) dollars, including a contingency allowance. ComEd estimates
that it will expend approximately $12.9 billion, including a contingency
allowance, for decommissioning costs primarily during the period from 2007
through 2032. Such costs are expected to be funded by the external
decommissioning trusts, which ComEd established in compliance with Illinois law
and into which ComEd has been making annual contributions. Future
decommissioning cost estimates may be significantly affected by the adoption of
or changes to NRC regulations as well as changes in the assumptions used in
making such estimates, including changes in technology, available alternatives
for the disposal of nuclear waste and inflation.
Pursuant to the Rate Order, since 1995, ComEd has collected decommissioning
costs from its ratepayers in conjunction with a rider, which allows annual
adjustments to decommissioning cost collections outside the context of a
traditional rate proceeding. Recovery of decommissiong costs through the rider
will continue under the 1997 Act. The current estimated decommissioning costs
include a contingency allowance. Contingency allowances used in decommissioning
cost estimates provide for currently unspecifiable costs that are likely to
occur after decommissioning begins and generally range from 20% to 25% of the
currently specifiable costs. Under its most recent annual rider, filed with the
ICC on February 28, 1997, ComEd has proposed to decrease its estimated annual
decommissioning cost accrual from $108.8 million to $107.5 million. The
reduction primarily reflects stronger than expected after-tax returns on the
external trust funds in 1996 and lower than expected escalation in low-level
waste disposal costs, partially offset by the higher current-year cost
estimates, which include a contingency allowance.
The proposed annual decommissioning cost accrual of $107.5 million was
determined using the following assumptions: the decommissioning cost estimate
of $4.8 billion in current-year (1998) dollars, after-tax earnings on the tax-
qualified and nontax-qualified decommissioning funds of 7.30% and 6.26%,
respectively, and an escalation rate for future decommissioning costs of 4.1%.
The annual accrual of $107.5 million provided over the current NRC license
lives of the nuclear plants, coupled with the expected fund earnings and
amounts previously recovered in rates, is expected to aggregate approximately
$12.9 billion.
For the 10 operating nuclear units, decommissioning costs 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 of December 31, 1997, the total decommissioning costs included
in the accumulated provision for depreciation were $1,570 million. For
30
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
ComEd's retired nuclear unit, Dresden Unit 1, the total estimated liability at
December 31, 1997 in current-year (1998) dollars of $365 million was recorded
under nuclear decommissioning for retired plants and the unrecovered portion of
the liability of $268 million was recorded as a regulatory asset on the
Consolidated Balance Sheets. The increase from December 31, 1996 to December
31, 1997 in the total estimated liability related to Dresden Unit 1, and the
unrecovered portion of that liability, is due to higher current-year cost
estimates, which include a contingency allowance.
For ComEd's retired Zion nuclear station, the total estimated liability at
December 31, 1997 in current-year (1998) dollars of $936 million was recorded
under nuclear decommissioning for retired plants and the unrecovered portion of
the liability of $580 million was recorded as a regulatory asset on the
Consolidated Balance Sheets.
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts; and, consequently, such collections do not add
to the cash flows available for general corporate purposes. The ICC has
approved ComEd's funding plan, which provides for annual contributions of
current accruals and ratable contributions of past accruals over the remaining
current NRC license lives of the nuclear plants. At December 31, 1997, the past
accruals that are required to be contributed to the external trusts aggregate
$167 million. The fair value of funds accumulated in the external trusts at
December 31, 1997 was $1,856 million, which includes pre-tax unrealized
appreciation of $429 million. The earnings on the external trusts accumulate in
the fund balance and accumulated provision for depreciation.
Income Taxes. ComEd is included in the consolidated federal and state income
tax returns filed by Unicom. Current and deferred income taxes of the
consolidated group are allocated to ComEd as if ComEd filed separate tax
returns. Deferred income taxes are provided for income and expense items
recognized for financial accounting purposes in periods that differ from those
for income tax purposes. Income taxes deferred in prior years are charged or
credited to income as the book/tax timing differences reverse. Prior years'
deferred investment tax credits are amortized through credits to income
generally over the lives of the related property. Income tax credits resulting
from interest charges applicable to nonoperating activities, principally
construction, are classified as other income.
AFUDC. In accordance with the uniform systems of accounts prescribed by
regulatory authorities, ComEd capitalizes AFUDC, compounded semiannually, which
represents the estimated cost of funds used to finance its construction
program. The equity component of AFUDC is recorded on an after-tax basis and
the borrowed funds component of AFUDC is recorded on a pre-tax basis. The
average annual capitalization rates were 9.39%, 9.02% and 9.52% for the years
1997, 1996 and 1995, respectively. AFUDC does not contribute to the current
cash flow of ComEd. ComEd discontinued SFAS No. 71 regulatory accounting
practices in December 1997 for the generation portion of its business. As a
result, ComEd will not record AFUDC, but will capitalize interest costs on its
generation-related construction work in progress and nuclear fuel in process
beginning in 1998.
Interest. Total interest costs incurred on debt, leases and other obligations
were $588 million, $620 million and $693 million for the years 1997, 1996 and
1995, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt are being amortized over the lives of the respective issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from reacquisition in connection with the refinancing of first mortgage bonds,
sinking fund debentures and pollution control
31
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
obligations prior to their scheduled maturity dates is deferred and amortized
over the lives of the long-term debt issued to finance the reacquisition for
non-generation related financings. See "Regulatory Assets and Liabilities"
above and Note 2 for additional information.
Stock Option Awards/Employee Stock Purchase Plan. ComEd has elected to adopt
SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure purposes
only. ComEd accounts for its stock option awards and ESPP under APB Opinion No.
25, Accounting for Stock Issued to Employees. See Note 8 for additional
information.
Energy Risk Management Contracts. In the normal course of business ComEd
utilizes contracts for the forward sale and purchase of energy to effectively
manage 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 recognized
immediately for contracts with terms of less than one year and are amortized
over the length of the term of contracts covering more than one year.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no effect
on operating results.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be cash
equivalents. Supplemental cash flow information for the years 1997, 1996 and
1995 was as follows:
1997 1996 1995
-------- -------- --------
(THOUSANDS OF DOLLARS)
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized)............ $502,260 $533,498 $604,202
Income taxes (net of refunds)................... $280,368 $238,920 $368,842
Supplemental Schedule of Non-Cash Investing and Fi-
nancing Activities:
Capital lease obligations incurred................ $158,412 $320,975 $198,577
(2) ACCOUNTING EFFECTS RELATED TO THE 1997 ACT
On December 16, 1997, the Governor of Illinois signed into law the 1997 Act,
which, as it applies to ComEd, provides for, among other things, a 15%
residential base rate reduction commencing August 1, 1998, an additional 5%
residential base rate reduction commencing May 1, 2002, and customer access to
other electric suppliers in a phased-in process. Access for commercial and
industrial customers will occur over a period from October 1999 to December
2000, and access for residential customers will occur after May 1, 2002. The
15% residential base rate reduction, commencing on August 1, 1998, is expected
to reduce ComEd's operating revenues by approximately $160 million and $375
million in 1998 and 1999, respectively, compared to 1997 rate levels. ComEd is
engaged in certain pricing experiments contemplated by the 1997 Act, which are
expected to reduce its operating revenues by approximately $30 million and $60
million in 1998 and 1999, respectively, compared to 1997 rate levels,
notwithstanding the effects of customer growth.
32
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The 1997 Act also provides for the collection of a CTC from customers who
choose another electric service provider during a transition period that
extends through 2006, and can be extended through 2008 with ICC approval if
certain factors are met. The CTC will be established in accordance with a
formula defined in the legislation. The CTC, which will be applied on a cents
per kilowatthour basis, considers the revenue which would have been collected
from a customer under tariffed rates, reduced by 1) the revenue the utility
will receive for providing delivery services to the customer, 2) the market
price for electricity and 3) a defined mitigation factor which represents the
utility's opportunity to develop new revenue sources and achieve cost savings.
Notwithstanding these rate reductions, and subject to certain earnings tests,
a rate freeze will generally be in effect until at least January 1, 2005.
During this period utilities may reorganize, sell or assign assets, retire or
remove plants from service, and accelerate depreciation or amortization of
assets with limited ICC authority. Under the earnings provision of the
legislation, if the earned return on common equity of a utility during this
period exceeds an established threshold, a portion of the excess earnings must
be refunded to customers. A utility may request a rate increase during the rate
freeze period when necessary to ensure the utility's financial viability, but
not before January 1, 2000.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based
regulated rates. The 1997 Act also requires utilities to establish or join an
ISO that will independently manage and control utility transmission systems.
Additionally, the 1997 Act includes the option to eliminate the FAC, the
leveling of certain regulatory requirements to permit operational flexibility,
the leveling of certain regulatory and tax provisions as applied to various
electric suppliers, and a new more stringent liability standard applicable to
ComEd in the event of a major outage.
The 1997 Act also allows ComEd to unbundle a portion of its future revenues,
including tariffed and contract rates and CTC revenues and issue securities
backed by these revenues. The proceeds from such security issuances must
generally be used to refinance outstanding debt or equity or for certain other
limited purposes. The total amount of ComEd's revenues securitized cannot
exceed $6.5 billion; approximately one-half of that amount can be issued in the
twelve-month period commencing on August 1, 1998.
As a result of the 1997 Act, prices for the supply of electric generation are
expected to transition from cost-based, regulated rates to rates determined by
competitive market forces. The CTC allows ComEd to recover a portion of any 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 include cost control
efforts and developing new sources of revenue.
Because the 1997 Act is expected ultimately to lead to market-based pricing
of electric generation services, ComEd discontinued SFAS No. 71 regulatory
accounting practices for the generation portion of its business in December
1997. ComEd evaluated the regulatory assets and liabilities related to the
generation portion of its business and determined that it is not probable that
such costs will be
33
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
recovered through the cash flows from the regulated portion of its business.
Accordingly, the generation-related regulatory assets and liabilities were
written off in the fourth quarter of 1997, resulting in a charge of $810
million (after-tax). These costs relate principally to previously incurred
costs originally expected to be collected through future revenues, including
income tax benefits previously flowed through to customers, deferred carrying
charges on the Byron Unit 2 and Braidwood Units 1 and 2 nuclear generating
plants, generation-related unamortized loss on reacquired debt and other
miscellaneous generation-related costs. The regulatory asset for the
unrecovered nuclear decommissioning costs of currently retired nuclear plants
was not written off, as the 1997 Act provides for the ongoing recovery of
decommissioning costs through regulated rates. See "Regulatory Assets and
Liabilities" and "Depreciation and Decommissioning" in Note 1 of Notes to
Financial Statements.
Pursuant to an option contained in the 1997 Act, ComEd filed a tariff on
December 16, 1997 to eliminate its FAC as of January 1, 1997. Under ComEd's
regulated rates, the FAC provided for the recovery of changes in fossil and
nuclear fuel costs and the energy portion of purchased power costs as compared
to the fuel and purchased energy costs included in ComEd's base rates.
Elimination of the FAC requires ComEd to refund to customers any net FAC
charges billed from January 1, 1997 through December 31, 1997. Such FAC charges
were $25 million (after-tax). These costs, as well as deferred underecovered
energy costs of $19 million (after- tax) which ComEd would have been entitled
to recover if the FAC had remained in effect, were recorded as a reduction to
operating results in 1997.
Additionally, elimination of the FAC and a transition to market-based pricing
for generation-related costs required ComEd to write down its investment in
uranium-related properties. Current projections of the market price for uranium
indicate that the expected incremental costs of mining and milling uranium at
such properties will exceed the expected market price for uranium. Such costs
are not expected to be recoverable in a competitive market. A write down of
ComEd's investment in uranium-related properties to realizable value resulted
in a charge of $60 million (after-tax) in December 1997.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which was adopted on January 1, 1996,
established accounting standards for the impairment of long-lived assets, i.e.,
determining whether the costs of such assets are recoverable through future
revenues. SFAS No. 121 also requires that regulatory assets, which are no
longer probable of recovery through future revenue, be charged to operations.
ComEd evaluated whether the recoverability of the costs of its generating
stations has been impaired as defined in SFAS No. 121. This evaluation was
conducted to determine whether future revenues expected to be recovered from
electric supply services will be sufficient to cover the costs of its
generating assets. Notwithstanding the retirement and write-off of Zion
Station, as discussed in Note 5, ComEd has concluded, as a result of these
studies, that impairment, as defined in SFAS No. 121, does not currently exist
and that asset write downs are not necessary at this time. However, ComEd is
engaged in an ongoing examination of its assets and operations. If ComEd
retires or closes one or more additional generating plants prior to expected
retirement dates, further write-offs will be required.
(3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
ComEd changed its accounting method for revenue recognition to record
revenues associated with service which has been provided to customers but has
not yet been billed at the end of each accounting period, retroactive to
January 1, 1997. This change in accounting method increased operating results
by $170 million (after-tax), consisting of a one-time cumulative effect of the
change
34
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
for years prior to 1997 of $197 million (after-tax), less the impact of the
change on 1997 results of $27 million (after-tax). The following pro forma
information reflects the financial results for the years 1997, 1996 and 1995 as
if the new accounting method had been used in such periods (unaudited):
1997 1996 1995
----------- -------- --------
(THOUSANDS EXCEPT PER SHARE
DATA)
Net Income (Loss) Before Extraordinary Items and
Cumulative Effect of Change in Accounting Prin-
ciple.......................................... $ (160,138) $775,497 $760,331
Net Income (Loss) on Common Stock............... $(1,030,959) $711,073 $670,348
(4) RATE MATTERS
In January 1995, the ICC issued its Rate Order in the proceedings relating to
ComEd's February 1994 rate increase request. The Rate Order provided, among
other things, for an increase in ComEd's total revenues of approximately $302
million (excluding add-on revenue taxes), on an annual basis. The rates
provided in the Rate Order became effective on January 14, 1995; however, they
are being collected subject to refund as a result of subsequent judicial
action. The Rate Order was appealed by intervenors and ComEd to the Illinois
Appellate Court, which issued a decision on May 30, 1997 affirming the Rate
Order in all respects with the exception of two issues, which it remanded to
the ICC for the purpose of providing further analysis. Those issues relate to:
(i) the manner in which certain costs are recovered and which customers should
pay those costs, and (ii) the proper rate of return on common equity for ComEd.
ComEd believes that the ICC can satisfy the Appellate Court's remand directions
on the basis of the existing record from the ICC proceedings which led to the
Rate Order. The Appellate Court's decision was not appealed and the matter was
returned to the ICC, where a decision is expected early in the second quarter
of 1998.
With respect to the first issue remanded to the ICC, ComEd does not believe
it will have any effect on the overall level of rates. With respect to the rate
of return on common equity issue, the ICC had determined in the Rate Order that
ComEd's cost of common equity was 12.28%. Intervenors had submitted testimony
recommending a return on common equity of 11.50%. The Appellate Court decision
requires the ICC to clarify the basis for certain of its findings relating to
its rejection of the intervenors' recommendation and to analyze further how it
arrived at its conclusions. The Appellate Court stated that after reanalyzing
these bases the ICC can determine whether or not the cost of common equity
determination it adopted should still be followed. Each tenth of one percent
change in the rate of return on common equity has approximately an $8 million
effect on the level of annual revenues. The Appellate Court's decision does not
have any immediate effect on ComEd's rates or require any refunds. In
connection with the initiation of the appeal, ComEd committed to make refunds
"in the event that a final, non-appealable order is entered reversing the ICC's
Rate Order." Revenues of approximately $195 million would be subject to refund
if the ICC were to adopt the lower rate of return on common equity recommended
by intervenors. An ICC Hearing Examiner issued a proposed order in January
1998, which if adopted by the ICC, would uphold the Rate Order and the
associated $302 million revenue increase on an annual basis.
ComEd's costs increased by $30 million in 1996 (before income tax effects)
for an increase in depreciation charges on its nuclear generating units related
to its additional depreciation initiative in 1996. See Note 1 under
"Depreciation and Decommissioning" for information concerning additional
depreciation charges related to ComEd's steam generators at Byron Unit 1 and
Braidwood Unit 1.
See Note 2 for information regarding the 1997 Act.
35
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(5) CLOSURE AND SALE OF PLANTS
On January 14, 1998, the Boards of Directors of Unicom and ComEd authorized
the permanent cessation of nuclear generation operations and retirement of
facilities at ComEd's 2,080 megawatt Zion nuclear generating station. Such
retirement resulted in a charge for 1997 of $523 million (after-tax). The
decision to close Zion Station was a result of an ongoing analysis, which
ComEd performed regarding the economic value of its generating assets in light
of the expected changes in the manner in which electric energy is marketed and
sold. The passage of the 1997 Act provided a clearer basis for evaluating the
costs and benefits of alternative courses of action. In reaching the decision
to cease nuclear generation operations at Zion Station, the Boards also
considered the significant uncertainty associated with continued operation of
the station due to the degradation of the steam generators, and the expected
operating costs associated with continued station operation.
ComEd's fourth quarter 1997 financial results reflected a charge of $406
million (after-tax) representing the undepreciated costs of Zion Station
(excluding the portion which will remain in use to provide voltage support),
materials and supplies inventories, and nuclear fuel inventories. In addition,
as required by GAAP, a liability for future closing costs associated with the
retirement of Zion Station, excluding severance costs, was recorded resulting
in a charge of $117 million (after-tax) in the fourth quarter of 1997.
In April 1996, ComEd announced that it had finalized agreements to sell 2 of
its coal-fired generating stations, representing 1,600 megawatts of generating
capacity. Under the agreements, State Line and Kincaid stations are expected
to be sold for a total of $250 million, which approximates the book value of
the stations. The net proceeds are expected to be approximately $200 million
(after-tax), which will be used to retire or redeem existing debt. Under the
terms of the sales, ComEd will enter into exclusive 15-year purchased power
agreements for the output of the plants. On March 31, 1997, the ICC issued an
order approving the agreements. A subsequent appeal has been dropped by the
intervening parties. The sale of State Line Station for its approximate book
value was finalized in December 1997. The net proceeds of the sale, after
income tax effects and closing costs, were approximately $56 million. The
Kincaid Station sale is expected to be finalized during the first quarter of
1998.
(6) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK
At December 31, 1997, the authorized shares of capital stock were: common
stock--250,000,000 shares; preference stock--22,368,560 shares; $1.425
convertible preferred stock--65,912 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.
(7) COMMON EQUITY
At December 31, 1997, shares of common stock were reserved for the following
purposes:
Conversion of $1.425 convertible preferred stock................... 67,230
Conversion of warrants............................................. 25,622
------
92,852
======
36
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Common stock for the years 1997, 1996 and 1995 was issued as follows:
1997 1996 1995
----- ------ -----
Conversion of $1.425 convertible preferred stock...... 9,261 22,146 3,630
Conversion of warrants................................ 362 1,358 299
----- ------ -----
9,623 23,504 3,929
===== ====== =====
At December 31, 1997 and 1996, 76,868 and 78,045 common stock purchase
warrants, respectively, were outstanding. The warrants entitle the holders to
convert such warrants into common stock at a conversion rate of one share of
common stock for three warrants.
ComEd's retained earnings account had a deficit balance of $19.2 million at
December 31, 1997. As of December 31, 1997, $384 million of retained earnings
has been appropriated for future dividend payments.
(8) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN
Unicom has a nonqualified stock option awards program under its Long-Term
Incentive Plan. The stock option awards program was adopted by Unicom in July
1996 to reward valued employees responsible for, or contributing to, the
management, growth and profitability of Unicom and its subsidiaries. The stock
options granted will expire ten years from the 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 and will also vest in
full upon a change in control of Unicom.
Stock options transactions for the years 1997 and 1996 are summarized as
follows:
WEIGHTED
AVERAGE
OPTIONS PRICE
--------- --------
Outstanding at the beginning of 1996.................. -- $ --
Granted during the year............................... 1,205,500 25.500
Expired/cancelled during the year..................... (17,500) 25.500
---------
Outstanding as of December 31, 1996................... 1,188,000 25.500
Granted during the year............................... 1,339,350 22.313
Exercised during the year............................. (23,423) 25.500
Expired/cancelled during the year..................... (213,549) 23.649
---------
Outstanding as of December 31, 1997................... 2,290,378 23.809
=========
Of the stock options outstanding at December 31, 1997, 426,174 have vested
at a weighted average price of $25.455.
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
---------------
1997 1996
------- -------
Expected option life...................................... 7 years 7 years
Dividend yield............................................ 7.20% 6.30%
Expected volatility....................................... 22.29% 20.98%
Risk-free interest rate................................... 6.25% 6.64%
37
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The estimated fair value for each stock option granted in 1997 and 1996 was
$2.79 and $3.74, respectively.
The ESPP allows employees to purchase Unicom common stock at a 10% discount
from market value. Substantially all of the employees of Unicom, ComEd and
certain subsidiaries are eligible to participate in the ESPP. Unicom issued
196,003, 196,513 and 217,080 shares of common stock in 1997, 1996 and 1995,
respectively, under the ESPP at a weighted average annual purchase price of
$19.15, $23.52 and $25.34, respectively.
ComEd has adopted the disclosure-only provisions of SFAS No. 123. For
financial reporting purposes, ComEd has adopted APB No. 25 and thus no
compensation cost has been recognized for the stock option awards program or
ESPP. If ComEd 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 effect on
operating results would have been immaterial.
(9) PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS
No shares of preferred or preference stocks without mandatory redemption
requirements were issued or redeemed during 1997, 1996 and 1995. The series of
preference stock without mandatory redemption requirements outstanding at
December 31, 1997 are summarized as follows:
INVOLUNTARY
SHARES AGGREGATE REDEMPTION LIQUIDATION
SERIES OUTSTANDING STATED VALUE PRICE(1) PRICE(1)
------- ----------- ------------ ---------- -----------
(THOUSANDS
OF DOLLARS)
$1.90 4,249,549 $106,239 $ 25.25 $25.00
$2.00 2,000,000 51,560 $ 26.04 $25.00
$1.96 2,000,000 52,440 $ 27.11 $25.00
$7.24 750,000 74,340 $101.00 $99.12
$8.40 750,000 74,175 $101.00 $98.90
$8.38 750,000 73,566 $100.16 $98.09
$2.425 3,000,000 72,637 $ 25.00 $25.00
---------- --------
13,499,549 $504,957
========== ========
--------
(1) Per share plus accrued and unpaid dividends, if any.
The outstanding shares of $1.425 convertible preferred stock are convertible
at the option of the holders thereof, at any time, into common stock 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.
38
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(10) PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS
During 1997, 1996 and 1995, no shares of preference stock subject to
mandatory redemption requirements were issued. The series of preference stock
subject to mandatory redemption requirements outstanding at December 31, 1997
are summarized as follows:
SHARES AGGREGATE
SERIES OUTSTANDING STATED VALUE OPTIONAL REDEMPTION PRICE(1)
- -------------- ----------- ------------ -----------------------------------------------
(THOUSANDS
OF DOLLARS)
$8.20 178,560 $ 17,856 $101
$8.40 Series B 300,000 29,798 $101
$8.85 225,000 22,500 $103 through July 31, 1998; and $101 thereafter
$9.25 525,000 52,500 $103 through July 31, 1999; and $101 thereafter
$9.00 130,000 12,887 Non-callable
$6.875 700,000 69,475 Non-callable
--------- --------
2,058,560 $205,016
========= ========
- --------
(1) Per share plus accrued and unpaid dividends, if any.
The annual sinking fund requirements and sinking fund and involuntary
liquidation prices per share of the outstanding series of preference stock
subject to mandatory redemption requirements are summarized as follows:
SINKING
ANNUAL SINKING FUND INVOLUNTARY
SERIES FUND REQUIREMENT PRICE(1) LIQUIDATION PRICE(1)
-------------- ----------------- -------- --------------------
$8.20 35,715 shares $100 $100.00
$8.40 Series B 30,000 shares(2) $100 $ 99.326
$8.85 37,500 shares $100 $100.00
$9.25 75,000 shares $100 $100.00
$9.00 130,000 shares(2) $100 $ 99.125
$6.875 (3) $100 $ 99.25
--------
(1) Per share plus accrued and unpaid dividends, if any.
(2) ComEd has a non-cumulative option to increase the annual
sinking fund payment on each sinking fund redemption date
to retire an additional number of shares, not in excess of
the sinking fund requirement, at the applicable redemption
price.
(3) All shares are required to be redeemed on May 1, 2000.
Annual remaining sinking fund requirements through 2002 on preference stock
outstanding at December 31, 1997 will aggregate $31 million in 1998, $18
million in 1999, $88 million in 2000, and $18 million in each of 2001 and
2002. During each of 1997 and 1996 438,215 shares and during 1995 178,215
shares of preference stock subject to mandatory redemption requirements were
reacquired to meet sinking fund requirements.
Sinking fund requirements due within one year are included in current
liabilities.
(11) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY THE COMPANY'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% company-obligated mandatorily redeemable
preferred securities. The sole asset of the 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-
39
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
owned subsidiary trust of ComEd, issued 150,000 of its 8.50% company-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 10 consecutive semi-annual periods. If interest
payments on the subordinated deferrable interest notes or debentures are so
deferred, distributions on the preferred securities will also be deferred.
During any deferral, distributions will continue to accrue with interest
thereon. In addition, during any such deferral, ComEd may not declare or pay
any dividend or other distribution on, or redeem or purchase, any of its
capital stock.
The subordinated deferrable interest notes are redeemable by ComEd, in whole
or in part, from time to time, on or after September 30, 2000, and with
respect to the subordinate deferrable interest debentures, on or after January
15, 2007, or at any time in the event of certain income tax circumstances. If
the subordinated deferrable interest notes or debentures are redeemed, the
Trusts must redeem preferred securities having an aggregate liquidation amount
equal to the aggregate principal amount of the subordinated deferrable
interest notes or debentures so redeemed. In the event of the dissolution,
winding up or termination of the Trusts, the holders of the preferred
securities will be entitled to receive, for each preferred security, a
liquidation amount of $25 for the securities of ComEd Financing I and $1,000
for the securities of ComEd Financing II, plus accrued and unpaid
distributions thereon, including interest thereon, to the date of payment,
unless in connection with the dissolution, the subordinated deferrable
interest notes or debentures are distributed to the holders of the preferred
securities.
(12) LONG-TERM DEBT
Sinking fund requirements and scheduled maturities remaining through 2002
for first mortgage bonds, sinking fund debentures and other long-term debt
outstanding at December 31, 1997, after deducting sinking fund debentures
reacquired for satisfaction of future sinking fund requirements, are
summarized as follows: 1998--$503 million; 1999--$150 million; 2000--$462
million; 2001--$108 million; and 2002--$305 million.
At December 31, 1997, outstanding first mortgage bonds maturing through 2002
were as follows:
SERIES PRINCIPAL AMOUNT
------ ----------------------
(THOUSANDS OF DOLLARS)
6 1/4% due February 1, 1998....................... $ 50,000
6% due March 15, 1998............................. 130,000
6 3/4% due July 1, 1998........................... 50,000
6 3/8% due October 1, 1998........................ 75,000
9 3/8% due February 15, 2000...................... 125,000
6 1/2% due April 15, 2000......................... 230,000
6 3/8% due July 15, 2000.......................... 100,000
7 1/2% due January 1, 2001........................ 100,000
7 3/8% due September 15, 2002..................... 200,000
----------
$1,060,000
==========
40
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Other long-term debt outstanding at December 31, 1997 is summarized as
follows:
PRINCIPAL
DEBT SECURITY AMOUNT INTEREST RATE
------------- ---------- ------------------------------------------------------
(THOUSANDS
OF
DOLLARS)
Notes:
Medium Term
Notes, Se-
ries 1N due
various
dates
through
April 1,
1998 $ 35,500 Interest rates ranging from 9.52% to 9.65%
Medium Term
Notes, Se-
ries 3N due
various
dates
through
October 15,
2004 296,000 Interest rates ranging from 9.00% to 9.20%
Notes due 150,000 Interest rate of 7.375%
January 15,
2004
Notes due 235,000 Interest rate of 6.40%
October 15,
2005
Notes due 150,000 Interest rate of 7.625%
January 15,
2007
----------
$ 866,500
----------
Long-Term
Note Payable
to Bank
due June 1, $ 150,000 Prevailing interest rate of 6.53% at December 31, 1997
1998
----------
Purchase Con-
tract Obli-
gation
due April
30, 2005 $ 389 Interest rate of 3.00%
----------
$1,016,889
==========
Long-term debt maturing within one year has been included in current
liabilities.
The outstanding first mortgage bonds are secured by a lien on substantially
all property and franchises, other than expressly excepted property, owned by
ComEd.
ComEd recorded an extraordinary loss of $33 million in the fourth quarter of
1995 related to the early redemption of $645 million of long-term debt which
resulted in a charge of $20 million, after reflecting income tax effects of
$13 million.
(13) LINES OF CREDIT
ComEd had total bank lines of credit of $766 million and unused bank lines
of credit of $758 million at December 31, 1997. Of that amount, $758 million
(of which $146 million expires on September 27, 1998, $27 million expires in
equal quarterly installments commencing on March 31, 1998 and ending on
September 30, 1998 and $585 million expires in equal quarterly installments
commencing on March 31, 1998 and ending on September 30, 1999) may be borrowed
on secured or unsecured notes of ComEd at various interest rates. The interest
rate is set at the time of a borrowing and is based on several floating rate
bank indices plus a spread, which is dependent upon the credit rating of
ComEd's outstanding first mortgage bonds or on a prime interest rate. Amounts
under the remaining lines of credit may be borrowed at prevailing prime
interest rates on unsecured notes of ComEd. Collateral, if required for the
borrowings, would consist of first mortgage bonds issued under and in
accordance with the provisions of ComEd's mortgage. ComEd is obligated to pay
commitment fees with respect to the unused portion of such lines of credit.
41
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(14) DISPOSAL OF SPENT NUCLEAR FUEL
Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the
selection and development of repositories for, and the disposal of, spent
nuclear fuel and high-level radioactive waste. ComEd, as required by that Act,
has signed a contract with the DOE to provide for the disposal of spent
nuclear fuel and high-level radioactive waste from ComEd's nuclear generating
stations beginning not later than January 1998. The DOE advised ComEd in
December 1996 that it anticipated it would be unable to begin acceptance of
spent nuclear fuel by January 1998. It is expected this delivery schedule will
be delayed significantly. Extended delays in spent nuclear fuel acceptance by
the DOE would lead to ComEd's consideration of costly storage alternatives.
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. As
provided for under 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.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments either held or issued and outstanding. The disclosure
of such information does not purport to be a market valuation of ComEd 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 ComEd and subsidiary companies is in part
dependent on the treatment authorized under future ratemaking proceedings.
Investments. Securities included in the nuclear decommissioning funds have
been classified
and accounted for as "available for sale" securities. The estimated fair value
of the nuclear decommissioning funds, as determined by the trustee and based
on published market data, as of December 31, 1997 and 1996 was as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------- --------------------------------
UNREALIZED
UNREALIZED GAINS
COST BASIS GAINS FAIR VALUE COST BASIS (LOSSES) FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Short-term investments.. $ 33,524 $ 2 $ 33,526 $ 32,778 $ 38 $ 32,816
U.S. Government and
Agency issues.......... 170,240 15,882 186,122 251,994 6,885 258,879
Municipal bonds......... 306,104 20,598 326,702 331,936 17,985 349,921
Corporate bonds......... 231,738 4,293 236,031 22,405 (54) 22,351
Common stock............ 667,657 385,851 1,053,508 539,392 201,304 740,696
Other................... 17,300 2,508 19,808 47,462 4,235 51,697
---------- -------- ---------- ---------- -------- ----------
$1,426,563 $429,134 $1,855,697 $1,225,967 $230,393 $1,456,360
========== ======== ========== ========== ======== ==========
At December 31, 1997, the debt securities held by the nuclear
decommissioning funds had the following maturities:
COST BASIS FAIR VALUE
---------- ----------
(THOUSANDS OF
DOLLARS)
Within 1 year....................................... $ 33,699 $ 33,702
1 through 5 years................................... 162,558 166,427
5 through 10 years.................................. 219,201 232,508
Over 10 years....................................... 335,538 359,411
42
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The net earnings of the nuclear decommissioning funds, which are recorded as
increases to the accumulated provision for depreciation, for the years 1997,
1996 and 1995 were as follows:
1997 1996 1995
----------- ----------- -----------
(THOUSANDS OF DOLLARS)
Gross proceeds from sales of securi-
ties.................................. $ 2,163,522 $ 2,335,974 $ 2,598,889
Less cost based on specific identifica-
tion.................................. (2,088,300) (2,300,038) (2,581,714)
----------- ----------- -----------
Realized gains on sales of securities.. $ 75,222 $ 35,936 $ 17,175
Other realized fund earnings net of ex-
penses................................ 39,123 33,008 46,294
----------- ----------- -----------
Total realized net earnings of the
funds................................. $ 114,345 $ 68,944 $ 63,469
Unrealized gains....................... 198,741 65,516 160,843
----------- ----------- -----------
Total net earnings of the funds....... $ 313,086 $ 134,460 $ 224,312
=========== =========== ===========
Current Assets. Cash, temporary cash investments and other cash investments,
which include U.S. Government obligations and other short-term marketable
securities, and special deposits, which primarily includes cash deposited for
the redemption, refund or discharge of debt securities, are stated at cost,
which approximates their fair value because of the short maturity of these
instruments. The securities included in these categories have been classified
as "available for sale" securities.
Capitalization. The estimated fair values of preferred and preference
stocks, company-obligated mandatorily redeemable preferred securities of the
Trusts and long-term debt were obtained from an independent consultant. The
estimated fair values, which include the current portions of redeemable
preference stock and long-term debt but exclude accrued interest and
dividends, as of December 31, 1997 and 1996 were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------------------- --------------------------------
CARRYING UNREALIZED CARRYING UNREALIZED
VALUE LOSSES FAIR VALUE VALUE LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Preferred and preference
stocks................. $ 712,069 $ 11,970 $ 724,039 $ 755,931 $ 3,948 $ 759,879
Company-obligated
mandatorily redeemable
preferred securities of
the Trusts holding
solely ComEd's
subordinated debt
securities............. $ 350,000 $ 21,701 $ 371,701 $ 200,000 $ 1,000 $ 201,000
Long-term debt.......... $5,913,942 $380,890 $6,294,832 $6,345,533 $159,818 $6,505,351
Long-term notes payable, which are not included in the above table, amounted
to $150 million at December 31, 1997 and 1996. Such notes, for which interest
is paid at fixed and prevailing rates, are included in the consolidated
financial statements at cost, which approximates their fair value.
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
portions of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of accrued spent nuclear
fuel disposal fee and related interest represents the settlement value as of
December 31, 1997 and 1996; therefore, the carrying value is equal to the fair
value.
43
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(16) PENSION BENEFITS
As of December 31, 1997, ComEd and the Indiana Company had qualified non-
contributory defined benefit pension plans which cover all regular employees.
Benefits under these plans reflect each employee's compensation, years of
service and age at retirement. During 1995, these plans were amended to more
closely base retirement benefits on final pay. Funding is based upon
actuarially determined contributions that take into account the amount
deductible for income tax purposes and the minimum contribution required under
the Employee Retirement Income Security Act of 1974, as amended. The December
31, 1997 and 1996 pension liabilities and related data were determined using
the January 1, 1997 actuarial valuation. Additionally, ComEd maintains a
nonqualified supplemental retirement plan which covers any excess pension
benefits that would be payable to management employees under the qualified
plan but which are limited by the Internal Revenue Code. On January 19, 1998,
the Indiana Company plan was merged into the ComEd pension plan as a result of
the sale of the Indiana Company's State Line Station.
The funded status of these plans, including the supplemental plan, at
December 31, 1997 and 1996 was as follows:
DECEMBER 31
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
Actuarial present value of accumulated pension plan
benefits:
Vested benefit obligation.......................... $(3,472,000) $(3,075,000)
Nonvested benefit obligation....................... (140,000) (118,000)
----------- -----------
Accumulated benefit obligation..................... $(3,612,000) $(3,193,000)
Effect of projected future compensation levels..... (462,000) (386,000)
----------- -----------
Projected benefit obligation....................... $(4,074,000) $(3,579,000)
Fair value of plan assets, invested primarily in
U.S. Government, government-sponsored corporation
and agency securities, fixed income funds, regis-
tered investment companies, equity index funds and
other equity and fixed income funds................ 3,706,000 3,281,000
----------- -----------
Plan assets less than projected benefit obligation.. $ (368,000) $ (298,000)
Unrecognized prior service cost..................... (64,000) (69,000)
Unrecognized transition asset....................... (114,000) (130,000)
Unrecognized net loss............................... 132,000 113,000
----------- -----------
Accrued pension liability.......................... $ (414,000) $ (384,000)
=========== ===========
The fair value of plan assets excludes $17 million held in grantor trust as
of December 31, 1997 for payments of benefits under the supplemental plan.
The assumed discount rate was 7.0% and 7.5% at December 31, 1997 and 1996,
respectively, and the assumed annual rate of increase in future compensation
levels was 4.0%. These rates were used in determining the projected benefit
obligations, the accumulated benefit obligations and the vested benefit
obligations.
Pension costs were determined under the projected unit credit actuarial cost
method and the following actuarial assumptions for the years 1997, 1996 and
1995:
1997 1996 1995
----- ----- -----
Annual discount rate.......................................... 7.50% 7.50% 8.00%
Annual rate of increase in future compensation levels......... 4.00% 4.00% 4.00%
Annual long-term rate of return on plan assets................ 9.75% 9.75% 9.75%
44
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of pension costs, portions of which were recorded as
components of construction costs, for the years 1997, 1996 and 1995 were as
follows:
1997 1996 1995
-------- --------- ---------
(THOUSANDS OF DOLLARS)
Service cost.................................... $100,000 $ 93,000 $ 87,000
Interest cost on projected benefit obligation... 261,000 247,000 226,000
Actual return on plan assets.................... (630,000) (421,000) (681,000)
Curtailment gain................................ (5,000) -- --
Net amortization and deferral................... 305,000 117,000 419,000
-------- --------- ---------
$ 31,000 $ 36,000 $ 51,000
======== ========= =========
The curtailment gain for the year 1997 represents the recognition of prior
service costs, the transition asset and the decrease in the projected benefit
obligation related to the sale of the State Line Station by the Indiana
Company.
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay. The participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $33 million,
$30 million and $25 million for the years 1997, 1996 and 1995, respectively.
(17) POSTRETIREMENT BENEFITS
ComEd and the Indiana Company provide certain postretirement health care,
dental care, vision care and life insurance for retirees and their dependents
and for the surviving dependents of eligible employees and retirees. The
employees become eligible for postretirement benefits when they reach age 55
with 10 years of service. The liability for postretirement benefits is funded
through trust funds based upon actuarially determined contributions that take
into account the amount deductible for income tax purposes. The plan is
contributory, funded jointly by the companies and the participating employees.
The December 31, 1997 and 1996 postretirment benefit liabilities and related
data were determined using the January 1,1997 actuarial valuations.
Postretirement health care costs for the years 1997, 1996 and 1995 included
$8 million, $4 million and $25 million, respectively, related to voluntary
separation offers to certain employees of ComEd and the Indiana Company.
The funded status of the plan at December 31, 1997 and 1996 was as follows:
DECEMBER 31
------------------------
1997 1996
----------- -----------
(THOUSANDS OF DOLLARS)
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees........................................... $ (573,000) $ (558,000)
Active fully eligible participants................. (28,000) (28,000)
Other participants................................. (483,000) (449,000)
----------- -----------
Accumulated benefit obligation..................... $(1,084,000) $(1,035,000)
Fair value of plan assets, invested primarily in S&P
500 common stocks, registered investment companies
and U.S. Government, government agency, municipal
and listed corporate obligations................... 768,000 665,000
----------- -----------
Plan assets less than accumulated postretirement
benefit obligation................................. $ (316,000) $ (370,000)
Unrecognized transition obligation.................. 345,000 370,000
Unrecognized prior service cost..................... 52,000 56,000
Unrecognized net gain............................... (406,000) (323,000)
----------- -----------
Accrued liability for postretirement benefits...... $ (325,000) $ (267,000)
=========== ===========
45
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Different health care cost trends are used for pre-Medicare and post-
Medicare expenses. The pre-Medicare trend rates were 8.5% and 9.0% at December
31, 1997 and 1996, respectively, grading down in 0.5% annual increments and
leveling off at 5.0%. The post-Medicare trend rates were 6.5% and 7.0% at
December 31, 1997 and 1996, respectively, grading down in 0.5% annual
increments to 5.0%. The assumed discount rates were 7.0% and 7.5% at December
31, 1997 and 1996, respectively, which were used to determine the accumulated
benefit obligations. The effect of a 1% increase in the health care cost trend
rate for each future year would increase the accumulated postretirement health
care obligations by approximately $187 million.
The components of postretirement health care costs, portions of which were
recorded as components of construction costs, for the years 1997, 1996 and
1995 were as follows:
1997 1996 1995
--------- -------- ---------
(THOUSANDS OF DOLLARS)
Service cost............................. $ 34,000 $ 32,000 $ 31,000
Interest cost on accumulated benefit ob-
ligation................................ 76,000 73,000 69,000
Actual return on plan assets............. (130,000) (83,000) (137,000)
Amortization of transition obligation.... 22,000 22,000 23,000
Severance plan cost...................... 8,000 4,000 25,000
Other.................................... 60,000 22,000 83,000
--------- -------- ---------
$ 70,000 $ 70,000 $ 94,000
========= ======== =========
Postretirement benefit costs were determined using the projected unit credit
actuarial cost method. The discount rates used were 7.5% for the years 1997
and 1996 and 8.0% for the year 1995 and the estimated long-term rate of return
of fund assets, net of income tax effects, were 9.40%, 9.38% and 9.32% for the
years 1997, 1996 and 1995, respectively. Pre-Medicare health care cost trend
rates were 13.5% for the first three months of 1995 and 10% for the remainder
of the year, grading down in 0.5% annual increments to 5.0%. Post-Medicare
health care cost trend rates were 11% for the first three months of 1995 and
8% for the remainder of the year, grading down in 0.5% annual increments to
5.0%. The effect of a 1% increase in the health care cost trend rate for each
future year would increase the aggregate of the service and interest cost
components of postretirement benefit costs by approximately $21 million for
1997.
(18) SEPARATION PLAN COSTS
O&M expenses included $39 million, $12 million and $97 million for the years
1997, 1996 and 1995, respectively, for costs related to voluntary separation
offers to certain employees of ComEd and the Indiana Company. Such costs
resulted in charges (after-tax) of $24 million, $7 million and $59 million for
the years 1997, 1996 and 1995, respectively.
46
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(19) INCOME TAXES
The components of the net deferred income tax liability at December 31, 1997
and 1996 were as follows:
DECEMBER 31
----------------------
1997 1996
---------- ----------
(THOUSANDS OF
DOLLARS)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs........................... $4,051,191 $3,507,916
Overheads capitalized................................. 131,509 261,437
Repair allowance...................................... 231,697 228,426
Regulatory assets recoverable through future rates.... 785,354 1,649,037
Deferred income tax assets:
Postretirement benefits............................... (305,220) (269,153)
Unbilled revenues..................................... -- (136,406)
Alternative minimum tax............................... -- (80,159)
Unamortized investment tax credits.................... (206,112) (225,360)
Regulatory liabilities to be settled through future
rates................................................ (698,750) (442,941)
Nuclear plant closure................................. (194,244) --
Other--net............................................ (135,311) (43,882)
---------- ----------
Net deferred income tax liability...................... $3,660,114 $4,448,915
========== ==========
The $789 million decrease in the net deferred income tax liability from
December 31, 1996 to December 31, 1997 is comprised of $376 million of
deferred income tax benefits reflected in operations, a $315 million decrease
for an adjustment associated with the write-off of the generation-related net
regulatory assets and a $98 million decrease in other regulatory assets net of
regulatory liabilities pertaining to income taxes for the year. The amount of
regulatory assets included in deferred income tax liabilities primarily
relates to the equity component of AFUDC which is recorded on an after-tax
basis, the borrowed funds component of AFUDC which was previously recorded net
of tax and other temporary differences for which the related tax effects were
not previously recorded. The amount of other regulatory liabilities included
in deferred income tax assets primarily relates to deferred income taxes
provided at rates in excess of the current statutory rate.
The components of net income tax expense charged to continuing operations
for the years 1997, 1996 and 1995 were as follows:
1997 1996 1995
--------- -------- --------
(THOUSANDS OF DOLLARS)
Electric operating income:
Current income taxes.......................... $ 279,636 $339,517 $344,221
Deferred income taxes......................... 58,655 156,261 188,008
Investment tax credits deferred--net.......... (31,015) (33,378) (28,710)
Other (income) and deductions, primarily de-
ferred income taxes in 1997................... (407,624) (7,383) (7,685)
--------- -------- --------
Net income taxes charged (credited) to continu-
ing operations................................ $(100,348) $455,017 $495,834
========= ======== ========
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted in the following effective
income tax rates for the years 1997, 1996 and 1995:
1997 1996 1995
--------- ---------- ----------
Pre-tax book income (loss) (thousands)....... $(260,486) $1,198,385 $1,233,010
Effective income tax rate.................... 38.5% 38.0% 40.2%
47
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the years 1997, 1996 and 1995 were as follows:
1997 1996 1995
--------- -------- --------
(THOUSANDS OF DOLLARS)
Federal income taxes computed at statutory rate. $ (91,170) $419,435 $431,554
Equity component of AFUDC which was excluded
from taxable income............................ (8,320) (7,272) (4,595)
Amortization of investment tax credits.......... (53,541) (33,378) (28,710)
State income taxes, net of federal income taxes. 3,470 58,381 65,972
Differences between book and tax accounting,
primarily property-related deductions.......... 51,465 14,150 27,534
Other--net...................................... (2,252) 3,701 4,079
--------- -------- --------
Net income taxes charged (credited) to continu-
ing operations................................. $(100,348) $455,017 $495,834
========= ======== ========
The effects of an income tax refund related to prior years were recorded in
1996, resulting in a positive impact of $26 million (after-tax).
(20) TAXES, EXCEPT INCOME TAXES
Provisions for taxes, except income taxes, for the years 1997, 1996 and 1995
were as follows:
1997 1996 1995
-------- -------- --------
(THOUSANDS OF DOLLARS)
Illinois public utility revenue............... $228,350 $227,062 $229,546
Illinois invested capital..................... 99,503 104,663 106,830
Municipal utility gross receipts.............. 168,094 168,715 167,758
Real estate................................... 150,179 129,985 175,747
Municipal compensation........................ 78,286 78,544 78,602
Other--net.................................... 74,755 73,699 73,543
-------- -------- --------
$799,167 $782,668 $832,026
======== ======== ========
ComEd's real estate taxes in 1996 reflect a credit of $23 million which
related to the year 1995.
(21) LEASE OBLIGATIONS
Under its nuclear fuel lease arrangement, ComEd may sell and lease back
nuclear fuel from a lessor who may borrow an aggregate of $700 million,
consisting of $300 million of commercial paper/bank borrowings and $400
million of intermediate term notes, to finance the transactions. The
commercial paper/bank borrowing portion of $300 million will expire on
November 23, 1999. With respect to the intermediate term notes, $74 million
expires on November 23, 1998, and an additional portion each November 23
thereafter through November 23, 2003. At December 31, 1997, ComEd's obligation
to the lessor for leased nuclear fuel amounted to approximately $679 million.
ComEd has agreed to make lease payments which cover the amortization of the
nuclear fuel used in ComEd's reactors plus the lessor's related financing
costs. ComEd has an obligation for spent nuclear fuel disposal costs of leased
nuclear fuel.
Future minimum rental payments, net of executory costs, at December 31, 1997
for capital leases are estimated to aggregate $777 million, including $268
million in 1998, $167 million in 1999, $125 million in 2000, $81 million in
2001, $56 million in 2002 and $80 million in 2003-2005. The estimated interest
component of such rental payments aggregates $100 million. The estimated
portions of obligations due within one year under capital leases of $114
million and $174 million at December 31, 1997 and 1996, respectively, are
included in current liabilities on the Consolidated Balance Sheets.
48
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Future minimum rental payments at December 31, 1997 for operating leases are
estimated to aggregate $166 million, including $21 million in 1998, $19
million in 1999, $15 million in 2000, $14 million in 2001, $10 million in 2002
and $87 million in 2003-2024.
(22) 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. At December 31, 1997, for its
share of ownership in the station, ComEd had an investment of $669 million in
production and transmission plant in service (before a reduction of $209
million for the related accumulated provision for depreciation) and $8 million
in construction work in progress.
(23) COMMITMENTS AND CONTINGENT LIABILITIES
Purchase commitments, principally related to construction and nuclear fuel,
approximated $286 million at December 31, 1997. In addition, ComEd has
substantial commitments for the purchase of coal. ComEd's coal costs are high
compared to those of other utilities. ComEd's western coal contracts and its
rail contracts for delivery of the western coal provide for the purchase of
certain coal at prices substantially above currently prevailing market prices.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," subcaption "Liquidity and Capital Resources," for additional
information regarding ComEd's purchase commitments.
ComEd was a member of NML, established to provide insurance coverage against
property damage to members' nuclear generating facilities. NML has merged into
NEIL as of January 1, 1998. ComEd's obligations and coverages have not been
affected by the merger. The members are subject to a retrospective premium
adjustment in the event losses exceed accumulated reserve funds. Capital has
been accumulated in the reserve funds of NML to the extent that ComEd would
not be liable for a retrospective premium adjustment in the event of a single
incident. However, ComEd could be subject to a maximum assessment of
approximately $51 million in any policy year, in the event losses exceed
accumulated reserve funds.
ComEd is a member of NEIL, which provides insurance coverage against the
cost of replacement power obtained during certain prolonged accidental outages
of nuclear generating units and coverage for property losses in excess of $500
million occurring at nuclear stations. All companies insured with NEIL are
subject to retrospective premium adjustments if losses exceed accumulated
reserve funds. Capital has been accumulated in the reserve funds of NEIL to
the extent that ComEd would not be liable for a retrospective premium
adjustment in the event of a single incident under the replacement power
coverage and the property damage coverage. However, ComEd could be subject to
maximum assessments, in any policy year, of approximately $22 million and $70
million in the event losses exceed accumulated reserve funds under the
replacement power and property damage coverages, respectively.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses,
ComEd would currently be subject to a maximum assessment of $1,030 million in
the event of an incident, limited to a maximum of $130 million in any calendar
year.
49
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that Cotter has permitted radioactive and other
hazardous material to be released from its mill into areas owned or occupied
by the plaintiffs resulting in property damage and potential adverse health
effects. In 1994, a federal jury returned nominal dollar verdicts on 8
bellwether plaintiffs' claims in these cases, which verdicts were upheld on
appeal. The remaining claims in the 1989 actions have been settled and
dismissed. Although the remaining cases will necessarily involve the
resolution of numerous contested issues of fact and law, ComEd's determination
is that these actions will not have a material impact on its financial
position or results of operations. A case relating to 14 of the plaintiffs in
the 1991 cases has been set for trial in June 1998.
ComEd is involved in administrative and legal proceedings concerning air
quality, water quality and other matters. The outcome of these proceedings may
require increases in future construction expenditures and operating expenses
and changes in operating procedures. ComEd and its subsidiaries are or are
likely to become parties to proceedings initiated by the U.S. EPA, state
agencies and/or other responsible parties under CERCLA with respect to a
number of sites, including MGP sites, or may voluntarily undertake to
investigate and remediate sites for which they may be liable under CERCLA.
ComEd generally did not operate MGPs as a corporate entity but did, however,
acquire MGP sites as part of the absorption of smaller utilities.
Approximately half of these sites were transferred to Northern Illinois Gas
Company as part of a general conveyance in 1954. ComEd also acquired former
MGP sites as vacant real estate on which ComEd facilities have been
constructed. To date, ComEd has identified 44 former MGP sites for which it
may be liable for remediation. ComEd presently estimates that its costs of
former MGP site investigation and remediation will aggregate from $25 million
to $150 million in current-year (1998) dollars. It is expected that the costs
associated with investigation and remediation of former MGP sites will be
incurred over a period not to exceed 30 years. Because ComEd is not able to
determine the most probable liability for such MGP costs, in accordance with
accounting standards, a reserve of $25 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets as of December 31,
1997 and 1996, which reflects the low end of the range of ComEd's estimate of
the liability associated with former MGP sites. In addition, as of December
31, 1997 and 1996, a reserve of $8 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets, representing
ComEd's estimate of the liability associated with cleanup costs of remediation
sites other than former MGP sites. Approximately half of this reserve relates
to anticipated cleanup costs associated with a property formerly used as a
tannery which was purchased by ComEd in 1973. ComEd presently estimates that
its costs of investigating and remediating the former MGP and other
remediation sites, pursuant to CERCLA and state environmental laws, will not
have a material impact on the financial position or results of operations of
ComEd. These cost estimates are based on currently available information
regarding the responsible parties likely to share in the costs of responding
to site contamination, the extent of contamination at sites for which the
investigation has not yet been completed and the cleanup levels to which sites
are expected to have to be remediated.
50
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
Final ICC orders have been issued in fuel reconciliation proceedings for
years prior to 1994 and for the year 1995. In 1996, an intervenor filed
testimony in the fuel reconciliation proceeding for 1994 seeking a refund of
approximately $90 million relating to nuclear station performance. The 1997
Act provides that the fuel reconciliation proceedings for 1994 and 1996 must
be concluded by the end of 1998. If refunds are required in these proceedings,
the refunds could have a material effect on results of operations. The 1997
Act also provides that, because ComEd eliminated its FAC effective January 1,
1997, the lCC shall not conduct a fuel reconciliation proceeding for the year
1997 and subsequent years. See Note 2 for information regarding the
elimination of ComEd's FAC.
(24) QUARTERLY FINANCIAL INFORMATION
THREE MONTHS ENDED NET INCOME/
(1997 RESTATED FOR ELECTRIC ELECTRIC (LOSS) ON
CHANGE IN OPERATING OPERATING NET COMMON
ACCOUNTING PRINCIPLE) REVENUES INCOME INCOME/(LOSS) STOCK
- ---------------------- ---------- --------- ------------- -----------
(THOUSANDS EXCEPT PER SHARE DATA)
March 31, 1997.......... $1,669,495 $214,310 $ 277,928 $ 262,401
June 30, 1997........... $1,685,196 $154,820 $ 25,063 $ 9,578
September 30, 1997...... $2,068,087 $390,630 $ 260,985 $ 246,083
December 31, 1997....... $1,650,310 $162,054 $(1,337,749) $(1,352,321)
March 31, 1996.......... $1,683,489 $298,711 $ 155,891 $ 139,377
June 30, 1996........... $1,547,632 $254,690 $ 119,448 $ 102,976
September 30, 1996...... $2,066,975 $475,839 $ 353,147 $ 337,262
December 31, 1996....... $1,636,451 $241,278 $ 114,882 $ 99,329
NET INCOME/
ELECTRIC ELECTRIC (LOSS) ON
THREE MONTHS ENDED PRO OPERATING OPERATING NET COMMON
FORMA (UNAUDITED) (A) REVENUES INCOME INCOME/(LOSS) STOCK
- ----------------------- ---------- --------- ------------- -----------
(THOUSANDS EXCEPT PER SHARE DATA)
March 31, 1997.......... $1,669,495 $214,310 $ 81,228 $ 65,701
June 30, 1997........... $1,685,196 $154,820 $ 25,063 $ 9,578
September 30, 1997...... $2,068,087 $390,630 $ 260,985 $ 246,083
December 31, 1997....... $1,650,310 $162,054 $(1,337,749) $(1,352,321)
March 31, 1996.......... $1,636,072 $272,444 $ 129,624 $ 113,110
June 30, 1996........... $1,599,596 $284,870 $ 149,628 $ 133,156
September 30, 1996...... $2,044,793 $462,950 $ 340,258 $ 324,373
December 31, 1996....... $1,708,617 $282,384 $ 155,988 $ 140,435
(a) Pro Forma quarterly financial information as if the change in accounting
principle had been applied retroactively, excluding the cumulative effect
of a change in accounting principle.
51