- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION
FILE REGISTRANT; STATE OF INCORPORATION; IRS EMPLOYER
NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
---------- ----------------------------------- ------------------
1-11375 UNICOM CORPORATION 36-3961038
(an Illinois corporation)
37th Floor, 10 South Dearborn Street
Post Office Box A-3005
Chicago, Illinois 60690-3005
312/394-7399
1-1839 COMMONWEALTH EDISON COMPANY 36-0938600
(an Illinois corporation)
37th Floor, 10 South Dearborn Street
Post Office Box 767
Chicago, Illinois 60690-0767
312/394-4321
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
Common Stock outstanding at April 30, 1998:
Unicom Corporation 216,906,113 shares
Commonwealth Edison Company 214,234,975 shares
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNICOM CORPORATION
AND
COMMONWEALTH EDISON COMPANY
QUARTERLY REPORTS ON FORM 10-Q
TO THE SECURITIES AND EXCHANGE COMMISSION
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
This document contains the Quarterly Reports on Form 10-Q for the quarterly
period ended March 31, 1998 for each of Unicom Corporation and Commonwealth
Edison Company. Information contained herein relating to an individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, Commonwealth Edison Company makes no representation as
to information relating to Unicom Corporation or to any other companies
affiliated with Unicom Corporation. In addition, several portions of these
Quarterly Reports contain forward looking statements; and reference is made to
page 67-68 for the location and character of such statements.
INDEX
PAGE
-----
Definitions.............................................................. 3
PART I. FINANCIAL INFORMATION
Unicom Corporation and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 4
Statements of Consolidated Operations for the three months and twelve
months ended March 31, 1998 and 1997................................ 5
Consolidated Balance Sheets--March 31, 1998 and December 31, 1997.... 6-7
Statements of Consolidated Capitalization--March 31, 1998 and
December 31, 1997 .................................................. 8
Statements of Consolidated Retained Earnings (Deficit) for the three
months and twelve months ended March 31, 1998 and 1997.............. 9
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1998 and 1997................................ 10
Notes to Financial Statements........................................ 11-36
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 37-52
Commonwealth Edison Company and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 54
Statements of Consolidated Operations for the three months and twelve
months ended March 31, 1998 and 1997................................ 55
Consolidated Balance Sheets--March 31, 1998 and December 31, 1997.... 56-57
Statements of Consolidated Capitalization--March 31, 1998 and
December 31, 1997................................................... 58
Statements of Consolidated Retained Earnings (Deficit) for the three
months and twelve months ended March 31, 1998 and 1997.............. 59
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1998 and 1997................................ 60
Notes to Financial Statements........................................ 61-65
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 66
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 67-68
Item 6. Exhibits and Reports on Form 8-K............................... 68-69
SIGNATURES............................................................... 70
2
DEFINITIONS
The following terms are used in this document with the following meanings:
TERM MEANING
---------------------- -------------------------------------------------------
1997 Act Illinois Electric Service Customer Choice and Rate
Relief Law of 1997
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
CERCLA Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended
CFC Chlorofluorocarbon
Clean Air Amendments Clean Air Act Amendments of 1990
ComEd Commonwealth Edison Company
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
IDR Illinois Department of Revenue
Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd
subsidiary
INPO Institute of Nuclear Power Operations
ISO Independent System Operator
MGP Manufactured gas plant
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NML Nuclear Mutual Limited
NPL National Priorities List
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
Rate Order ICC rate order issued in January 1995, 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 ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely ComEd's
subordinated debt securities
Unicom Unicom Corporation
Unicom Energy Services Unicom Energy Services Inc., a Unicom subsidiary
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
U.S. EPA U.S. Environmental Protection Agency
UT Holdings UT Holdings Inc., a Unicom subsidiary
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unicom Corporation:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Unicom Corporation (an Illinois corporation)
and subsidiary companies as of March 31, 1998 and December 31, 1997, and the
related statements of consolidated operations, retained earnings (deficit) and
cash flows for the three-month and twelve-month periods ended March 31, 1998
and 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 Unicom Corporation and
subsidiary companies as of March 31, 1998 and December 31, 1997, and the
results of their operations and their cash flows for the three-month and
twelve-month periods ended March 31, 1998 and 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
May 11, 1998
4
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months and
twelve months ended March 31, 1998 and 1997 reflect the results of past
operations and are not intended as any representation as to results of
operations for any future period. Future operations will necessarily be
affected by various and diverse factors and developments, including changes in
electric prices, regulation, population, business activity, competition,
taxes, environmental control, energy use, fuel, cost of labor, purchased power
and other matters, the nature and effect of which cannot now be determined.
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
(THOUSANDS EXCEPT PER SHARE DATA)
Operating Revenues............ $1,712,235 $1,670,812 $ 7,124,445 $6,923,908
---------- ---------- ----------- ----------
Operating Expenses and Taxes:
Fuel......................... $ 231,376 $ 309,068 $ 1,161,746 $1,182,948
Purchased power.............. 220,730 64,307 556,478 178,167
Operation and maintenance.... 568,996 570,246 2,437,138 2,218,437
Depreciation................. 248,902 249,860 988,859 972,636
Recovery of regulatory
assets...................... -- 3,818 11,454 15,272
Taxes (except income)........ 207,426 201,198 807,114 766,490
Income taxes................. 51,551 65,253 304,076 443,327
Investment tax credits
deferred--net .............. (7,160) (7,897) (30,278) (34,109)
---------- ---------- ----------- ----------
$1,521,821 $1,455,853 $ 6,236,587 $5,743,168
---------- ---------- ----------- ----------
Operating Income.............. $ 190,414 $ 214,959 $ 887,858 $1,180,740
---------- ---------- ----------- ----------
Other Income and (Deductions):
Interest on long-term debt... $ (112,754) $ (126,968) $ (473,819) $ (511,392)
Interest on notes payable.... (5,809) (1,951) (12,992) (11,007)
Allowance for funds used
during construction--
Borrowed funds............. 1,576 4,052 16,079 18,580
Equity funds............... 1,584 5,080 20,274 21,158
Income taxes applicable to
nonoperating activities..... 2,884 366 13,748 3,902
Provision for dividends--
Preferred and preference
stocks of ComEd........... (14,547) (15,527) (59,506) (63,437)
ComEd-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
ComEd's subordinated debt
securities................ (7,428) (6,648) (29,640) (19,368)
Loss on nuclear plant
closure..................... -- -- (885,611) --
Income tax effect of nuclear
plant closure............... -- -- 362,952 --
Miscellaneous--net........... (2,205) (7,646) (90,559) (24,291)
---------- ---------- ----------- ----------
$ (136,699) $ (149,242) $(1,139,074) $ (585,855)
---------- ---------- ----------- ----------
Net Income (Loss) Before
Extraordinary Item and
Cumulative Effect of Change
in Accounting Principle...... $ 53,715 $ 65,717 $ (251,216) $ 594,885
Extraordinary Loss Less
Applicable Income Taxes...... -- -- (810,335) --
Cumulative Effect of Change in
Accounting Principle......... -- 196,700 -- 196,700
---------- ---------- ----------- ----------
Net Income (Loss)............. $ 53,715 $ 262,417 $(1,061,551) $ 791,585
========== ========== =========== ==========
Average Number of Common
Shares Outstanding........... 216,707 216,053 216,493 215,701
Basic and Diluted Earnings
(Loss) Per Common Share:
Earnings (Loss) Per Common
Share Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle.................. $ 0.25 $ 0.30 $ (1.15) $ 2.76
Extraordinary Loss Less
Applicable Income Taxes.... -- -- (3.75) --
Cumulative Effect of Change
in Accounting Principle.... -- 0.91 -- 0.91
---------- ---------- ----------- ----------
Earnings (Loss) Per Common
Share...................... $ 0.25 $ 1.21 $ (4.90) $ 3.67
========== ========== =========== ==========
Cash Dividends Declared per
Common Share................. $ 0.40 $ 0.40 $ 1.60 $ 1.60
The accompanying Notes to Financial Statements are an integral part of the
above statements.
5
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(THOUSANDS OF DOLLARS)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $1,086 million
and $1,131 million, respectively)................. $27,264,888 $27,519,365
Less--Accumulated provision for depreciation....... 11,737,771 11,645,985
----------- -----------
$15,527,117 $15,873,380
Nuclear fuel, at amortized cost.................... 929,631 906,043
----------- -----------
$16,456,748 $16,779,423
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 2,087,093 $ 1,855,697
Subsidiary companies............................... 41,259 41,830
Other, at cost..................................... 240,043 216,243
----------- -----------
$ 2,368,395 $ 2,113,770
----------- -----------
Current Assets:
Cash............................................... $ 23,674 $ 18,519
Temporary cash investments......................... 89,714 102,702
Other cash investments............................. 13,350 --
Special deposits................................... 271 271
Receivables--
Customers........................................ 882,114 873,418
Other............................................ 62,190 132,449
Provisions for uncollectible accounts............ (17,432) (17,544)
Coal and fuel oil, at average cost................. 156,850 120,664
Materials and supplies, at average cost............ 257,272 255,338
Deferred income taxes related to current assets and
liabilities....................................... 64,134 179,553
Prepayments and other.............................. 135,929 126,088
----------- -----------
$ 1,668,066 $ 1,791,458
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 1,452,013 $ 1,685,235
Coal reserves...................................... 167,524 194,769
Other.............................................. 76,273 135,095
----------- -----------
$ 1,695,810 $ 2,015,099
----------- -----------
$22,189,019 $22,699,750
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
6
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ----------- ------------
(THOUSANDS OF DOLLARS)
Capitalization (see accompanying statements):
Common stock equity................................. $ 4,887,890 $ 4,918,687
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements......... 506,920 507,053
Subject to mandatory redemption requirements...... 174,328 174,328
ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
ComEd's subordinated debt securities*.............. 350,000 350,000
Long-term debt...................................... 5,757,279 5,737,348
----------- -----------
$11,676,417 $11,687,416
----------- -----------
Current Liabilities:
Notes payable....................................... $ 379,650 $ 158,150
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations of
subsidiary companies............................... 410,996 775,296
Accounts payable.................................... 474,692 505,444
Accrued interest.................................... 141,077 169,559
Accrued taxes....................................... 205,974 175,758
Dividends payable................................... 103,942 107,001
Customer deposits................................... 54,023 55,214
Accrued plant closing costs......................... 119,641 135,000
Other............................................... 135,585 165,177
----------- -----------
$ 2,025,580 $ 2,246,599
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,772,503 $ 3,850,308
Nuclear decommissioning liability for retired
plants............................................. 1,202,600 1,301,000
Accumulated deferred investment tax credits......... 587,490 602,122
Accrued spent nuclear fuel disposal fee and related
interest........................................... 701,756 692,673
Obligations under capital leases of subsidiary com-
panies............................................. 424,343 437,950
Regulatory liabilities.............................. 607,623 698,750
Other............................................... 1,190,707 1,182,932
----------- -----------
$ 8,487,022 $ 8,765,735
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$22,189,019 $22,699,750
=========== ===========
*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.
7
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
MARCH 31, DECEMBER
1998 31, 1997
----------- -----------
(THOUSANDS OF DOLLARS)
Common Stock Equity:
Common stock, without par value--
Outstanding--216,841,318 shares and 216,659,480
shares, respectively (excludes $9 million and $7
million as of March 31, 1998 and December 31,
1997, respectively, held by trustee for Unicom
Stock Bonus Deferral Plan)....................... $ 4,945,437 $ 4,943,211
Preference stock expense of ComEd.................. (3,340) (3,340)
Retained earnings (deficit)........................ (54,207) (21,184)
----------- -----------
$ 4,887,890 $ 4,918,687
----------- -----------
Preferred and Preference Stocks of ComEd--
Without Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--13,499,549 shares.................. $ 504,957 $ 504,957
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--61,724 shares and 65,912 shares,
respectively................................... 1,963 2,096
Prior preferred stock, cumulative, $100 par value
per share-- No shares outstanding............... -- --
----------- -----------
$ 506,920 $ 507,053
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--2,058,560 shares................... $ 205,016 $ 205,016
Current redemption requirements for preference
stock included in current liabilities........... (30,688) (30,688)
----------- -----------
$ 174,328 $ 174,328
----------- -----------
ComEd-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
ComEd's Subordinated Debt Securities................ $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1998 through 2002--6.00% to 9 3/8%...... $ 880,000 $ 1,060,000
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 1,791,000
Maturing 2023--7 3/4% to 8 3/8%.................. 560,000 560,000
----------- -----------
$ 4,671,400 $ 4,851,400
Sinking fund debentures, due 1999 through 2011--2
3/4% to 7 5/8%.................................... 98,298 100,298
Pollution control obligations, due 2007 through
2014--3.65% to 5 7/8%............................. 142,200 142,200
Other long-term debt............................... 1,034,310 1,193,818
Deposit for retirement of long-term debt........... (4,064) --
Current maturities of long-term debt included in
current liabilities............................... (139,413) (503,909)
Unamortized net debt discount and premium.......... (45,452) (46,459)
----------- -----------
$ 5,757,279 $ 5,737,348
----------- -----------
$11,676,417 $11,687,416
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
8
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- -----------------------
1998 1997 1998 1997
-------- ---------- ----------- ----------
(THOUSANDS OF DOLLARS)
Balance at Beginning of Period.. $(21,184) $1,177,997 $ 1,353,931 $ 907,723
Add--Net income (loss).......... 53,715 262,417 (1,061,551) 791,585
-------- ---------- ----------- ----------
$ 32,531 $1,440,414 $ 292,380 $1,699,308
-------- ---------- ----------- ----------
Deduct--
Cash dividends declared on
common stock................ $ 86,739 $ 86,484 $ 346,479 $ 345,274
Other capital stock transac-
tions--net.................. (1) (1) 108 103
-------- ---------- ----------- ----------
$ 86,738 $ 86,483 $ 346,587 $ 345,377
-------- ---------- ----------- ----------
Balance at End of Period (In-
cludes $298 million of appro-
priated retained earnings at
March 31, 1998)................ $(54,207) $1,353,931 $ (54,207) $1,353,931
======== ========== =========== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
9
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
(THOUSANDS OF DOLLARS)
Cash Flow From Operating Activ-
ities:
Net income (loss)............. $ 53,715 $ 262,417 $(1,061,551) $ 791,585
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortiza-
tion....................... 262,010 259,455 1,038,826 1,009,045
Deferred income taxes and
investment tax credits--
net........................ 26,681 (7,972) (310,389) 105,465
Extraordinary loss related
to write-off of certain net
regulatory assets.......... -- -- 810,335 --
Cumulative effect of a
change in accounting prin-
ciple...................... -- (196,700) -- (196,700)
Loss on nuclear plant clo-
sure....................... -- -- 885,611 --
Provisions/(payments) for
revenue refunds............ (34,504) -- 10,966 --
Equity component of
allowance for funds used
during construction........ (1,584) (5,080) (20,274) (21,158)
Recovery of regulatory as-
sets....................... -- 3,818 11,454 15,272
Provisions/(payments) for
liability for separation
costs--net................. 7,425 (626) 24,037 1,790
Net effect on cash flows of
changes in:
Receivables............... 61,451 101,676 (16,142) 54,338
Coal and fuel oil......... (36,186) (32,275) 15,787 (27,970)
Materials and supplies.... (5,221) (30) 36,468 10,627
Accounts payable excluding
separation costs--net.... (37,367) (41,348) 8,752 (16,410)
Accrued interest and tax-
es....................... 1,734 55,365 (71,534) (32,922)
Other changes in certain
current assets and
liabilities.............. 18,790 36,421 276,415 194,468
Other--net.................. 49,495 83,783 136,546 146,601
--------- --------- ----------- -----------
$ 366,439 $ 518,904 $ 1,775,307 $ 2,034,031
--------- --------- ----------- -----------
Cash Flow From Investing Activ-
ities:
Construction expenditures..... $(172,951) $(234,481) $ (981,782) $ (928,199)
Nuclear fuel expenditures..... (60,549) (48,773) (197,149) (296,187)
Sale of generating plants..... 177,454 -- 238,245 --
Equity component of allowance
for funds used during
construction................. 1,584 5,080 20,274 21,158
Contributions to nuclear
decommissioning funds........ (80,077) (80,181) (114,721) (116,284)
Other investments and special
deposits..................... (17,519) (29,939) (827) (31,756)
--------- --------- ----------- -----------
$(152,058) $(388,294) $(1,035,960) $(1,351,268)
--------- --------- ----------- -----------
Cash Flow From Financing Activ-
ities:
Issuance of securities--
Long-term debt............... $ 25,000 $ 297,663 $ 90,000 $ 549,565
ComEd-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
ComEd's subordinated debt
securities.................. -- 150,000 -- 150,000
Capital stock................ 4,223 5,777 14,223 22,896
Retirement and redemption of
securities--
Long-term debt............... (366,509) (503,883) (599,366) (935,827)
Capital stock................ (133) (199) (44,045) (44,687)
Deposits and securities held
for retirement and
redemption of securities..... (4,064) (2,331) (1,733) 1,287
Premium paid on early redemp-
tion of long-term debt....... -- (9,500) -- (9,500)
Cash dividends paid on common
stock........................ (86,610) (86,321) (346,225) (344,892)
Proceeds from sale/leaseback
of nuclear fuel.............. 16,565 44,470 122,049 236,875
Nuclear fuel lease principal
payments..................... (32,186) (49,550) (149,048) (205,241)
Increase (Decrease) in short-
term borrowings.............. 221,500 1,000 249,900 (105,800)
--------- --------- ----------- -----------
$(222,214) $(152,874) $ (664,245) $ (685,324)
--------- --------- ----------- -----------
Increase (Decrease) in Cash and
Temporary Cash Investments.... $ (7,833) $ (22,264) $ 75,102 $ (2,561)
Cash and Temporary Cash
Investments at Beginning of
Period........................ 121,221 60,550 38,286 40,847
--------- --------- ----------- -----------
Cash and Temporary Cash Invest-
ments at End of Period........ $ 113,388 $ 38,286 $ 113,388 $ 38,286
========= ========= =========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
10
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Corporate Structure and Basis of Presentation. Unicom is the parent holding
company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility,
is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated
subsidiary of Unicom and is engaged, through its subsidiaries, in energy
service activities.
The consolidated financial statements include the accounts of Unicom, ComEd,
the Indiana Company, the Trusts and Unicom's unregulated subsidiaries. All
significant intercompany transactions have been eliminated. ComEd's
investments in other subsidiary companies, which are not material in relation
to ComEd's financial position or results of operations, are accounted for in
accordance with the equity method of accounting.
Use of Estimates. The preparation of financial statements in conformity with
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 returned to customers through future rates. See Note 2 for information
regarding the write-off of generation-related regulatory assets and
liabilities in December 1997.
ComEd's investment in generation-related net utility plant, including
construction work in progress and nuclear fuel and excluding the
decommissioning costs included in the accumulated provision for depreciation,
not subject to cost-based rate regulation, was $12.2 billion and $12.4 billion
at March 31, 1998 and December 31, 1997, respectively.
11
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Regulatory Assets and Liabilities. Regulatory assets are incurred costs
which have been deferred and are amortized for ratemaking and accounting
purposes. Regulatory liabilities represent amounts to be settled with
customers through future rates. Regulatory assets and liabilities reflected on
the Consolidated Balance Sheets at March 31, 1998 and December 31, 1997 were
as follows:
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(THOUSANDS OF DOLLARS)
Regulatory assets:
Deferred income taxes (1)............................ $ 690,442 $ 785,354
Nuclear decommissioning costs--Dresden Unit 1 (2).... 263,955 268,369
Nuclear decommissioning costs--Zion Units 1 and 2
(3)................................................. 447,231 579,777
Unamortized loss on reacquired debt (4).............. 50,385 51,735
---------- ----------
$1,452,013 $1,685,235
========== ==========
Regulatory liabilities:
Deferred income taxes (1)............................ $ 607,623 $ 698,750
========== ==========
- --------
(1) Recorded in compliance with SFAS No. 109, Accounting For Income Taxes, for
non-generation related timing differences.
(2) Amortized over the period 1998 to 2011. See "Depreciation and
Decommissioning" below for additional information.
(3) Amortized over the period 1998 to 2013. See "Depreciation and
Decommissioning" below for additional information.
(4) Amortized over the remaining lives of the non-generation related long-term
debt issued to finance the reacquisition. See "Loss on Reacquired Debt"
below for additional information.
Fuel Adjustment Clause. 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. 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. As authorized
by the ICC, ComEd had recorded under or overrecoveries of allowable fuel and
energy costs which, under the FAC, were recoverable or refundable in
subsequent months. See Note 2 for additional information regarding the effects
of eliminating the FAC. See Note 4 for information concerning FAC
reconciliation proceedings for the years 1994 and 1996.
Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on
the quantity of heat produced using the unit of production method. As
authorized by the ICC, provisions for spent nuclear fuel disposal costs have
been recorded at a level required to recover the fee payable on the current
nuclear-generated and sold electricity and the current interest accrual on the
one-time fee payable to the DOE for nuclear generation prior to April 7, 1983.
The one-time fee and interest thereon have been recovered and the current fee
and 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, one-time fee and interest accrual on the one-time fee.
Nuclear fuel expenses, including leased fuel costs and provisions for spent
nuclear fuel disposal costs, were $67 million and $80 million for the three
months ended March 31, 1998 and 1997, respectively, and $285 million and $338
million for the twelve months ended March 31, 1998 and 1997, respectively.
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 March
31, 1998 and December 31, 1997, an asset related to the assessments of $152
million and $156 million, respectively, was recorded. As of March 31, 1998 and
December 31, 1997, a corresponding liability of $144 million was recorded, of
which $16 million was included in other current liabilities on the
Consolidated Balance Sheets for each period.
12
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Coal Reserves. At March 31, 1998 and December 31, 1997, ComEd had coal
reserves of $263 million and $282 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 $96 million and $87 million at March 31, 1998
and December 31, 1997, respectively, have been included in current assets as
prepayments and other on the Consolidated Balance Sheets. ComEd expects to
recover fully the costs of the coal reserves before the year 2001. See Note 22
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 March 31,
1998. 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 the twelve months
ended March 31, 1998. ComEd had 3.4 million electric customers at March 31,
1998.
Depreciation and Decommissioning. ComEd's depreciation is provided on the
straight-line basis by amortizing the cost of depreciable plant and equipment
over estimated composite service lives. Non-nuclear plant and equipment is
depreciated at annual rates developed for each class of plant based on their
composite service lives. Provisions for depreciation were at average annual
rates of 3.40% and 3.37% for the three months and twelve months ended March
31, 1998, respectively, of average depreciable utility plant and equipment,
including the effects of additional depreciation on ComEd's nuclear generating
units. Provisions for depreciation were at average annual rates of 3.36% and
3.31% for the three months and twelve months ended March 31, 1997,
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 primarily relates
to its steam generators at Byron Unit 1 and Braidwood Unit 1, which are
expected to be replaced prior to year-end 1998. ComEd recorded additional
depreciation charges relating to its nuclear generating units of $17 million
and $61 million for the three months and twelve months ended March 31, 1998,
respectively, and $15 million and $45 million for the three months and twelve
months ended March 31, 1997, respectively.
Nuclear plant decommissioning costs generally are accrued over the current
NRC license lives of the related nuclear generating units. The accrual is
based on an annual levelized cost of the unrecovered portion of estimated
decommissioning costs, which are escalated for expected inflation to the
expected time of decommissioning and are net of expected earnings on the trust
funds. See "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 generating station
currently operating. 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
13
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Zion Station and its first nuclear unit, Dresden Unit 1, are retired and are
expected to be dismantled beginning in the years 2014 and 2012, respectively,
which is consistent with the regulatory treatment for the related
decommissioning costs.
Based on ComEd's most recent study approved by the ICC, decommissioning
costs, including the cost of decontamination and dismantling, are estimated to
aggregate $4.4 billion in current-year (1998) dollars, including a contingency
allowance. ComEd estimates that it will expend approximately $11.6 billion,
including a contingency allowance, for decommissioning costs primarily during
the period from 2007 through 2034. Additionally, ComEd estimates that it will
expend an aggregate of approximately $217 million in current-year (1998)
dollars during the period 2000 through 2014 to maintain Zion Station in a
secured mode until decommissioning begins. All such costs are expected to be
funded by the external decommissioning trusts, which ComEd established in
compliance with Illinois law and into which ComEd has been making annual
contributions. Future decommissioning cost estimates may be significantly
affected by the adoption of or changes to NRC regulations, as well as changes
in the assumptions used in making such estimates, including changes in
technology, available alternatives for the disposal of nuclear waste and
inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider. The rider allows annual adjustments to
decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. The current estimated
decommissioning costs include a contingency allowance, but, except at Dresden
Unit 1, exclude amounts for spent fuel storage installations, which may be
necessary to store spent fuel during the period beginning at the end of the
NRC license life of the plants to the date when the DOE accepts the spent fuel
for permanent storage. Contingency allowances used in decommissioning cost
estimates provide for currently unspecifiable costs that are likely to occur
after decommissioning begins and generally range from 20% to 25% of the
currently specifiable costs.
In February 1998, the ICC approved a reduction in the annual decommissioning
cost accrual from $109 million to $84 million. The reduction primarily
reflects stronger than expected after-tax returns on the external trust funds
in 1996 and lower than expected escalation in low level waste disposal costs,
partially offset by the higher current-year cost estimates, including a
contingency allowance.
The approved annual decommissioning cost accrual of $84 million was
determined using the following assumptions: the decommissioning cost estimate
of $4.4 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 $84 million provided over the current NRC license lives
of the nuclear plants, coupled with the expected fund earnings and amounts
previously recovered in rates, is expected to aggregate approximately $11.6
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 March 31, 1998, the total decommissioning costs included
in the accumulated provision for depreciation were $1,710 million. For ComEd's
retired nuclear unit, Dresden Unit 1, the total estimated liability at March
31, 1998 in current-year (1998) dollars of $369 million was recorded under
nuclear decommissioning liability for
14
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
retired plants and the unrecovered portion of the liability of $264 million
was recorded as a regulatory asset on the Consolidated Balance Sheets. For
ComEd's retired Zion nuclear station, the total estimated liability at March
31, 1998 in current-year (1998) dollars of $834 million was recorded under
nuclear decommissioning liability for retired plants and the unrecovered
portion of the liability of $447 million was recorded as a regulatory asset on
the Consolidated Balance Sheets. The total estimated liability related to Zion
nuclear station, and the unrecovered portion of that liability, decreased from
December 31, 1997 to March 31, 1998 due to the exclusion of estimated dry cask
storage costs.
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts; 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 March 31, 1998, the past
accruals that are required to be contributed to the external trusts aggregate
$115 million. The fair value of funds accumulated in the external trusts at
March 31, 1998 was $2,087 million, which includes pre-tax unrealized
appreciation of $543 million. The earnings on the external trusts accumulate
in the fund balance and accumulated provision for depreciation.
Income Taxes. Deferred income taxes are provided for income and expense
items recognized for financial accounting purposes in periods that differ from
those for income tax purposes. Income taxes deferred in prior years are
charged or credited to income as the book/tax timing differences reverse.
Prior years' deferred investment tax credits are amortized through credits to
income generally over the lives of the related property. Income tax credits
resulting from interest charges applicable to nonoperating activities,
principally construction, are classified as other income.
AFUDC and Interest Capitalized. In accordance with the uniform systems of
accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC,
compounded semiannually, which represents the estimated cost of funds used to
finance its construction program for the non-generation portion of its
business. The equity component of AFUDC is recorded on an after-tax basis and
the borrowed funds component of AFUDC is recorded on a pre-tax basis. The
average annual capitalization rates were 8.96% and 9.34% for the three months
ended March 31, 1998 and 1997, respectively, and 9.29% and 9.15% for the
twelve months ended March 31, 1998 and 1997, respectively. ComEd discontinued
SFAS No. 71 regulatory accounting practices in December 1997 for the
generation portion of its business. As a result, beginning in 1998, ComEd
capitalizes interest costs on its generation-related construction work in
progress and nuclear fuel in process. Interest costs capitalized were $2
million for the three months and twelve months ended March 31, 1998. AFUDC and
interest capitalized do not contribute to the current cash flow of Unicom or
ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations were $140 million and $154 million for the three months ended
March 31, 1998 and 1997, respectively, and $584 million and $621 million for
the twelve months ended March 31, 1998 and 1997, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt of ComEd are being amortized over the lives of the respective
issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from ComEd's reacquisition in connection with the refinancing of first
mortgage bonds, sinking fund debentures and pollution control obligations
prior to their scheduled maturity dates is deferred and amortized over the
15
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
lives of the long-term debt issued to finance the reacquisition for non-
generation related financings. See "Regulatory Assets and Liabilities" above
and Note 2 for additional information.
Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to
adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure
purposes only. Unicom accounts for its stock option awards and ESPP under APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 8 for
additional information.
Earnings per Share. Unicom has presented basic EPS on the Statements of
Consolidated Operations for the three months and twelve months ended March 31,
1998 and 1997. Basic EPS and diluted EPS for the periods presented are the
same. The diluted average number of common shares outstanding was 217,372,000
and 216,157,000 for the three months ended March 31, 1998 and 1997,
respectively, and 216,493,000 and 215,805,000 for the twelve months ended
March 31, 1998 and 1997, respectively.
Energy Risk Management Contracts. In the normal course of business ComEd
utilizes contracts for the forward sale and purchase of energy to manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap arrangements to limit
the market price risk associated with the forward commodity contracts. As
ComEd does not currently utilize financial or commodity instruments for
trading or speculative purposes, any gains or losses on forward commodity
contracts are recognized when the underlying transactions affect earnings.
Revenues and expenses associated with market price risk management contracts
are amortized over the terms of such contracts.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on operating results. See Note 3 for information regarding the
restatement of 1997 interim financial statements for a change in accounting
principle.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months and
twelve months ended March 31, 1998 and 1997 was as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
Supplemental Cash Flow Infor-
mation:
Cash paid during the period
for:
Interest (net of amount
capitalized).............. $ 154,881 $ 160,928 $ 506,003 $541,435
Income taxes (net of re-
funds).................... $ -- $ 6,998 $ 258,803 $ 241,741
Supplemental Schedule of Non-
Cash Investing and Financing
Activities:
Capital lease obligations
incurred by subsidiary com-
panies...................... $ 17,996 $ 46,397 $ 130,011 $ 241,879
(2) ACCOUNTING EFFECTS RELATED TO 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 on
August 1, 1998, an additional 5% residential base rate reduction commencing on
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
16
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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; however, such
reductions are expected to be offset by 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 the revenue the utility will
receive for providing delivery services to the customer, the market price for
electricity and a defined mitigation factor which represents the utility's
opportunity to develop new revenue sources and achieve cost savings.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. 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 leveling of certain regulatory
requirements to permit operational flexibility, the leveling of certain
regulatory and tax provisions as applied to various electric suppliers and a
new, more stringent, liability standard applicable to ComEd in the event of a
major outage.
The 1997 Act also allows a portion of ComEd's future revenues, including
tariffed rates and CTC revenues, to be segregated and used to support the
issuance of securities by ComEd or a special purpose financing entity. The
proceeds from such security issuances must be used to refinance outstanding
debt or equity or for certain other limited purposes. The total amount of such
securities that may be issued is approximately $6.8 billion; approximately
one-half of that amount can be issued in the twelve-month period commencing on
August 1, 1998. On April 22, 1998, ComEd filed an application with the ICC
seeking certain actions and approvals of the ICC under the 1997 Act in
connection with the proposed issuance of up to $3.4 billion of such
securities. ComEd plans to use the proceeds of the sale of such securities to
refinance its debt and equity, and anticipates using between $750 million and
$1.14 billion to repurchase shares of ComEd common stock held by Unicom.
Unicom in turn will use the funds it receives from ComEd's share repurchase to
repurchase publicly held shares of Unicom's common stock. At current market
prices, this repurchase would involve between 22 million and 33 million
shares, or 10 to 15 percent of Unicom's outstanding
17
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
common stock. The Boards of Directors of Unicom and ComEd have each approved
the repurchase of up to 33 million shares of common stock. ComEd plans to use
the remaining proceeds, net of transaction costs, to redeem preference stock
and debt.
As a result of the 1997 Act, prices for the supply of electric energy 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 may include cost
control efforts, developing new sources of revenue and potential asset
dispositions.
Because the 1997 Act is expected ultimately to lead to market-based pricing
of electric generation services, ComEd discontinued SFAS No. 71 regulatory
accounting practices for the generation portion of its business in December
1997. ComEd evaluated the regulatory assets and liabilities related to the
generation portion of its business and determined that it was not probable
that such costs would be recovered through the cash flows from the regulated
portion of its business. Accordingly, the generation-related regulatory assets
and liabilities were written off in the fourth quarter of 1997, resulting in
an extraordinary charge of $810 million (after-tax), or $3.75 per common
share. These write-offs related principally to previously incurred costs
originally expected to be collected through future revenues, including income
tax benefits previously flowed through to customers, deferred carrying charges
on the Byron Unit 2 and Braidwood Units 1 and 2 nuclear 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.
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 required ComEd to refund to customers the net
FAC charges billed during the calendar year 1997 of $25 million (after-tax),
or $0.12 per common share. These costs, as well as deferred underrecovered
energy costs of $19 million (after-tax), or $0.08 per common share which ComEd
would have been entitled to recover if the FAC had remained in effect, were
recorded as a reduction to operating results in the fourth quarter of 1997.
As of March 31, 1998, ComEd's liability for revenue refunds was $11 million.
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. Projections of the market price for
uranium indicate that the expected incremental costs of mining and milling
uranium at such properties would exceed the expected market price for uranium.
Such costs are not expected to be recoverable in a competitive market. A write
down of ComEd's investment in uranium-related properties to realizable value
resulted in a charge of $60 million (after-tax), or $0.28 per common share in
December 1997.
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, establishes 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
18
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
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, including the collection of the CTC, 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 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. In the fourth
quarter of 1997, ComEd changed its accounting method for revenue recognition
to record revenues associated with service which has been provided to
customers but has not yet been billed at the end of each accounting period,
retroactive to January 1, 1997. This change in accounting method increased
operating results for the three months and twelve months ended March 31, 1997
to reflect the one-time cumulative effect of the change for years prior to
1997 of $197 million (after-tax), or $0.91 per common share. The results per
common share for the first, second, third and fourth quarters of 1997,
reflecting the results of restatement for the effect of the change in
accounting principle, were $1.21, $0.03, $1.11 and $(6.29), respectively. The
following pro forma information reflects the financial results for the twelve
months ended March 31, 1997 as if the new accounting method had been in effect
for the full twelve-month period, excluding the cumulative effect of a change
in accounting principle (unaudited):
(THOUSANDS EXCEPT
PER SHARE DATA)
Net Income.................................................... $653,282
Earnings Per Common Share..................................... $ 3.03
(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 related to: (i) the manner in which certain costs were recovered
and which customers should pay those costs, and (ii) the proper rate of return
on common equity for ComEd. As of March 31, 1998, electric operating revenues
of approximately $215 million would be subject to refund in connection with
the remanded issues. On April 6, 1998, the ICC entered an order providing the
analysis required by the Appellate Court and affirming the Rate Order and the
associated $302 million revenue increase on an annual basis. The order is
subject to a pending petition for rehearing and to appeal.
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. In March
1998, the ICC staff also filed testimony in the fuel reconciliation proceeding
for 1994 proposing a refund of $36 million. 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
19
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
have a material adverse 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 or
any subsequent years.
See Note 2 for information regarding the 1997 Act and the elimination of
ComEd's FAC.
(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 in the fourth quarter
of 1997 of $523 million (after-tax), or $2.42 per common share. 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 reflect 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. See
Note 17 for information regarding costs of voluntary employee separation
plans.
ComEd has completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has entered into
exclusive 15-year purchased power agreements for the output of the stations.
The sale of State Line Station was completed in December 1997, and the sale of
Kincaid Station was completed in February 1998. The net proceeds of the sales,
after income tax effects and closing costs, were approximately $190 million.
The proceeds were used to retire or redeem existing debt in the first quarter
of 1998.
(6) AUTHORIZED SHARES AND VOTING RIGHTS AND STOCK RIGHTS OF CAPITAL STOCK.
At March 31, 1998, Unicom's authorized shares consisted of 400,000,000 shares
of common stock. The authorized shares of ComEd preferred and preference
stocks at March 31, 1998 were: preference stock--22,368,560 shares; $1.425
convertible preferred stock--61,724 shares; and prior preferred stock--850,000
shares. The preference and prior preferred stocks are issuable in series and
may be issued with or without mandatory redemption requirements. Holders of
outstanding Unicom shares are entitled to one vote for each share held on each
matter submitted to a vote of such shareholders; and holders of outstanding
ComEd shares are entitled to one vote for each share held on each matter
submitted to a vote of such shareholders. All such shares have the right to
cumulate votes in elections for the directors of the corporation which issued
the shares.
Pursuant to a plan adopted by Unicom's Board of Directors on February 2,
1998, each share of Unicom's common stock carries the right (referred to
herein as a "Right") to purchase one-thousandth of one share of Unicom's
common stock at a purchase price of $100 per whole share of common stock,
subject to adjustment. The Rights are tradable only with Unicom's common stock
until they become exercisable. The Rights become exercisable upon the earlier
of ten days following a public
20
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
announcement that a person (an "Acquiring Person") has acquired 15% or more of
Unicom's outstanding common stock or ten business days (or such later date as
may be determined by action of Unicom's Board of Directors) following the
commencement of a tender or exchange offer which, if consummated, would result
in a person or group becoming an Acquiring Person. The Rights are subject to
redemption by Unicom at a price of $0.01 per Right, subject to certain
limitations, and will expire on February 2, 2008. If a person or group becomes
an Acquiring Person, each holder of a Right will thereafter have the right to
receive, upon exercise, Unicom common stock at a 50% discount from the then
current market price. If Unicom is acquired in a merger or other business
combination transaction in which Unicom is not the survivor, or 50% or more of
Unicom's assets or earning power is sold or transferred, each holder of a
Right shall then have the right to receive, upon exercise, common stock of the
acquiring company at a 50% discount from the then current market price of such
common stock. Rights held by an Acquiring Person become void upon the
occurrence of such events.
See Note 2 regarding ComEd's application to the ICC for the proposed
issuance of up to $3.4 billion of securities to refinance debt and equity, as
permitted under the 1997 Act.
(7) COMMON EQUITY. At March 31, 1998, shares of Unicom common stock were
reserved for the following purposes:
Long-Term Incentive Plan........................................ 3,003,279
Employee Stock Purchase Plan.................................... 507,567
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 94,476
1996 Directors' Fee Plan........................................ 176,639
---------
4,181,961
=========
Common stock issued for the three months and twelve months ended March 31,
1998 and 1997 was as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Shares of Common Stock Issued:
Long-Term Incentive Plan........ 174,287 45,144 337,247 200,527
Employee Stock Purchase Plan.... -- -- 196,003 196,513
Employee Savings and Investment
Plan........................... -- 202,700 71,503 496,700
Exchange for ComEd common stock
not held by Unicom............. 3,477 6,669 9,178 31,992
1996 Directors' Fee Plan........ 4,074 3,949 14,300 9,061
--------- --------- --------- ---------
181,838 258,462 628,231 934,793
========= ========= ========= =========
(THOUSANDS OF DOLLARS)
Amount of Common Stock Issued:
Total issued.................... $ 4,198 $ 5,727 $ 14,239 $ 22,848
Held by trustee for Unicom Stock
Bonus Deferral Plan............ (1,997) (2,343) (2,129) (2,440)
Other........................... 25 50 (15) 64
--------- --------- --------- ---------
$ 2,226 $ 3,434 $ 12,095 $ 20,472
========= ========= ========= =========
At March 31, 1998 and December 31, 1997, 76,607 and 76,868 ComEd common
stock purchase warrants, respectively, were outstanding. The warrants entitle
the holders to convert such warrants into common stock of ComEd at a
conversion rate of one share of common stock for three warrants.
21
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Unicom's retained earnings account had a deficit balance of $54 million and
$21 million at March 31, 1998 and December 31, 1997, respectively. As of March
31, 1998 and December 31, 1997, $298 million and $331 million, respectively,
of retained earnings have been appropriated for future dividend payments.
See Note 2 regarding ComEd's application to the ICC for the proposed
issuance of up to $3.4 billion of securities to refinance debt and equity, as
permitted under the 1997 Act.
(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 their grant date. One-third of the shares subject
to the options vest on each of the first three anniversaries of the option
grant date. In addition, the stock options will become fully vested
immediately if the holder dies, retires, is terminated by the Company other
than for cause or qualifies for long-term disability and will also vest in
full upon a change in control.
Stock options transactions through March 31, 1998 are summarized as follows:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE 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................... (212,549) 23.632
---------
Outstanding as of December 31, 1997................. 2,291,378 23.810
Granted during the first quarter.................... 260,000 33.010
Exercised during the first quarter.................. (164,077) 24.335
Expired/cancelled during the first quarter.......... (23,583) 23.473
---------
Outstanding as of March 31, 1998.................... 2,363,718 24.789
=========
Of the stock options outstanding at March 31, 1998, 383,810 have vested with
a weighted average exercise price of $25.307.
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
-------------------------
1998 1997 1996
------- ------- -------
Expected option life............................... 7 years 7 years 7 years
Dividend yield..................................... 4.80% 7.20% 6.30%
Expected volatility................................ 22.85% 22.29% 20.98%
Risk-free interest rate............................ 5.63% 6.25% 6.64%
The estimated fair value for each stock option granted in the first quarter
of 1998 and in the years 1997 and 1996 was $6.22, $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
22
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
participate in the ESPP. Unicom issued 196,003 and 196,513 shares of common
stock for the twelve months ended March 31, 1998 and 1997, respectively, under
the ESPP at a weighted average annual purchase price of $19.15 and $23.52,
respectively.
Unicom has adopted the disclosure-only provisions of SFAS No. 123. For
financial reporting purposes, Unicom has adopted APB No. 25 and thus no
compensation cost has been recognized for the stock option awards program or
ESPP. If Unicom had recorded compensation expense for the stock options
granted and the shares of common stock issued under the ESPP in accordance
with SFAS No. 123 using the fair value based method of accounting, the
additional charge to operations would have been $2 million (after-tax), or
$0.01 per common share and $1 million (after-tax), or $0.01 per common share
for the twelve months ended March 31, 1998 and 1997, respectively.
(9) COMED PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION
REQUIREMENTS. No shares of ComEd preferred or preference stocks without
mandatory redemption requirements were issued or redeemed during the twelve
months ended March 31, 1998 and 1997. The series of ComEd preference stock
without mandatory redemption requirements outstanding at March 31, 1998 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 ComEd's $1.425 convertible preferred stock are
convertible at the option of the holders thereof, at any time, into common
stock of ComEd at the rate of 1.02 shares of common stock for each share of
convertible preferred stock, subject to future adjustment. The convertible
preferred stock may be redeemed by ComEd at $42 per share, plus accrued and
unpaid dividends, if any. The involuntary liquidation price of the $1.425
convertible preferred stock is $31.80 per share, plus accrued and unpaid
dividends, if any.
23
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(10) COMED PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS.
During the twelve months ended March 31, 1998 and 1997, no shares of ComEd
preference stock subject to mandatory redemption requirements were issued. The
series of ComEd preference stock subject to mandatory redemption requirements
outstanding at March 31, 1998 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 ComEd 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 $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 ComEd preference
stock outstanding at March 31, 1998 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 the twelve months ended March 31, 1998 and 1997, 438,215 shares
of ComEd preference stock subject to mandatory redemption requirements were
reacquired to meet sinking fund requirements.
Sinking fund requirements due within one year are included in current
liabilities.
(11) COMED-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY COMED'S SUBORDINATED DEBT SECURITIES. In
September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd,
issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred
securities. The sole asset of ComEd Financing I is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust
of ComEd, issued 150,000 of its
24
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
8.50% ComEd-obligated mandatorily redeemable capital securities. The sole
asset of ComEd Financing II is $154.6 million principal amount of ComEd's
8.50% subordinated deferrable interest debentures due January 15, 2027. There
is a full and unconditional guarantee by ComEd of the Trusts' obligations
under the securities issued by the Trusts. However, ComEd's obligations are
subordinate and junior in right of payment to certain other indebtedness of
ComEd. ComEd has the right to defer payments of interest on the subordinated
deferrable interest notes by extending the interest payment period, at any
time, for up to 20 consecutive quarters. Similarly, ComEd has the right to
defer payments of interest on the subordinated deferrable interest debentures
by extending the interest payment period, at any time, for up to 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 subordinated deferrable interest debentures, on or after
January 15, 2007, or at any time in the event of certain income tax
circumstances. If the subordinated deferrable interest notes or debentures are
redeemed, the Trusts 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 ComEd's first mortgage bonds, sinking fund
debentures and other long-term debt outstanding at March 31, 1998, after
deducting deposits made for retirement of sinking fund debentures and sinking
fund debentures reacquired for satisfaction of future sinking fund
requirements, are summarized as follows: 1998--$135 million; 1999--$150
million; 2000--$462 million; 2001--$108 million; and 2002--$305 million.
Unicom Enterprises' note payable to bank of $185 million will mature in 1999.
At March 31, 1998, ComEd's outstanding first mortgage bonds maturing through
2002 were as follows:
PRINCIPAL AMOUNT
SERIES ----------------------
(THOUSANDS OF DOLLARS)
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
--------
$880,000
========
25
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Other long-term debt outstanding at March 31, 1998 is summarized as follows:
PRINCIPAL
DEBT SECURITY AMOUNT INTEREST RATE
- --------------- ---------- ---------------------------------------------------
(THOUSANDS
OF
DOLLARS)
Unicom--
Loans Payable:
Loan due Janu-
ary 1, 2003 $ 6,775 Interest rate of 8.31%
Loan due Janu-
ary 1, 2004 7,690 Interest rate of 8.44%
----------
$ 14,465
----------
ComEd--
Notes:
Medium Term
Note, Series
1N due April
1, 1998 $ 3,500 Interest rate of 9.55%
Medium Term
Notes, Series
3N due vari-
ous dates
through
October 15,
2004 296,000 Interest rates ranging from 9.00% to 9.20%
Notes due Jan-
uary 15, 2004 150,000 Interest rate of 7.375%
Notes due Oc-
tober 15,
2005 235,000 Interest rate of 6.40%
Notes due Jan-
uary 15, 2007 150,000 Interest rate of 7.625%
----------
$ 834,500
----------
Purchase Con-
tract Obliga-
tion
due April 30,
2005 $ 345 Interest rate of 3.00%
----------
Total ComEd $ 834,845
----------
Unicom Enter-
prises--
Long-Term Note
Payable to
Bank
due November
15, 1999 $ 185,000 Prevailing interest rate of 6.63% at March 31, 1998
----------
Total Unicom $1,034,310
==========
Long-term debt maturing within one year has been included in current
liabilities.
ComEd's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by ComEd.
See Note 2 regarding ComEd's application to the ICC for the proposed
issuance of up to $3.4 billion of securities to refinance debt and equity, as
permitted under the 1997 Act.
(13) LINES OF CREDIT. ComEd had total bank lines of credit of $673 million
and unused bank lines of credit of $665 million at March 31, 1998. Of that
amount, $665 million (of which $146 million expires on September 27, 1998, $18
million expires in equal quarterly installments commencing on June 30, 1998
and ending on September 30, 1998 and $501 million expires in equal quarterly
installments commencing on June 30, 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.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $15 million was unused as of March 31, 1998. The
credit facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings
26
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
and Unicom Energy Services, and for general corporate purposes. The credit
facility is guaranteed by Unicom and includes certain covenants with respect
to Unicom and Unicom Enterprises' operations. Such covenants include, among
other things, (i) a requirement that Unicom and its consolidated subsidiaries
maintain a tangible net worth at least $10 million over that of ComEd and its
consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt
to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the
indebtedness for borrowed money that Unicom (excluding ComEd) and Unicom
Enterprises may incur, and (iv) a requirement that Unicom own 100% of the
outstanding stock of Unicom Enterprises and at least 80% of the outstanding
stock of ComEd; and provide that Unicom may not declare or pay dividends
during the continuance of an event of default. Interest rates for borrowings
under the credit facility are set at the time of a borrowing and are based on
either a prime interest rate or a floating rate bank index plus a spread which
varies with the credit rating of ComEd's outstanding first mortgage bonds.
Unicom Enterprises is obligated to pay commitment fees with respect to the
unused portion of such lines of credit.
(14) DISPOSAL OF SPENT NUCLEAR FUEL. Under the Nuclear Waste Policy Act of
1982, the DOE is responsible for the selection and development of repositories
for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
ComEd, as required by that Act, has signed a contract with the DOE to provide
for the disposal of spent nuclear fuel and high-level radioactive waste from
ComEd's nuclear generating stations. That contract provided for acceptance by
the DOE of such materials to begin in January 1998; however, that date was not
met by the DOE and is expected to be delayed significantly. The DOE's current
estimate for opening a facility to accept such waste is 2010. Extended delays
in spent nuclear fuel acceptance by the DOE would lead to ComEd's
consideration of costly storage alternatives. See "Depreciation and
Decommissioning" under Note 1 for additional information. 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 Unicom and subsidiary companies as a
whole. The impact of any realized or unrealized gains or losses related to
such financial instruments on the financial position or results of operations
of Unicom and subsidiary companies is in part dependent on the treatment
authorized under future ComEd ratemaking proceedings.
27
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Investments. Securities included in the nuclear decommissioning funds have
been classified and accounted for as "available for sale" securities. The
estimated fair value of the nuclear decommissioning funds, as determined by
the trustee and based on published market data, as of March 31, 1998 and
December 31, 1997 was as follows:
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------------- --------------------------------
UNREALIZED UNREALIZED
COST BASIS GAINS FAIR VALUE COST BASIS GAINS FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Short-term investments. $ 33,728 $ 28 $ 33,756 $ 33,524 $ 2 $ 33,526
U.S. Government and
Agency issues......... 216,748 15,122 231,870 170,240 15,882 186,122
Municipal bonds........ 334,709 19,067 353,776 306,104 20,598 326,702
Corporate bonds........ 240,393 4,411 244,804 231,738 4,293 236,031
Common stock........... 706,895 494,157 1,201,052 667,657 385,851 1,053,508
Other.................. 11,448 10,387 21,835 17,300 2,508 19,808
---------- -------- ---------- ---------- -------- ----------
$1,543,921 $543,172 $2,087,093 $1,426,563 $429,134 $1,855,697
========== ======== ========== ========== ======== ==========
At March 31, 1998, the debt securities held by the nuclear decommissioning
funds had the following maturities:
COST BASIS FAIR VALUE
----------- -----------
(THOUSANDS OF DOLLARS)
Within 1 year................................... $ 41,937 $ 41,986
1 through 5 years............................... 168,309 172,855
5 through 10 years.............................. 258,750 270,647
Over 10 years................................... 365,972 388,399
The net earnings of the nuclear decommissioning funds, which are recorded as
increases to the accumulated provision for depreciation, for the three months
and twelve months ended March 31, 1998 and 1997 were as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
(THOUSANDS OF DOLLARS)
Gross proceeds from sales of
securities.................... $ 428,003 $ 570,769 $ 2,020,756 $ 2,288,872
Less cost based on specific
identification................ (394,333) (557,508) (1,925,126) (2,254,050)
--------- --------- ----------- -----------
Realized gains on sales of se-
curities...................... $ 33,670 $ 13,261 $ 95,630 $ 34,822
Other realized fund earnings
net of expenses............... 3,614 8,467 34,267 34,754
--------- --------- ----------- -----------
Total realized net earnings of
the funds..................... $ 37,284 $ 21,728 $ 129,897 $ 69,576
Unrealized gains (losses)...... 114,038 (14,057) 326,836 63,381
--------- --------- ----------- -----------
Total net earnings of the
funds........................ $ 151,322 $ 7,671 $ 456,733 $ 132,957
========= ========= =========== ===========
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 ComEd preferred and preference
stocks, ComEd- obligated mandatorily redeemable preferred securities of the
Trusts and long-term debt were
28
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
obtained from an independent consultant. The estimated fair values, which
include the current portions of redeemable preference stock and long-term debt
but exclude accrued interest and dividends, as of March 31, 1998 and December
31, 1997 were as follows:
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------------- --------------------------------
CARRYING UNREALIZED CARRYING UNREALIZED
VALUE LOSSES FAIR VALUE VALUE LOSSES FAIR VALUE
---------- ---------- ---------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
ComEd preferred and
preference stocks.... $ 711,936 $ 11,695 $ 723,631 $ 712,069 $ 11,970 $ 724,039
ComEd-obligated
mandatorily
redeemable preferred
securities of the
Trusts holding solely
ComEd's subordinated
debt securities...... $ 350,000 $ 14,544 $ 364,544 $ 350,000 $ 21,701 $ 371,701
Long-term debt........ $5,700,946 $383,359 $6,084,305 $5,913,942 $380,890 $6,294,832
Long-term notes payable, which are not included in the above table, amounted
to $200 million and $327 million at March 31, 1998 and December 31, 1997,
respectively. Such notes, for which interest is paid at fixed and prevailing
rates, are included in the consolidated financial statements at cost, which
approximates their fair value.
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
portions of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of accrued spent nuclear
fuel disposal fee and related interest represents the settlement value as of
March 31, 1998 and December 31, 1997; therefore, the carrying value is equal
to the fair value.
(16) PENSION AND POSTRETIREMENT BENEFITS. As of March 31, 1998, ComEd had a
qualified non-contributory defined benefit pension plan which covers all
regular employees. Benefits under this plan reflect each employee's
compensation, years of service and age at retirement. Funding is based upon
actuarially determined contributions that take into account the amount
deductible for income tax purposes and the minimum contribution required under
the Employee Retirement Income Security Act of 1974, as amended. The March 31,
1998 and December 31, 1997 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 qualified defined benefit plan of the Indiana Company was merged
into the ComEd pension plan as a result of the sale of the Indiana Company's
State Line Station and the transfer of its remaining employees to ComEd.
ComEd and the Indiana Company provide certain postretirement medical 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 health care
plans are contributory, funded jointly by the companies and the participating
retirees. The March 31, 1998 and December 31, 1997 postretirement benefit
liabilities and related data were determined using the January 1, 1997
actuarial valuations.
29
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
Reconciliations of the beginning and ending balances of the pension
projected benefit obligation and the accumulated postretirement benefit
obligation and the funded status of these plans for the three months ended
March 31, 1998 and the twelve months ended December 31, 1997 are as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 1998 DECEMBER 31, 1997
-------------------------- --------------------------
OTHER OTHER
PENSION POSTRETIREMENT PENSION POSTRETIREMENT
BENEFITS BENEFITS BENEFITS BENEFITS
---------- -------------- ---------- --------------
(THOUSANDS OF DOLLARS)
CHANGE IN BENEFIT
OBLIGATION
- -----------------
Benefit obligation at
beginning of period.... $4,074,000 $1,084,000 $3,579,000 $1,035,000
Service cost............ 31,000 9,000 100,000 34,000
Interest cost........... 70,000 19,000 261,000 76,000
Plan participants' con-
tributions............. -- 1,000 -- 3,000
Curtailment gain........ -- -- (5,000) --
Actuarial loss (gain)... 1,000 -- 346,000 (23,000)
Benefits paid........... (53,000) (11,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,123,000 $1,102,000 $4,074,000 $1,084,000
---------- ---------- ---------- ----------
CHANGE IN PLAN ASSETS
- ---------------------
Fair value of plan as-
sets at beginning of
period................. $3,706,000 $ 768,000 $3,281,000 $ 665,000
Actual return on plan
assets................. 314,000 76,000 631,000 130,000
Employer contribution... -- -- 1,000 11,000
Plan participants' con-
tributions............. -- 1,000 -- 3,000
Benefits paid........... (53,000) (11,000) (207,000) (41,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $3,967,000 $ 834,000 $3,706,000 $ 768,000
---------- ---------- ---------- ----------
Plan assets less than
benefit obligation..... $ (156,000) $ (268,000) $ (368,000) $ (316,000)
Unrecognized net actuar-
ial loss (gain)........ (96,000) (461,000) 132,000 (406,000)
Unrecognized prior serv-
ice cost (asset)....... (63,000) 51,000 (64,000) 52,000
Unrecognized transition
obligation (asset)..... (110,000) 340,000 (114,000) 345,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (425,000) $ (338,000) $ (414,000) $ (325,000)
========== ========== ========== ==========
The fair value of pension plan assets excludes $19 million and $17 million
held in grantor trust as of March 31, 1998 and December 31, 1997,
respectively, for payment of benefits under the supplemental plan.
In accounting for the pension costs and other postretirement benefit costs
under the plans, the following weighted average actuarial assumptions were
used for the periods during 1998, 1997 and 1996:
OTHER
PENSION BENEFITS POSTRETIREMENT BENEFITS
----------------- -----------------------
1998 1997 1996 1998 1997 1996
----- ----- ----- ------- ------- -------
Annual discount rate................. 7.00% 7.50% 7.50% 7.00% 7.50% 7.50%
Annual long-term rate of return on
plan assets......................... 9.50% 9.75% 9.75% 9.20% 9.40% 9.38%
Annual rate of increase in future
compensation levels................. 4.00% 4.00% 4.00% -- -- --
30
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of pension and other postretirement benefit costs, portions
of which were recorded as components of construction costs, for the three
months and twelve months ended March 31, 1998 and 1997 were as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
PENSION COSTS --------- --------- --------- ---------
- ------------- (THOUSANDS OF DOLLARS)
Service cost...................... $ 31,000 $ 25,000 $ 106,000 $ 93,000
Interest cost on projected benefit
obligation....................... 70,000 65,000 266,000 250,000
Expected return on plan assets.... (86,000) (78,000) (318,000) (294,000)
Amortization of transition asset.. (3,000) (3,000) (13,000) (13,000)
Amortization of prior service cost
(asset).......................... (1,000) (1,000) (4,000) (4,000)
Recognized loss................... -- -- 2,000 1,000
Curtailment gain.................. -- -- (5,000) --
--------- --------- --------- ---------
Net periodic benefit cost........ $ 11,000 $ 8,000 $ 34,000 $ 33,000
========= ========= ========= =========
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
OTHER POSTRETIREMENT BENEFIT COSTS --------- --------- --------- ---------
- ---------------------------------- (THOUSANDS OF DOLLARS)
Service cost...................... $ 9,000 $ 9,000 $ 34,000 $ 33,000
Interest cost on accumulated bene-
fit obligation................... 19,000 20,000 75,000 76,000
Expected return on plan assets.... (17,000) (15,000) (63,000) (55,000)
Amortization of transition obliga-
tion............................. 5,000 6,000 22,000 22,000
Amortization of prior service
cost............................. 1,000 1,000 4,000 3,000
Recognized gain................... (5,000) (3,000) (15,000) (10,000)
Severance plan cost............... 1,000 -- 8,000 5,000
--------- --------- --------- ---------
Net periodic benefit cost........ $ 13,000 $ 18,000 $ 65,000 $ 74,000
========= ========= ========= =========
The pension curtailment gain in December 1997 represents the recognition of
prior service costs, the transition asset and the decrease in the projected
benefit obligation related to the reduction in the number of employees due to
the sale of State Line Station by the Indiana Company.
Postretirement health care costs for the twelve months ended March 31, 1998
and 1997 included $8 million and $5 million, respectively, related to
voluntary separation offers to certain employees of ComEd and the Indiana
Company.
The health care cost trend rates used to measure the expected cost of the
postretirement medical benefits are assumed to be 8.5% for pre-Medicare
recipients and 6.5% for Medicare recipients for 1998. Those rates are assumed
to grade down in 0.5% annual increments to 5% for the years 2005 and 2001,
respectively, and to remain at that level thereafter. Assumed health care cost
trend rates have a significant effect on the amounts reported for the health
care plans. A one percentage point change in the assumed health care cost
trend rates would have the following effects:
1 PERCENTAGE 1 PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(THOUSANDS OF DOLLARS)
Effect on total annual service and interest cost
components...................................... $ 21,000 $ (16,000)
Effect on postretirement benefit obligation...... 187,000 (151,000)
31
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay. The participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $8 million for
the three months ended March 31, 1998 and 1997 and $32 million and $30 million
for the twelve months ended March 31, 1998 and 1997, respectively.
(17) SEPARATION PLAN COSTS. O&M expenses included $16 million and $3 million
for the three months ended March 31, 1998 and 1997, respectively, and $52
million and $18 million for the twelve months ended March 31, 1998 and 1997,
respectively, for costs related to voluntary separation offers to certain
employees of ComEd and the Indiana Company, as well as certain other one-time
employee related costs. Such costs resulted in charges of $10 million (after-
tax), or $0.04 per common share and $2 million (after-tax), or $0.01 per
common share for the three months ended March 31, 1998 and 1997, respectively,
and $31 million (after-tax), or $0.15 per common share and $11 million (after-
tax), or $0.05 per common share for the twelve months ended March 31, 1998 and
1997, respectively.
(18) INCOME TAXES. The components of the net deferred income tax liability
at March 31, 1998 and December 31, 1997 were as follows:
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(THOUSANDS OF DOLLARS)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs.......................... $4,004,936 $4,062,801
Overheads capitalized................................ 123,259 131,509
Repair allowance..................................... 227,650 231,697
Regulatory assets recoverable through future rates... 690,442 785,354
Deferred income tax assets:
Postretirement benefits.............................. (314,757) (305,242)
Unamortized investment tax credits................... (197,855) (206,112)
Regulatory liabilities to be settled through future
rates............................................... (607,623) (698,750)
Nuclear plant closure................................ (74,708) (194,244)
Other--net........................................... (142,975) (136,258)
---------- ----------
Net deferred income tax liability..................... $3,708,369 $3,670,755
========== ==========
The $38 million increase in the net deferred income tax liability from
December 31, 1997 to March 31, 1998 is comprised of $42 million of deferred
income tax expenses reflected in operations and a $4 million decrease in
regulatory assets net of regulatory liabilities pertaining to income taxes for
the period. 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.
32
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of net income tax expense charged to continuing operations
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
(THOUSANDS OF DOLLARS)
Operating income:
Current income taxes............. $ 56,948 $ 65,265 $ 250,591 $306,366
Deferred income taxes............ (5,397) (12) 53,485 136,961
Investment tax credits deferred--
net............................. (7,160) (7,897) (30,278) (34,109)
Other (income) and deductions,
primarily deferred income taxes
in 1997.......................... (10,195) (283) (417,537) (3,543)
--------- -------- ---------- ---------
Net income taxes charged
(credited) to continuing
operations....................... $ 34,196 $ 57,073 $ (143,739) $405,675
========= ======== ========== =========
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted in the following effective
income tax rates for the three months and twelve months ended March 31, 1998
and 1997:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ----------
(THOUSANDS OF DOLLARS)
Net income (loss) before
extraordinary item and cumulative
effect of change in accounting
principle........................ $ 53,715 $ 65,717 $(251,216) $ 594,885
Net income taxes charged
(credited) to continuing
operations....................... 34,196 57,073 (143,739) 405,675
Provision for dividends on ComEd
preferred and preference stocks.. 14,547 15,527 59,506 63,437
--------- --------- --------- ----------
Pre-tax income (loss) before
extraordinary item, cumulative
effect and provision for
dividends........................ $ 102,458 $ 138,317 $(335,449) $1,063,997
========= ========= ========= ==========
Effective income tax rate......... 33.4% 41.3% 42.8% 38.1%
========= ========= ========= ==========
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ----------
(THOUSANDS OF DOLLARS)
Federal income taxes computed at
statutory rate................... $ 35,860 $ 74,661 $(117,408) $ 398,649
Equity component of AFUDC which
was excluded from taxable income. (89) (1,778) (6,630) (7,405)
Amortization of investment tax
credits, net of deferred income
taxes............................ (9,210) (7,897) (32,328) (34,109)
State income taxes, net of federal
income taxes..................... 5,838 11,647 (862) 56,632
Differences between book and tax
accounting, primarily
property-related deductions...... 1,797 (19,560) 13,489 (8,092)
--------- --------- --------- ----------
Net income taxes charged
(credited) to continuing
operations....................... $ 34,196 $ 57,073 $(143,739) $ 405,675
========= ========= ========= ==========
The effects of an income tax refund related to prior years were recorded in
the third quarter of 1996, resulting in a positive impact of $26 million
(after-tax), or $0.12 per common share.
33
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
Illinois public utility revenue......... $ 57,682 $ 51,755 $ 234,276 $ 220,306
Illinois invested capital............... -- 26,190 73,314 104,699
Illinois electricity distribution tax... 26,718 -- 26,718 --
Municipal utility gross receipts........ 42,551 41,103 169,542 168,240
Real estate............................. 39,991 39,168 152,331 124,491
Municipal compensation.................. 19,871 19,110 79,047 78,559
Other--net.............................. 20,613 23,872 71,886 70,195
--------- --------- --------- ---------
$ 207,426 $ 201,198 $ 807,114 $ 766,490
========= ========= ========= =========
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
ComEd's real estate taxes reflect a credit of $23 million, recorded in the
second quarter of 1996, which related to the year 1995.
(20) LEASE OBLIGATIONS OF SUBSIDIARY COMPANIES. Under its nuclear fuel lease
arrangement, ComEd may sell and lease back nuclear fuel from a lessor who may
borrow an aggregate of $700 million, consisting of $300 million of commercial
paper/bank borrowings and $400 million of intermediate term notes, to finance
the transactions. 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 March 31, 1998, ComEd's
obligation to the lessor for leased nuclear fuel amounted to approximately
$665 million. As a result of the cessation of nuclear generation operations at
Zion Station (see Note 5), ComEd is required to repurchase not later than mid-
June 1998 approximately $100 million of nuclear fuel assemblies held under the
nuclear fuel lease arrangements at Zion Station. ComEd has agreed to make
lease payments which cover the amortization of the nuclear fuel used in
ComEd's reactors plus the lessor's related financing costs. ComEd has an
obligation for spent nuclear fuel disposal costs of leased nuclear fuel.
Future minimum rental payments, including the repurchase of Zion Station
nuclear fuel assemblies discussed above and net of executory costs, at March
31, 1998 for capital leases are estimated to aggregate $759 million, including
$223 million in 1998, $170 million in 1999, $133 million in 2000, $84 million
in 2001, $57 million in 2002 and $92 million in 2003-2006. The estimated
interest component of such rental payments aggregates $97 million. The
estimated portions of obligations due within one year under capital leases of
$241 million at March 31, 1998 and December 31, 1997 are included in current
liabilities on the Consolidated Balance Sheets.
Future minimum rental payments at March 31, 1998 for operating leases are
estimated to aggregate $353 million, including $31 million in 1998, $39
million in 1999, $36 million in 2000, $30 million in 2001, $26 million in 2002
and $191 million in 2003-2043.
(21) JOINT PLANT OWNERSHIP. ComEd has a 75% undivided ownership interest in
the Quad Cities nuclear generating station. Further, ComEd is responsible for
75% of all costs which are charged to appropriate investment and O&M accounts,
and provides its own financing. At March 31, 1998, for its share of ownership
in the station, ComEd had an investment of $669 million in production and
34
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
transmission plant in service (before a reduction of $214 million for the
related accumulated provision for depreciation) and $15 million in
construction work in progress.
(22) COMMITMENTS AND CONTINGENT LIABILITIES. Purchase commitments,
principally related to construction and nuclear fuel, approximated $346
million at March 31, 1998, comprised of $324 million for ComEd, $12 million
for UT Holdings and $10 million for Unicom Energy Services. In addition, ComEd
has substantial commitments for the purchase of coal. ComEd's coal costs are
high compared to those of other utilities. ComEd's western coal contracts and
its rail contracts for delivery of the western coal provide for the purchase
of certain coal at prices substantially above currently prevailing market
prices. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subcaption "Liquidity and Capital Resources," for
additional information regarding ComEd's purchase commitments.
ComEd is a member of NEIL which provides insurance coverage against property
damage and associated replacement power costs occurring at members' nuclear
generating facilities. All companies insured with NEIL are subject to
retrospective premium adjustments if losses exceed accumulated reserve funds.
Capital has been accumulated in the reserve funds such that ComEd would not be
liable for any single incident. However, ComEd could be subject to assessments
in any policy year for each of three types of coverage provided. The maximum
assessments are approximately $53 million for primary property damage, $73
million for excess property damage and $22 million for replacement power.
Prior to January 1, 1998, the primary property damage coverage described was
provided by NML, another mutual insurance company which merged into NEIL. The
merger did not affect ComEd's obligations or coverage.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses,
ComEd would currently be subject to a maximum assessment of $1,030 million in
the event of an incident, limited to a maximum of $130 million in any calendar
year.
In addition, ComEd participates in the American Nuclear Insurers Master
Worker Program, which provides coverage for worker tort claims filed for
bodily injury caused by the nuclear energy hazard. This program was modified,
effective January 1, 1998, to provide coverage to all workers whose "nuclear
related employment" began on or after the commencement date of reactor
operations. ComEd will not be liable for a retrospective assessment under this
new policy. However, ComEd is still subject to a maximum retroactive
assessment of up to $36 million in the event losses incurred under the small
number of policies in the old program exceed accumulated reserves.
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 eight
bellwether plaintiffs' claims in the 1989 cases, which verdicts were upheld on
appeal. The remaining claims in the 1989 actions have been settled and
dismissed. Although the 1991 cases will necessarily involve the resolution of
numerous contested issues of fact and law, Unicom and ComEd's determination is
that these actions will not have a material impact on their financial position
or results of operations. 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
35
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
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 March 31, 1998
and December 31, 1997, which reflects the low end of the range of ComEd's
estimate of the liability associated with former MGP sites. In addition, as of
March 31, 1998 and December 31, 1997, a reserve of $8 million has been
included in other noncurrent liabilities on the Consolidated Balance Sheets,
representing ComEd's estimate of the liability associated with cleanup costs
of remediation sites other than former MGP sites. Approximately half of this
reserve relates to anticipated cleanup costs associated with a property
formerly used as a tannery which was purchased by ComEd in 1973. Unicom and
ComEd presently estimate that ComEd's costs of investigating and remediating
the former MGP and other remediation sites, pursuant to CERCLA and state
environmental laws, will not have a material impact on the financial position
or results of operations of Unicom or ComEd. These cost estimates are based on
currently available information regarding the responsible parties likely to
share in the costs of responding to site contamination, the extent of
contamination at sites for which the investigation has not yet been completed
and the cleanup levels to which sites are expected to have to be remediated.
36
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN THE ELECTRIC UTILITY INDUSTRY
Unicom and its predominant business, electric energy generation,
transmission and distribution, are in a period of fundamental change in the
manner in which customers obtain, and energy suppliers provide, energy
services. These changes are attributable to changes in technology, the
relaxation of regulatory barriers to utilities' respective service territories
as well as to efforts to change the manner in which electric utilities are
regulated. Federal law and regulations have been amended to provide for open
transmission system access, and various states, including Illinois, are
considering, or have adopted, new regulatory structures to allow access by
some or all customers to energy suppliers in addition to the local utility.
Electric Utility Industry. The electric utility industry historically has
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serve customers within relatively
defined service territories; and operate under extensive regulation with
respect to rates, operations and other matters. Utilities have operated under
a regulatory compact with the state, with a statutory obligation to serve all
of the electricity needs within their service territory in a nondiscriminatory
manner. Historically, investment and operating decisions have been made based
upon the utilities' respective assessment of the current and projected needs
of their customers. In view of this obligation, regulation has focused on
investment and operating costs, and rates have been based on a recovery of
some or all of such prudently incurred costs plus a return on invested
capital. Such rate regulation, and the ability of utilities to recover
investment and other costs through rates, have provided the basis for
recording certain costs as regulatory assets. These assets represent costs
which are allocated over future periods reflecting related regulatory
treatment, rather than expensed in the current period.
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 on August 1, 1998, an additional 5%
residential base rate reduction commencing on 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;
however, such reductions are expected to be offset by 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 the revenue the utility will
receive for providing delivery services to the customer, the market price for
electricity and a defined mitigation factor which represents the utility's
opportunity to develop new revenue sources and achieve cost savings.
37
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. 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 leveling of certain regulatory
requirements to permit operational flexibility, the leveling of certain
regulatory and tax provisions as applied to various electric suppliers and a
new, more stringent, liability standard applicable to ComEd in the event of a
major outage.
The 1997 Act also allows a portion of ComEd's future revenues, including
tariffed rates and CTC revenues, to be segregated and used to support the
issuance of securities by ComEd or a special purpose financing entity. The
proceeds from such security issuances must be used to refinance outstanding
debt or equity or for certain other limited purposes. The total amount of such
securities that may be issued is approximately $6.8 billion; approximately
one-half of that amount can be issued in the twelve-month period commencing on
August 1, 1998. On April 22, 1998, ComEd filed an application with the ICC
seeking certain actions and approvals of the ICC under the 1997 Act in
connection with the proposed issuance of up to $3.4 billion of such
securities. ComEd plans to use the proceeds of the sale of such securities to
refinance its debt and equity, and anticipates using between $750 million and
$1.14 billion to repurchase shares of ComEd common stock held by Unicom.
Unicom in turn will use the funds it receives from ComEd's share repurchase to
repurchase publicly held shares of Unicom's common stock. At current market
prices, this repurchase would involve between 22 million and 33 million
shares, or 10 to 15 percent of Unicom's outstanding common stock. The Boards
of Directors of Unicom and ComEd have each approved the repurchase of up to 33
million shares of common stock. ComEd plans to use the remaining proceeds, net
of transaction costs, to redeem preference stock and debt.
As a result of the 1997 Act, prices for the supply of electric energy 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 may include cost
control efforts, developing new sources of revenue and potential asset
dispositions.
See Note 2 of Notes to Financial Statements for the accounting effects
related to the 1997 Act.
Federal Regulation. The Federal Energy Policy Act of 1992, among other
things, empowered the FERC to introduce a greater level of competition into
the wholesale marketplace for electric energy. 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.
38
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 significant strategic planning efforts 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.
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. Both
Unicom and ComEd have been examining methods of positioning themselves and
their 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, potential asset sales and retirement or closure. As discussed
below, ComEd recently ceased nuclear generation operations and retired
facilities at its Zion Station. If ComEd retires or closes one or more
additional generating plants prior to expected retirement dates, further
write-offs will be required.
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 in the fourth quarter of 1997 of $523 million
(after-tax), or $2.42 per common share. The decision to close Zion Station was
a result of ComEd's 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
39
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.
ComEd has completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has entered into
exclusive 15-year purchased power agreements for the output of the stations.
The sale of State Line Station was completed in December 1997, and the sale of
Kincaid Station was completed in February 1998. The net proceeds of the sales,
after income tax effects and closing costs, were approximately $190 million.
The proceeds were used to retire or redeem existing debt in the first quarter
of 1998.
ComEd joined with eight Midwestern utilities to form a regional Midwest ISO
in January 1998. To date, three other utilities have joined the Midwest ISO
and others have indicated their intent to join. 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 direct the planning and operation 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.
LIQUIDITY AND CAPITAL RESOURCES
UTILITY OPERATIONS
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 $95 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, in addition to approximately $35 million
for removal costs. The total replacement cost is estimated to be $455 million,
including approximately $80 million of removal costs. Approximately $325
million has been incurred through March 31, 1998 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
and/or the development of additional demand-side management resources, in 1998
and each year thereafter for the foreseeable future. However, ComEd believes
that adequate resources, including cost-effective demand-side management
resources, non-utility generation resources and other-utility power purchases,
could be obtained in sufficient quantities to meet such forecasted needs.
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $324 million at March 31, 1998. In addition,
ComEd's estimated commitments for the purchase of coal are as follows:
CONTRACT PERIOD COMMITMENT(1)
-------- --------- -------------
Black Butte Coal Co. ............................. 1998-2000 $ 626
Decker Coal Co. .................................. 1998-2014 478
Other commitments ................................ 1998 25
------
$1,129
======
--------
(1) In millions of dollars, excluding transportation costs. No
estimate of future cost escalation has been made.
40
For additional information concerning these coal contracts and ComEd's fuel
supply, see "Results of Operations," subcaption "Fuel Supply" below and Notes
1 and 22 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 scheduled debt maturities. See Notes 10 and 12 of Notes to
Financial Statements for the summaries of the annual sinking fund requirements
and scheduled maturities for ComEd preference stock and long-term debt,
respectively. The forecast takes into consideration the effects of the 1997
Act, but does not take into consideration ComEd's application to the ICC for
the proposed issuance of up to $3.4 billion of securities to refinance debt
and equity, as permitted under the 1997 Act. See "Changes in the Electric
Utility Industry," subcaption "The 1997 Act" 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 20 of Notes to Financial Statements for
additional information concerning ComEd's nuclear fuel lease facility. ComEd
has $665 million of unused bank lines of credit at March 31, 1998, 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, including scheduled commitment
reductions. See the Statements of Consolidated Cash Flows for the construction
expenditures and cash flow from operating activities for the three months and
twelve months ended March 31, 1998 and 1997.
During the first three months of 1998, ComEd sold and leased back $17
million of nuclear fuel through its existing nuclear fuel lease facility. See
the Statements of Consolidated Cash Flows and Note 7 of Notes to Financial
Statements for information regarding common stock activity.
As of May 11, 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
As of April 1998, Moody's rating outlook on ComEd's securities is
"negative", Duff & Phelps has classified ComEd's securities as "Rating Watch-
Down" and S&P's rating outlook is "positive."
See "Part II, Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters" in Unicom and ComEd's Annual Reports on Form 10-K for the
year ended December 31, 1997 for additional information regarding ComEd's
securities ratings.
41
See "Changes in the Electric Utility Industry," subcaption "The 1997 Act"
above, regarding ComEd's application to the ICC for the proposed issuance of
up to $3.4 billion of securities and use the proceeds to refinance debt and
equity, as permitted under the 1997 Act.
Capital Structure. ComEd's ratio of long-term debt to total capitalization
has increased to 48.6% at March 31, 1998 from 48.5% at December 31, 1997.
Unicom's retained earnings account had a deficit balance of $54 million and
$21 million as of March 31, 1998 and December 31, 1997, respectively. As of
March 31, 1998 and December 31, 1997, $298 million and $331 million,
respectively, of retained earnings had been appropriated for future dividend
payments. ComEd's retained earnings account had a deficit balance of $48
million and $19 million as of March 31, 1998 and December 31, 1997,
respectively. As of March 31, 1998 and December 31, 1997, $355 million and
$384 million, respectively, of retained earnings had been appropriated for
future dividend payments.
Year 2000 Conversion. Unicom, including 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.
Unicom'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 Unicom's business
plans. Unicom 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, Unicom is upgrading
existing software to versions that are Year 2000 compliant where such upgrades
are available. In cases where Unicom 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, Unicom is remediating the software
to make it Year 2000 compliant. Accordingly, Unicom 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. Unicom 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. The
company is currently performing an analysis of engineering systems to
determine additional remediation requirements. Preliminary estimates of the
costs of such additional remediation requirements range from $15 million to
$35 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 manage effectively 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," subcaption "Liquidity and Capital Resources--Interest
Rate Exposure" and "--Market Price Exposure" in Unicom and ComEd's Current
Reports on Form 8-K dated January 30, 1998. There has not been a material
change in ComEd's exposure to interest rate risk or market price risk since
December 31, 1997.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through subsidiaries, in energy service
activities which are not subject to utility regulation by federal or state
agencies. One of these subsidiaries, UT Holdings,
42
provides district cooling, heating and related services to offices and other
buildings in the central business district of the city of Chicago and in other
cities in North America, generally working with local utilities. District
cooling involves, in essence, the production of chilled water at one or more
central locations and its circulation to customers' buildings through a closed
circuit of supply and return piping. Such water is circulated through
customers' premises primarily for air conditioning. This process is used by
customers in lieu of self-generated cooling. As a result of the Clean Air
Amendments, the manufacture of CFCs has been curtailed since January 1996,
thereby creating a marketing opportunity for non-CFC based systems, such as UT
Holdings' district cooling.
Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged
in providing energy services, including gas services, performance contracting,
distributed energy and active energy management systems. In 1997, Unicom
Energy Services entered into a joint venture with Sonat Marketing Company L.P.
to market natural gas and related services to large gas purchasers within
ComEd's service area in Northern Illinois and other Midwestern areas. As an
entry into the distributed energy market, Unicom Energy Services also entered
into an alliance with AlliedSignal Power Systems, Inc., a subsidiary of
AlliedSignal Inc., to market, install and service an electric energy generator
developed by AlliedSignal, known as a TurboGenerator, in a 12-state region and
the province of Ontario, Canada. Unicom Energy Services entered into an
exclusive national distributorship agreement with Engage Networks, Inc. to
market active energy management software and related hardware and services. As
of March 31, 1998, Unicom Energy Services had purchase commitments of
approximately $10 million.
Construction Program. Unicom has approved capital expenditures for 1998 of
approximately $92 million for UT Holdings, primarily related to an expansion
of two of its four Chicago district cooling facilities, the related
distribution piping and plants in other cities. As of March 31, 1998, UT
Holdings' purchase commitments, principally related to construction, were
approximately $12 million.
Capital Resources. Unicom expects to obtain funds to invest in its
unregulated subsidiaries principally from dividends received on its ComEd
common stock and from borrowings. The availability of ComEd's dividends to
Unicom is dependent on ComEd's financial performance and cash position, as
well as legal restrictions on the payment of dividends by public utilities.
Other forms of financing by ComEd to Unicom or the unregulated subsidiaries of
Unicom, such as loans or additional equity investments, which are not
expected, would be subject to prior approval by the ICC.
Unicom Enterprises has a $200 million credit facility which will expire in
1999, of which $15 million was unused as of March 31, 1998. The credit
facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings and Unicom Energy
Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Interest rates for borrowings under the credit
facility are set at the time of a borrowing and are based on either a prime
interest rate or a floating rate bank index plus a spread which varies with
the credit rating of ComEd's outstanding first mortgage bonds. See Note 13 of
Notes to Financial Statements for additional information regarding certain
covenants with respect to Unicom and Unicom Enterprises' operations.
On April 1, 1998, S&P issued a rating on Unicom's senior debt obligations of
BBB-. Ratings have not been obtained from Moody's or Duff & Phelps. See "Part
II, Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters" in Unicom and ComEd's Annual Reports on Form 10-K for the year ended
December 31, 1997, for additional information regarding securities ratings.
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.
43
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 related to: (i) the manner in
which certain costs were recovered and which customers should pay those costs,
and (ii) the proper rate of return on common equity for ComEd. As of March 31,
1998, electric operating revenues of approximately $215 million would be
subject to refund in connection with the remanded issues. On April 6, 1998,
the ICC entered an order providing the analysis required by the Appellate
Court and affirming the Rate Order and the associated $302 million revenue
increase on an annual basis. The order is subject to a pending petition for
rehearing and to appeal.
See "Changes in the Electric Utility Industry," subcaption "The 1997 Act"
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.
See "Changes in the Electric Utility Industry," subcaption "ComEd's Response
to Regulatory Changes" above, for information regarding ComEd's cessation of
nuclear generation operations at its Zion Station.
ComEd's Dresden, Zion and LaSalle nuclear generating stations are currently
on the NRC's list of plants that require increased regulatory scrutiny by the
NRC. Dresden Station has been on the list since 1992 and LaSalle and Zion
Stations were added in January 1997. On January 21, 1998, the NRC stated in a
public meeting that although Dresden Station has demonstrated sustained
improved performance that would warrant removal from the list, continued
evidence of cyclical and inconsistent performance at ComEd's other nuclear
generating stations indicated removal of Dresden Station from the list would
not be appropriate at that time. The NRC also 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. In a meeting on March 3, 1998, the
NRC stated that weaknesses were observed with respect to certain operations,
maintenance and engineering activities at Quad Cities Station. 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 late January 1997, the NRC also took the unusual 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 then 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
44
established, or planned to establish, to measure performance and to explain
ComEd's proposed actions if the criteria are 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 that require increased
regulatory scrutiny by the NRC 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 had 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 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 discuss the status of
recovery and restart efforts and overall performance of the ComEd nuclear
program.
INPO, a nuclear power industry funded organization, also has been critical
of ComEd's nuclear operations and the progress made by ComEd at correcting
problems INPO previously identified. In the past, INPO has raised concerns
with respect to management and performance of ComEd's nuclear operations,
including accountability and the effectiveness of efforts aimed at engaging
the workforce in the improvement process. ComEd continues to address INPO's
concerns.
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. It
currently is expected that LaSalle Unit 1 will restart by the end of the third
quarter of 1998 and LaSalle Unit 2 is expected to restart by the end of the
first quarter of 1999. Both units at Quad Cities Station are expected to
return to service by approximately the end of the second quarter of 1998. In
each case, the restart of these units requires the resolution of issues with
the NRC.
The NERC is analyzing electric system reliability and the potential for
electric energy shortages in the summer of 1998 in light of the potential for
continued outages at nuclear plants operated by ComEd and other utilities in
the Midwest power grid. ComEd has taken numerous steps to support the
reliability of its system during the summer of 1998. Such steps include
maximizing available on-system generating capacity during periods of peak
demand, arrangements to purchase over 4,300 MW of power from other utilities,
reinforcements to the transmission systems of ComEd and neighboring utilities
to increase capacity and to provide voltage support, and working with
customers to manage the use of and demand for power. ComEd estimates the
transmission and distribution system upgrades will result in capital
expenditures of approximately $30 million in 1998.
Generating station availability and performance during a year have been
issues in fuel reconciliation proceedings in assessing the prudence of fuel
and purchased power costs during such year. Final ICC orders have been issued
in fuel reconciliation proceedings for years prior to 1994 and
45
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. In March 1998, the ICC Staff
also filed testimony in the fuel reconciliation proceeding for 1994 proposing
a refund of $36 million. 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 adverse
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 or any subsequent years.
Based on ComEd's most recent study approved by the ICC, decommissioning
costs, including the cost of decontamination and dismantling, are estimated to
aggregate $4.4 billion in current-year (1998) dollars, including a contingency
allowance. ComEd estimates that it will expend approximately $11.6 billion,
including a contingency allowance, for decommissioning costs primarily during
the period from 2007 through 2034. Additionally, ComEd estimates that it will
expend an aggregate of approximately $217 million in current-year (1998)
dollars during the period 2000 through 2014 to maintain Zion Station in a
secured mode until decommissioning begins. All such costs are expected to be
funded by the external decommissioning trusts, which ComEd established in
compliance with Illinois law and into which ComEd has been making annual
contributions. Future decommissioning cost estimates may be significantly
affected by the adoption of or changes to NRC regulations, as well as changes
in the assumptions used in making such estimates, including changes in
technology, available alternatives for the disposal of nuclear waste and
inflation. See Note 1 of Notes to Financial Statements under "Depreciation and
Decommissioning" for additional information regarding decommissioning costs.
Environmental Matters. ComEd is involved in administrative and legal
proceedings concerning air quality, water quality and other matters. The
outcome of these proceedings may require increases in future construction
expenditures and operating expenses and changes in operating procedures. See
Note 22 of Notes to Financial Statements and "Part II. Other Information, Item
1. Legal Proceedings."
RESULTS OF OPERATIONS
Unicom's earnings (loss) per common share were $0.25 for the three months
ended March 31, 1998, compared to $1.21 for the three months ended March 31,
1997, and $(4.90) for the twelve months ended March 31, 1998, compared to
$3.67 for the twelve months ended March 31, 1997. Earnings for the three
months and twelve months ended March 31, 1997 have been restated for a change
in accounting method for revenue recognition and, include the one-time
positive impact of a change in accounting principle of $197 million (after-
tax), or $0.91 per common share. Restated earnings per common share, excluding
the one-time positive effect of the change in accounting principle, were $0.30
and $2.76 for the three months and twelve months ended March 31, 1997,
respectively. Substantially all of the results of operations for Unicom are
the results of operations for ComEd. The results of Unicom's unregulated
subsidiaries currently are not material to the results of Unicom and
subsidiary companies as a whole. As such, the following section discusses the
effect of ComEd's operations on Unicom's financial results.
Net Income for the Three Months Ended March 31, 1998. The decrease in
ComEd's net income in the recent three-month period reflects, among other
factors, mild winter weather, the unfavorable comparison to the one-time
positive impact in the first quarter of 1997 of a change in accounting
principle of $197 million (after-tax) and increased energy costs.
Kilowatthour sales increased 3% during the first quarter of 1998, compared
to the same period in 1997, driven largely by increased sales to wholesale
customers. Kilowatthour sales to retail customers declined slightly due to
milder winter weather conditions experienced during the first quarter of 1998,
partially offset by continued economic growth in ComEd's service territory.
See "Operating Revenues" below for additional information.
46
Fuel and purchased power costs increased 21% in the first quarter of 1998,
compared to the first quarter of 1997, largely due to higher purchases from
other utilities. See "Purchased Power" below for additional information.
Partially offsetting the lower earnings was a 6% reduction in interest expense
and dividend requirements on preferred and preference stocks, compared to the
same period in 1997, reflecting ComEd's efforts to reduce long-term debt.
O&M expenses decreased by 1% for the first quarter of 1998, compared to the
same period in 1997, as discussed in "Operation and Maintenance Expenses"
below. Excluding the costs of employee separation programs and certain other
one-time employee related costs, O&M expenses decreased by 3% in the first
quarter of 1998, compared to the first quarter of 1997.
In the fourth quarter of 1997, ComEd changed its method of accounting for
revenue recognition, retroactive to January 1, 1997, to record estimated
revenue for service delivered but not yet billed at the end of each accounting
period. The 1997 quarterly results have been restated as required by GAAP.
Restated first quarter 1997 results include the one-time cumulative positive
impact for years prior to 1997 of $197 million (after-tax), or $0.91 per
common share.
Net Income (Loss) for the Twelve Months Ended March 31, 1998. The decrease
in ComEd's net income (loss) in the recent twelve-month period was primarily
due to ComEd's discontinuation of regulatory accounting practices for the
generation portion of its business and other charges recorded in response to
the effectiveness of the 1997 Act. The results for the twelve months ended
March 31, 1998 also include the write-off for the closure of the Zion nuclear
generating station.
ComEd discontinued regulatory accounting practices for the generation
portion of its business in the fourth quarter of 1997 due to the expected
transition of electric generation services to market- based pricing as a
result of the 1997 Act. Accordingly, ComEd's generation-related net regulatory
assets (which represent assets and liabilities properly recorded under
regulatory accounting practices but which would not be recorded under GAAP for
non-regulated entities) were written off, resulting in an extraordinary charge
in the fourth quarter of 1997 of $810 million (after-tax), or $3.75 per common
share.
In addition, as permitted under the 1997 Act, ComEd elected to eliminate its
FAC in December 1997, which resulted in a charge in the fourth quarter of 1997
of $44 million (after-tax), or $0.20 per common share. The reduction includes
$25 million (after-tax), or $0.12 per common share, in net FAC charges billed
to its customers in 1997, which are currently being refunded to customers. The
reduction also includes a write-off of $19 million (after-tax), or $0.08 per
common share, in underrecovered energy costs that ComEd would have been
entitled to recover if the FAC had remained in effect.
Also, the results for the twelve months ended March 31, 1998 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), or $0.28 per
common share, in the fourth quarter of 1997.
The twelve months ended March 31, 1998 reflect 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, included in restated three months and twelve months
ended March 31, 1997 results, had a cumulative one-time positive impact for
years prior to 1997 of $197 million (after-tax), or $0.91 per common share.
The fourth quarter of 1997 also includes a charge of $523 million (after-
tax), or $2.42 per common share, reflecting the write-off of the unrecoverable
portion of the cost of ComEd's Zion Station plant and inventories and a
liability for future closing costs, resulting from the decision in January
1998 to cease nuclear generation operations at Zion Station.
47
ComEd's kilowatthour sales, including sales to wholesale customers,
increased 5% in the twelve months ended March 31, 1998, compared to the same
period last year, as discussed in "Operating Revenues" below. O&M expenses
increased by 9% in the same period, as discussed in "Operation and Maintenance
Expenses" below.
Also reducing operating results for the recent twelve-month period was a 26%
increase in fuel and purchased power costs, largely due to higher purchases
from other utilities, as discussed in "Purchased Power" below. In addition a
1% increase in depreciation expense, primarily due to an increase in certain
nuclear plant depreciation, as discussed in "Depreciation" below.
Operating Revenues. ComEd's electric operating revenues reflect revenues
from sales to ultimate consumers (including residential, commercial and
industrial customers within its service territory), revenues from sales for
resale (i.e., sales to wholesale customers, principally other electric
utilities), and revenues from collections under its FAC for years prior to
1997 (which were intended to recover variations in ComEd's fuel cost for
generating electric energy and the energy portion of purchased power costs in
relation to the amount included in ComEd's base rates). Operating revenues are
affected by kilowatthour sales and rate levels. Kilowatthour sales, in turn,
are affected by weather, the level of economic activity within ComEd's service
area, and off-system or wholesale sales to other utilities. Off-system sales
are affected by a number of factors, including nuclear generating availability
and performance.
Operating revenues increased $40 million in the three months ended March 31,
1998, compared to the three months ended March 31, 1997, reflecting a 3%
increase in total kilowatthour sales, including an 18% increase in sales to
wholesale customers. Although total kilowatthour sales to ultimate consumers
decreased slightly primarily due to milder winter weather conditions, sales to
commercial and industrial customers increased, reflecting continued economic
growth. Operating revenues increased $192 million in the twelve months ended
March 31, 1998, compared to the twelve months ended March 31, 1997, reflecting
a 5% increase in total kilowatthour sales, primarily due to continued economic
growth and increased sales to wholesale customers.
Fuel Costs. Changes in fuel expense for the three months and twelve months
ended March 31, 1998, compared to the same periods ended March 31, 1997,
primarily resulted from changes in the average cost of fuel consumed, changes
in the mix of fuel sources of electric energy generated and changes in net
generation of electric energy. Fuel mix is determined primarily by system
load, the costs of fuel consumed and the availability of nuclear generating
units. The cost of fuel consumed, net generation of electric energy and fuel
sources of kilowatthour generation were as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ---------
Cost of fuel consumed (per million Btu):
Nuclear...................................... $0.63 $0.55 $0.59 $0.54
Coal......................................... $1.96 $2.45 $2.17 $2.42
Oil.......................................... $3.37 $3.66 $3.70 $3.68
Natural gas.................................. $2.39 $2.98 $2.58 $2.77
Average all fuels............................ $1.25 $1.30 $1.32 $1.24
Net generation of electric energy (millions of
kilowatthours)............................... 17,327 22,319 80,869 91,875
Fuel sources of kilowatthour generation:
Nuclear...................................... 58% 62% 56% 64%
Coal......................................... 36 36 39 33
Oil.......................................... 1 -- -- 1
Natural gas.................................. 5 2 5 2
--------- --------- --------- ---------
100% 100% 100% 100%
========= ========= ========= =========
The decrease in net generation of electric energy is due to the sale of
Kincaid and State Line Stations and lower nuclear plant availability. The
decrease in nuclear generation as a percentage of total generation for the
three months and twelve months ended March 31, 1998, compared to the prior
48
periods, 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.
Fuel Supply. Compared to other utilities, ComEd has relatively low average
fuel costs as a result of its reliance predominantly on lower cost nuclear
generation. ComEd's coal costs, however, are high compared to those of other
utilities. ComEd's western coal contracts and its rail contracts for delivery
of the western coal provide for the purchase of certain coal at prices
substantially above currently prevailing market prices, and ComEd has
significant purchase commitments under its contracts. In addition, as of March
31, 1998, ComEd had coal reserves of $263 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 see "Liquidity and Capital Resources" above
and for information concerning ComEd's fuel reconciliation proceedings see
"Regulation," subscription "Nuclear Matters" above. Also see Note 1 of Notes
to Financial Statements, under "Coal Reserves" and "Fuel Adjustment Clause",
concerning ComEd's coal reserves and FAC.
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of ComEd's generating units and the availability and
cost of power from other utilities. Purchased power increased $156 million and
$378 million for the three months and twelve months ended March 31, 1998,
compared to the same periods in 1997, primarily due to outages at certain of
ComEd's nuclear generating stations and the commencement of the power purchase
agreements associated with the sale of State Line and Kincaid 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:
THREE MONTHS
ENDED MARCH TWELVE MONTHS ENDED
31 MARCH 31
-------------- ---------------------
1998 1997 1998 1997
------ ------ ---------- ---------
Kilowatthours (millions)............. 8,685 3,452 21,905 8,111
Cost per kilowatthour................ 2.54c 1.86c 2.54c 2.20c
Purchased power is expected to increase in the year 1998, compared to the
year 1997, due to expected increased kilowatthour sales, lower nuclear
generation, increased sales to other utilities and higher costs for power
purchased from other utilities.
Operation and Maintenance Expenses. O&M expenses include the expenses
associated with operating and maintaining ComEd's generation, transmission and
distribution assets, as well as administrative overhead and support. Given the
variety of expense categories covered, there are a number of factors which
affect the level of such expenses within any given period. Two major
components of such expenses, however, are the costs associated with operating
and maintaining ComEd's nuclear and fossil generating facilities. Generating
station expenses are affected by the cost of materials, regulatory
requirements and expectations, the age of facilities and cost control efforts.
During the three months and twelve months ended March 31, 1998, the
aggregate level of O&M expenses decreased 1% and increased 9%, respectively,
compared to the same periods ended March 31, 1997. The recent twelve month
period includes an increase in the level of nuclear generating station
expenses, as discussed below. Additional factors in each period also affected
the level of O&M expenses.
O&M expenses associated with nuclear generating stations decreased $41
million and increased $24 million during the three months and twelve months
ended March 31, 1998, respectively,
49
compared to the same periods ended March 31, 1997. The decrease in the recent
three-month period was primarily due to the permanent cessation of nuclear
generation operations at Zion Station. The increase in the recent twelve-month
period is primarily due to activities associated with the repair, replacement
and improvement of nuclear generating facility equipment, partially offset by
the permanent cessation of nuclear generation operations at Zion Station.
Beginning in 1995, ComEd 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. See "Changes in the Electric Utility Industry," subcaption
"ComEd's Response to Regulatory Changes," regarding the permanent cessation of
nuclear operations at Zion Station.
The increase in O&M expenses associated with nuclear generating stations for
the recent twelve- month period 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 also is expected to achieve
a longer term goal of improved availability and to be positioned to take
advantage of opportunities in a more competitive market. Over the past several
years, ComEd has increased and reinforced station management with managers
drawn from other utilities which have resolved similar operating issues. It
has also sought to identify, anticipate and address nuclear station operation
and performance issues in a safe, cost-effective manner, while seeking to
improve the availability and capacity factors of its nuclear generating units.
Such activities have included improvements in operating and personnel
procedures and repair and replacement of equipment, and can result in longer
unit outages. Such activities have involved increased maintenance and repair
expenses in recent years.
During the three months and twelve months ended March 31, 1998, O&M expenses
associated with fossil generating stations increased $9 million and $53
million, respectively, compared to the same periods ended March 31, 1997. The
increases related to the fossil generating stations are primarily due to
increases in plant refurbishment costs, partially offset by a reduction of
personnel costs in the recent three months and twelve months ended, compared
to the same periods ended March 31, 1997.
O&M expenses associated with ComEd's transmission and distribution system
increased $13 million and $22 million in the three months and twelve months
ended March 31, 1998, respectively, compared to the same periods ended March
31, 1997. The increases in the recent three months and twelve months ended
reflect higher maintenance costs, including costs associated with emergency
storm restoration of electric service. O&M expenses associated with customer-
related activities increased $6 million and $19 million in the three months
and twelve months ended March 31, 1998, respectively, compared to the same
periods ended March 31, 1997, primarily due to an increase in uncollectible
accounts and personnel costs.
O&M expenses also include employee benefits expenses. Since 1995, ComEd has
reduced the size of its workforce by offering incentives for employees to
leave the company voluntarily. Such incentives included both current payments
and earlier eligibility for post-retirement health care benefits, in addition
to certain other one-time employee related costs, resulted in charges of $16
million and $3 million for the three months ended March 31, 1998 and 1997,
respectively, and $52 million and $18 million for the twelve months ended
March 31, 1997, respectively.
Other employee benefits expenses, excluding the effects of employee
separation plans and certain other one-time employee related costs, decreased
$10 million and $26 million for the three months and twelve months ended March
31, 1998, respectively, compared to the same periods ended March 31, 1997. The
decreases for the three months and twelve months ended March 31, 1998 are
primarily due to a reduction in medical costs for active and retired
employees.
50
O&M expenses also reflect $41 million and $38 million for employee incentive
compensation plan costs for the twelve months ended March 31, 1998 and 1997,
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 achievements during the years 1997 and 1996, respectively, of
specified financial performance, operating performance and increased
shareholder value.
O&M expenses for the twelve months ended March 31, 1998 also include $25
million for the additional write-off of obsolete materials and supplies,
compared to the twelve months ended March 31, 1997. O&M expenses associated
with certain administrative and general costs increased $8 million and $39
million for the three months and twelve months ended March 31, 1998,
respectively, compared to the same periods ended March 31, 1997. The increase
in the recent twelve-month period is due to a variety of reasons including an
increase in the provision for vacation pay liability, and costs associated
with information services and supply management. The effects of inflation have
also increased O&M expenses during the years and are also reflected in the
increases and decreases discussed herein.
Depreciation. Depreciation expense decreased for the three months and
increased for the twelve months ended March 31, 1998, compared to the same
periods ended March 31, 1997. The decrease in the recent three-month period is
primarily due to the retirement of Zion Station and the sale of State Line and
Kincaid Stations. The increase in the recent twelve-month period is a result
of additional nuclear plant depreciation and additions to plant in service,
partially offset by the reduction of depreciation expense due to the
retirement of Zion Station and the sale of State Line and Kincaid Stations.
The additional depreciation on ComEd's nuclear generating units primarily
relates to its steam generators at Byron Unit 1 and Braidwood Unit 1, which
are expected to be replaced prior to year-end 1998. This additional
depreciation resulted in charges of $17 million and $15 million for the three
months ended March 31, 1998 and 1997, respectively, and $61 million and
$45 million for the twelve months ended March 31, 1998 and 1997, respectively.
ComEd also continues to consider the possibility of additional depreciation
options. 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 three months and twelve months ended March 31, 1998, compared to the
same periods ended March 31, 1997, were due to changes in average interest
rates and in the amounts of long-term debt and notes payable outstanding.
Changes in interest on ComEd's long-term debt also reflected new issues of
debt, the retirement and early redemption of debt, and the retirement and
redemption of issues which were refinanced at generally lower rates of
interest. The average amounts of ComEd's long-term debt and notes payable
outstanding and average interest rates thereon were as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
--------------------- ---------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Long-term debt outstanding:
Average amount (millions)... $5,961 $6,519 $6,102 $6,599
Average interest rate....... 7.55% 7.68% 7.64% 7.66%
Notes payable outstanding:
Average amount (millions)... $ 213 $ 138 $ 172 $ 192
Average interest rate....... 5.95% 5.74% 5.99% 5.72%
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.
51
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. Unicom and ComEd do not believe that such
changes, if required, would have an adverse effect on the results of
operations due to ComEd's ability to recover decommissioning costs through
rates.
Other Items. The amounts of AFUDC reflect changes in the average levels of
investment subject to AFUDC and changes in the average annual capitalization
rates as discussed in Note 1 of Notes to Financial Statements under "AFUDC and
Interest Capitalized." ComEd discontinued SFAS No. 71 regulatory accounting
practices in December 1997 for the generation-related portion of its business.
As a result, beginning in 1998, ComEd capitalizes interest costs on its
generation-related construction work in progress and nuclear fuel in process.
Interest costs capitalized were $2 million for the three months and twelve
months ended March 31, 1998. AFUDC and interest capitalized do not contribute
to the current cash flow of Unicom or ComEd.
ComEd's ratios of earnings to fixed charges for the twelve months ended
March 31, 1998 and December 31, 1997 were 0.53 and 0.58, respectively. ComEd's
ratios of earnings to fixed charges and preferred and preference stock
dividend requirements for the twelve months ended March 31, 1998 and December
31, 1997 were 0.45 and 0.49, respectively. Earnings for the twelve months
ended March 31, 1998 and December 31, 1997 were inadequate to cover fixed
charges by approximately $282 million and $259 million, respectively, and
fixed charges and preferred and preference stock dividend requirements by
approximately $381 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.
52
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53
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Commonwealth Edison Company:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Commonwealth Edison Company (an Illinois
corporation) and subsidiary companies as of March 31, 1998 and December 31,
1997, and the related statements of consolidated operations, retained earnings
(deficit) and cash flows for the three-month and twelve-month periods ended
March 31, 1998 and 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 of March 31, 1998 and December 31, 1997,
and the results of their operations and their cash flows for the three-month
and twelve-month periods ended March 31, 1998 and 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
May 11, 1998
54
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months and
twelve months ended March 31, 1998 and 1997 reflect the results of past
operations and are not intended as any representation as to results of
operations for any future period. Future operations will necessarily be
affected by various and diverse factors and developments, including changes in
electric prices, regulation, population, business activity, competition,
taxes, environmental control, energy use, fuel, cost of labor, purchased power
and other matters, the nature and effect of which cannot now be determined.
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
---------------------- -----------------------
1998 1997 1998 1997
---------- ---------- ----------- ----------
(THOUSANDS OF DOLLARS)
Electric Operating Reve-
nues................... $1,709,613 $1,669,585 $ 7,113,116 $6,920,643
---------- ---------- ----------- ----------
Electric Operating Ex-
penses and Taxes:
Fuel................... $ 231,376 $ 309,068 $ 1,161,746 $1,182,948
Purchased power........ 220,730 64,307 556,478 178,167
Operation.............. 343,990 400,210 1,658,240 1,548,940
Maintenance............ 220,759 168,424 742,064 657,373
Depreciation........... 247,758 249,120 984,515 970,373
Recovery of regulatory
assets................ -- 3,818 11,454 15,272
Taxes (except income).. 206,966 201,101 805,032 765,638
Income taxes--
Current--Federal..... 51,501 50,707 215,143 248,320
--State.............. 10,591 18,043 57,835 71,046
Deferred--Federal--
net................. (7,016) 3,313 45,782 119,564
--State--net......... (563) (4,986) 6,967 10,948
Investment tax credits
deferred--net......... (7,160) (7,897) (30,278) (34,109)
---------- ---------- ----------- ----------
$1,518,932 $1,455,228 $ 6,214,978 $5,734,480
---------- ---------- ----------- ----------
Electric Operating In-
come................... $ 190,681 $ 214,357 $ 898,138 $1,186,163
---------- ---------- ----------- ----------
Other Income and (Deduc-
tions):
Interest on long-term
debt.................. $ (112,445) $ (125,109) $ (465,866) $ (505,277)
Interest on notes pay-
able.................. (3,119) (1,951) (10,302) (11,007)
Allowance for funds
used during construc-
tion--
Borrowed funds....... 1,576 4,052 16,079 18,580
Equity funds......... 1,584 5,080 20,274 21,158
Income taxes applicable
to nonoperating
activities............ 2,884 366 13,748 3,902
Provision for dividends
on company-obligated
mandatorily redeemable
preferred securities
of subsidiary trusts
holding solely the
Company's subordinated
debt securities....... (7,428) (6,648) (29,640) (19,368)
Loss on nuclear plant
closure............... -- -- (885,611) --
Income tax effect of
nuclear plant closure. -- -- 362,952 --
Miscellaneous--net..... (1,900) (8,872) (89,351) (25,399)
---------- ---------- ----------- ----------
$ (118,848) $ (133,082) $(1,067,717) $ (517,411)
---------- ---------- ----------- ----------
Net Income (Loss) Before
Extraordinary Item and
Cumulative Effect of
Change in Accounting
Principle.............. $ 71,833 $ 81,275 $ (169,579) $ 668,752
Extraordinary Loss, Less
Applicable Income
Taxes.................. -- -- (810,335) --
Cumulative Effect of
Change in Accounting
Principle.............. -- 196,700 -- 196,700
---------- ---------- ----------- ----------
Net Income (Loss)....... $ 71,833 $ 277,975 $ (979,914) $ 865,452
Provision for Dividends
on Preferred and
Preference Stocks...... 14,547 15,527 59,506 63,437
---------- ---------- ----------- ----------
Net Income (Loss) on
Common Stock........... $ 57,286 $ 262,448 $(1,039,420) $ 802,015
========== ========== =========== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
55
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(THOUSANDS OF DOLLARS)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $1,086 million
and $1,131 million, respectively)................. $27,264,888 $27,519,365
Less--Accumulated provision for depreciation....... 11,737,771 11,645,985
----------- -----------
$15,527,117 $15,873,380
Nuclear fuel, at amortized cost.................... 929,631 906,043
----------- -----------
$16,456,748 $16,779,423
----------- -----------
Investments:
Nuclear decommissioning funds...................... $ 2,087,093 $ 1,855,697
Subsidiary companies............................... 50,031 48,605
Other investments, at cost......................... 44,398 39,002
----------- -----------
$ 2,181,522 $ 1,943,304
----------- -----------
Current Assets:
Cash............................................... $ 3,468 $ --
Temporary cash investments......................... 76,576 72,634
Special deposits................................... 271 271
Receivables--
Customers........................................ 881,418 873,418
Other............................................ 58,140 130,537
Provisions for uncollectible accounts............ (17,432) (17,544)
Coal and fuel oil, at average cost................. 156,850 120,664
Materials and supplies, at average cost............ 255,790 255,338
Deferred income taxes related to current assets and
liabilities....................................... 72,651 179,493
Prepayments and other.............................. 135,443 125,507
----------- -----------
$ 1,623,175 $ 1,740,318
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 1,452,013 $ 1,685,235
Coal reserves...................................... 167,524 194,769
Other.............................................. 72,880 115,354
----------- -----------
$ 1,692,417 $ 1,995,358
----------- -----------
$21,953,862 $22,458,403
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
56
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
CAPITALIZATION AND LIABILITIES 1998 1997
------------------------------ ----------- ------------
(THOUSANDS OF DOLLARS)
Capitalization (see accompanying statements):
Common stock equity................................. $ 4,838,164 $ 4,866,438
Preferred and preference stocks without mandatory
redemption requirements............................ 506,920 507,053
Preference stock subject to mandatory redemption re-
quirements......................................... 174,328 174,328
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the
Company's subordinated debt securities* ........... 350,000 350,000
Long-term debt ..................................... 5,560,390 5,562,883
----------- -----------
$11,429,802 $11,460,702
----------- -----------
Current Liabilities:
Notes payable....................................... $ 379,650 $ 158,150
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations..... 408,421 772,831
Accounts payable.................................... 474,781 490,124
Accrued interest.................................... 140,534 167,807
Accrued taxes....................................... 234,096 198,556
Dividends payable................................... 102,896 106,083
Customer deposits................................... 54,023 55,214
Accrued plant closing costs......................... 119,641 135,000
Other............................................... 133,314 164,897
----------- -----------
$ 2,047,356 $ 2,248,662
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,768,112 $ 3,839,607
Nuclear decommissioning liability for retired
plants............................................. 1,202,600 1,301,000
Accumulated deferred investment tax credits......... 587,490 602,122
Accrued spent nuclear fuel disposal fee and related
interest........................................... 701,756 692,673
Obligations under capital leases.................... 424,343 437,950
Regulatory liabilities.............................. 607,623 698,750
Other............................................... 1,184,780 1,176,937
----------- -----------
$ 8,476,704 $ 8,749,039
----------- -----------
Commitments and Contingent Liabilities (Note 22)
$21,953,862 $22,458,403
=========== ===========
*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.
57
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(THOUSANDS OF DOLLARS)
Common Stock Equity:
Common stock, $12.50 par value per share--
Outstanding--214,232,430 shares and 214,228,077
shares, respectively............................. $ 2,677,906 $ 2,677,851
Premium on common stock and other paid-in capital.. 2,223,642 2,223,564
Capital stock and warrant expense.................. (15,805) (15,805)
Retained earnings (deficit)........................ (47,579) (19,172)
----------- -----------
$ 4,838,164 $ 4,866,438
----------- -----------
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--61,724 shares and 65,912 shares, re-
spectively....................................... 1,963 2,096
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding............................. -- --
----------- -----------
$ 506,920 $ 507,053
----------- -----------
Preference Stock Subject to Mandatory Redemption Re-
quirements:
Preference stock, cumulative, without par value--
Outstanding--2,058,560 shares..................... $ 205,016 $ 205,016
Current redemption requirements for preference
stock included in current liabilities............. (30,688) (30,688)
----------- -----------
$ 174,328 $ 174,328
----------- -----------
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely the
Company's Subordinated Debt Securities.............. $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1998 through 2002--6.00% to 9 3/8%...... $ 880,000 $ 1,060,000
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 1,791,000
Maturing 2023--7 3/4% to 8 3/8%.................. 560,000 560,000
----------- -----------
$ 4,671,400 $ 4,851,400
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%.................................. 98,298 100,298
Pollution control obligations, due 2007 through
2014--3.65% to 5 7/8%............................. 142,200 142,200
Other long-term debt............................... 834,845 1,016,889
Deposit for retirement of long-term debt........... (4,064) --
Current maturities of long-term debt included in
current liabilities............................... (136,837) (501,445)
Unamortized net debt discount and premium.......... (45,452) (46,459)
----------- -----------
$ 5,560,390 $ 5,562,883
----------- -----------
$11,429,802 $11,460,702
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
58
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
(THOUSANDS OF DOLLARS)
Balance at Beginning of Period..... $(19,172) $1,157,956 $1,334,714 $ 875,547
Add--Net income (loss)............. 71,833 277,975 (979,914) 865,452
-------- ---------- ---------- ----------
$ 52,661 $1,435,931 $ 354,800 $1,740,999
-------- ---------- ---------- ----------
Deduct--
Dividends declared on--
Common stock................... $ 85,693 $ 85,690 $ 342,766 $ 342,744
Preferred and preference
stocks........................ 14,547 15,527 59,179 63,108
Other capital stock
transactions--net.............. -- -- 434 433
-------- ---------- ---------- ----------
$100,240 $ 101,217 $ 402,379 $ 406,285
-------- ---------- ---------- ----------
Balance at End of Period (Includes
$355 million of appropriated
retained earnings at March 31,
1998)............................. $(47,579) $1,334,714 $ (47,579) $1,334,714
======== ========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
59
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- -----------------------
1998 1997 1998 1997
--------- --------- ---------- -----------
(THOUSANDS OF DOLLARS)
Cash Flow From Operating Activi-
ties:
Net income (loss).............. $ 71,833 $ 277,975 $ (979,914) $ 865,452
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortiza-
tion........................ 260,719 258,714 1,034,336 1,006,783
Deferred income taxes and in-
vestment tax credits--net... 24,500 (9,633) (314,755) 99,016
Extraordinary loss related to
write-off of certain net
regulatory assets........... -- -- 810,335 --
Cumulative effect of a change
in accounting principle..... -- (196,700) -- (196,700)
Loss on nuclear plant
closure..................... -- -- 885,611 --
Provisions/(payments) for
revenue refunds............. (34,504) -- 10,966 --
Equity component of allowance
for funds used during
construction................ (1,584) (5,080) (20,274) (21,158)
Recovery of regulatory as-
sets........................ -- 3,818 11,454 15,272
Provisions/(payments) for li-
ability for separation
costs--net.................. 7,425 (626) 24,037 1,790
Net effect on cash flows of
changes in:
Receivables................ 64,285 102,992 (17,513) 60,196
Coal and fuel oil.......... (36,186) (32,275) 15,787 (27,970)
Materials and supplies..... (3,739) (30) 37,950 10,627
Accounts payable excluding
separation costs--net..... (21,958) (38,736) (4,901) (16,099)
Accrued interest and taxes. 8,267 61,392 (59,590) (25,273)
Other changes in certain
current assets and
liabilities............... 16,704 36,168 274,449 194,274
Other--net................... 58,166 65,902 170,179 167,955
--------- --------- ---------- -----------
$ 413,928 $ 523,881 $1,878,157 $ 2,134,165
--------- --------- ---------- -----------
Cash Flow From Investing Activi-
ties:
Construction expenditures...... $(170,986) $(209,706) $ (930,905) $ (878,744)
Nuclear fuel expenditures...... (60,549) (48,773) (197,149) (296,187)
Sale on generating plants...... 177,454 -- 238,245 --
Equity component of allowance
for funds used during
construction.................. 1,584 5,080 20,274 21,158
Contributions to nuclear
decommissioning funds......... (80,077) (80,181) (114,721) (116,284)
Other investments and special
deposits...................... (861) (24,302) 18,739 (24,307)
--------- --------- ---------- -----------
$(133,435) $(357,882) $ (965,517) $(1,294,364)
--------- --------- ---------- -----------
Cash Flow From Financing Activi-
ties:
Issuance of securities--
Long-term debt................ $ -- $ 297,663 $ -- $ 496,565
Company-obligated mandatorily
redeemable preferred securi-
ties of subsidiary trusts
holding solely the Company's
subordinated debt securi-
ties......................... -- 150,000 -- 150,000
Capital stock................. 133 199 222 843
Retirement and redemption of
securities--
Long-term debt................ (364,044) (501,911) (596,901) (933,855)
Capital stock................. (133) (199) (44,045) (44,687)
Deposits and securities held
for retirement and redemption
of securities................. (4,064) (2,331) (1,733) 1,287
Premium paid on early redemp-
tion of long-term debt........ -- (9,500) -- (9,500)
Cash dividends paid on capital
stock......................... (110,854) (105,456) (432,314) (428,028)
Proceeds from sale/leaseback
of nuclear fuel............... 16,565 44,470 122,049 236,875
Nuclear fuel lease principal
payments...................... (32,186) (49,550) (149,048) (205,241)
Increase (Decrease) in short-
term borrowings............... 221,500 1,000 249,900 (105,800)
--------- --------- ---------- -----------
$(273,083) $(175,615) $ (851,870) $ (841,541)
--------- --------- ---------- -----------
Increase (Decrease) in Cash and
Temporary Cash Investments..... $ 7,410 $ (9,616) $ 60,770 $ (1,740)
Cash and Temporary Cash
Investments at Beginning of
Period......................... 72,634 28,890 19,274 21,014
--------- --------- ---------- -----------
Cash and Temporary Cash Invest-
ments at End of Period......... $ 80,044 $ 19,274 $ 80,044 $ 19,274
========= ========= ========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
60
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
See Unicom's Note 1 of Notes to Financial Statements for a discussion of
significant accounting policies, except for the following specific policies
discussed below and the subcaption "Earnings per Share" in Unicom's Note 1.
Income Taxes. ComEd is included in the consolidated federal and state income
tax returns filed by Unicom. Current and deferred income taxes of the
consolidated group are allocated to ComEd as if ComEd filed separate tax
returns. Deferred income taxes are provided for income and expense items
recognized for financial accounting purposes in periods that differ from those
for income tax purposes. Income taxes deferred in prior years are charged or
credited to income as the book/tax 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.
Interest. Total interest costs incurred on debt, leases and other
obligations were $137 million and $152 million for the three months ended
March 31, 1998 and 1997, respectively, and $573 million and $614 million for
the twelve months ended March 31, 1998 and 1997, respectively.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months and
twelve months ended March 31, 1998 and 1997 was as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(THOUSANDS OF DOLLARS)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capital-
ized)............................. $ 150,537 $ 157,735 $ 495,062 $ 534,623
Income taxes (net of refunds)...... $ -- $ 6,998 $ 274,370 $ 245,918
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Capital lease obligations incurred... $ 17,996 $ 46,397 $ 130,011 $ 241,879
(2) ACCOUNTING EFFECTS RELATED TO THE 1997 ACT. See Unicom's Note 2 of Notes
to Financial Statements, except for EPS information.
(3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. See Unicom's Note
3 of Notes to Financial Statements, except for pro forma and EPS information.
The following pro forma information reflects the financial results for the
twelve months ended March 31, 1997 as if the new accounting method had been in
effect for the full twelve-month period, excluding the cumulative effect of a
change in accounting principle (unaudited):
(THOUSANDS
OF
DOLLARS)
Net Income........................................................... $663,712
(4) RATE MATTERS. See Unicom's Note 4 of Notes to Financial Statements.
(5) CLOSURE AND SALE OF PLANTS. See Unicom's Note 5 of Notes to Financial
Statements, except for EPS information.
61
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(6) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK. At March 31, 1998,
the authorized shares of capital stock were: common stock--250,000,000 shares;
preference stock--22,368,560 shares; $1.425 convertible preferred stock--
61,724 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.
See Unicom's Note 2 regarding ComEd's application to the ICC for the
proposed issuance of up to $3.4 billion of securities to refinance debt and
equity, as permitted under the 1997 Act.
(7) COMMON EQUITY. At March 31, 1998, shares of common stock were reserved
for the following purposes:
Conversion of $1.425 convertible preferred stock................... 62,958
Conversion of warrants............................................. 25,535
------
88,493
======
Shares of common stock issued for the three months and twelve months ended
March 31, 1998 and 1997 were as follows:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
------------------- --------------------
1998 1997 1998 1997
--------- --------- --------- ----------
Conversion of $1.425 convertible
preferred stock...................... 4,269 6,382 7,148 27,727
Conversion of warrants................ 84 181 265 1,476
--------- --------- --------- ----------
4,353 6,563 7,413 29,203
========= ========= ========= ==========
At March 31, 1998 and December 31, 1997, 76,607 and 76,868 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 $48 million and
$19 million at March 31, 1998 and December 31, 1997, respectively. As of March
31, 1998 and December 31, 1997, $355 million and $384 million, respectively,
of retained earnings have been appropriated for future dividend payments.
See Unicom's Note 2 regarding ComEd's application to the ICC for the
proposed issuance of up to $3.4 billion of securities to refinance debt and
equity, as permitted under the 1997 Act.
(8) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN. See Unicom's Note 8 of
Notes to Financial Statements, except for EPS information.
(9) PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION
REQUIREMENTS. See Unicom's Note 9 of Notes to Financial Statements.
(10) PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS. See
Unicom's Note 10 of Notes to Financial Statements.
62
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(11) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY THE COMPANY'S SUBORDINATED DEBT SECURITIES.
See Unicom's Note 11 of Notes to Financial Statements.
(12) LONG-TERM DEBT. See Unicom's Note 12 of Notes to Financial Statements.
(13) LINES OF CREDIT. See the first paragraph of Unicom's Note 13 of Notes
to Financial Statements.
(14) DISPOSAL OF SPENT NUCLEAR FUEL. See Unicom's Note 14 of Notes to
Financial Statements.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS. See Unicom's Note 15 of Notes to
Financial Statements.
(16) PENSION AND POSTRETIREMENT BENEFITS. See Unicom's Note 16 of Notes to
Financial Statements.
(17) SEPARATION PLAN COSTS. See Unicom's Note 17 of Notes to Financial
Statements, except for EPS information.
(18) INCOME TAXES. The components of the net deferred income tax liability
at March 31, 1998 and December 31, 1997 were as follows:
MARCH 31, DECEMBER 31,
1998 1997
---------- ------------
(THOUSANDS OF DOLLARS)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized
depreciation, net of removal costs.................. $3,991,973 $4,051,191
Overheads capitalized................................ 123,259 131,509
Repair allowance..................................... 227,650 231,697
Regulatory assets recoverable through future rates... 690,442 785,354
Deferred income tax assets:
Postretirement benefits.............................. (314,733) (305,220)
Unamortized investment tax credits................... (197,855) (206,112)
Regulatory liabilities to be settled through future
rates............................................... (607,623) (698,750)
Nuclear plant closure................................ (74,708) (194,244)
Other--net........................................... (142,944) (135,311)
---------- ----------
Net deferred income tax liability..................... $3,695,461 $3,660,114
========== ==========
The $35 million increase in the net deferred income tax liability from
December 31, 1997 to March 31, 1998 is comprised of $39 million in deferred
income tax expenses reflected in operations and a $4 million decrease in
regulatory assets net of regulatory liabilities pertaining to income taxes for
the period. 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.
63
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONTINUED
The components of net income tax expense charged to continuing operations
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
(THOUSANDS OF DOLLARS)
Electric operating income:
Current income taxes.............. $ 62,092 $ 68,750 $ 272,978 $319,366
Deferred income taxes............. (7,579) (1,673) 52,749 130,512
Investment tax credits deferred--
net.............................. (7,160) (7,897) (30,278) (34,109)
Other (income) and deductions,
primarily deferred income taxes in
1997.............................. (10,195) (283) (417,537) (3,543)
--------- --------- --------- --------
Net income taxes charged (credited)
to continuing operations.......... $ 37,158 $ 58,897 $(122,088) $412,226
========= ========= ========= ========
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted in the following effective
income tax rates for the three months and twelve months ended March 31, 1998
and 1997:
THREE MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31 MARCH 31
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- --------- ----------
Pre-tax book income (loss) (thou-
sands)........................... $ 108,991 $ 140,172 $(291,667) $1,080,978
Effective income tax rate......... 34.1% 42.0% 41.9% 38.1%
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
(THOUSANDS OF DOLLARS)
Federal income taxes computed at
statutory rate...................... $ 38,147 $ 75,310 $(102,083) $404,592
Equity component of AFUDC which was
excluded from taxable income........ (89) (1,778) (6,630) (7,405)
Amortization of investment tax
credits, net of deferred income
taxes............................... (9,210) (7,897) (32,328) (34,109)
State income taxes, net of federal
income taxes........................ 6,134 11,647 1,272 56,625
Differences between book and tax
accounting, primarily property-
related deductions.................. 2,176 (18,385) 17,681 (7,477)
-------- --------- --------- --------
Net income taxes charged (credited)
to continuing operations............ $ 37,158 $ 58,897 $(122,088) $412,226
======== ========= ========= ========
The effects of an income tax refund related to prior years were recorded in
the third quarter of 1996, resulting in a positive impact of $26 million
(after-tax).
64
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--CONCLUDED
(19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1998 and 1997 were as
follows:
TWELVE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31 MARCH 31
------------------- -----------------
1998 1997 1998 1997
--------- --------- -------- --------
(THOUSANDS OF DOLLARS)
Illinois public utility revenue........... $ 57,682 $ 51,755 $234,276 $220,306
Illinois invested capital................. -- 26,190 73,314 104,699
Illinois electricity distribution tax..... 26,718 -- 26,718 --
Municipal utility gross receipts.......... 42,551 41,103 169,542 168,240
Real estate............................... 39,631 39,168 150,642 124,025
Municipal compensation.................... 19,871 19,110 79,047 78,559
Other--net................................ 20,513 23,775 71,493 69,809
--------- --------- -------- --------
$ 206,966 $ 201,101 $805,032 $765,638
========= ========= ======== ========
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
ComEd's real estate taxes reflect a credit of $23 million, recorded in the
second quarter of 1996, which related to the year 1995.
(20) LEASE OBLIGATIONS. See the first and second paragraphs of Unicom's Note
20 of Notes to Financial Statements.
Future minimum rental payments at March 31, 1998 for operating leases are
estimated to aggregate $320 million, including $30 million in 1998, $37
million in 1999, $35 million in 2000, $29 million in 2001, $24 million in 2002
and $165 million in 2003-2024.
(21) JOINT PLANT OWNERSHIP. See Unicom's Note 21 of Notes to Financial
Statements.
(22) COMMITMENTS AND CONTINGENT LIABILITIES. See Unicom's Note 22 of Notes
to Financial Statements.
65
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CHANGES IN THE ELECTRIC UTILITY INDUSTRY. See Unicom's "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Changes in the Electric Utility Industry," which is incorporated
herein by this reference, except for EPS information.
LIQUIDITY AND CAPITAL RESOURCES. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Liquidity and Capital Resources--UTILITY OPERATIONS," which is incorporated
herein by this reference.
REGULATION. See Unicom's "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Regulation," which is
incorporated herein by this reference.
RESULTS OF OPERATIONS. See Unicom's "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Results of
Operations" (other than the first paragraph thereof), which is incorporated
herein by this reference, except for EPS information.
66
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Since January 1, 1998, civil penalties were imposed on ComEd on three
occasions for violations of NRC regulations in amounts aggregating $495,000.
To ComEd's knowledge, there are two current enforcement issues outstanding and
under review by the NRC.
On June 13, 1997, the IDR issued a Notice of Tax Liability to ComEd alleging
deficiencies in Illinois invested capital tax for the years 1988 through 1994,
as subsequently adjusted by the IDR, of $32 million, plus interest of $15
million and a penalty of $3.5 million. On January 2, 1998, the IDR issued a
second Notice of Tax Liability also alleging deficiencies in Illinois invested
capital tax for the years 1995 through 1996 of $7 million, plus interest of $1
million. ComEd has protested the notices, and the matter is currently pending
before the IDR's Office of Administrative Hearings. Interest will continue to
accrue on the alleged tax deficiencies at 9% per annum.
CERCLA provides for immediate response and removal actions coordinated by
the U.S. EPA to releases of hazardous substances into the environment and
authorizes the U.S. Government either to clean up sites at which hazardous
substances have created actual or potential environmental hazards or to order
persons responsible for the situation to do so. Under CERCLA, generators and
transporters of hazardous substances, as well as past and present owners and
operators of hazardous waste sites, are made strictly, jointly and severally
liable for the cleanup costs of waste at sites, most of which are listed by
the U.S. EPA on the NPL. These responsible parties can be ordered to perform a
cleanup, can be sued for costs associated with a U.S. EPA directed cleanup,
may voluntarily settle with the U.S. Government concerning their liability for
cleanup costs, or may voluntarily begin a site investigation and site
remediation prior to listing on the NPL under state oversight. Various states,
including Illinois, have enacted statutes which contain provisions
substantially similar to CERCLA. ComEd and its subsidiaries are or are likely
to become parties to proceedings initiated by the U.S. EPA, state agencies
and/or other responsible parties under CERCLA with respect to a number of
sites, including MGP sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. See Note 22 of
Notes to Financial Statements for information regarding costs associated with
investigating and remediating former MGP sites.
From time to time, Unicom and its subsidiaries are, or are claimed to be, in
violation of or in default under orders, statutes, rules or regulations
relating to environmental controls and other matters, compliance plans imposed
upon or agreed to by them or permits issued by various state and federal
agencies for the construction or operation of their facilities. Unicom and
ComEd do not believe, so far as they now foresee, that such violations or
defaults will have a material adverse effect on their future business and
operating results, except for events otherwise described in Unicom and ComEd's
Annual Reports on Form 10-K for the year ended December 31, 1997 or in these
Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 1998,
which could have such an effect.
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,"
67
subcaptions "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction
Program" and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--
Construction Program," (3) statements regarding the estimated return to
service of certain nuclear generating units and an increase in purchased power
costs for 1998 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 22 of Notes to Financial Statements. Management cannot predict
the course of future events or anticipate the interaction of multiple factors
beyond management's control and their effect on revenues, project timing and
costs. The statements regarding revenue reductions 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. 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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ------------------------------------------------------------------
(10)-1 Retirement and Separation Agreement dated as of March 12, 1998
among Unicom, ComEd and Samuel K. Skinner.
(10)-2 Retirement and Separation Agreement dated as of March 30, 1998
among Unicom, ComEd and James J. O'Connor.
(10)-3 Employment Agreement among Unicom, ComEd and John W. Rowe dated as
of March 10, 1998.
(12) Statement computing Commonwealth Edison Company ratios of earnings
to fixed charges and ratios of earnings to fixed charges and
preferred and preference stock dividend requirements.
(23)-1 Consent of independent public accountants applicable to Unicom
Corporation.
(23)-2 Consent of independent public accountants applicable to
Commonwealth Edison Company.
(27)-1 Financial data schedule of Unicom Corporation.
(27)-2 Financial data schedule of Commonwealth Edison Company.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated January 14, 1998 was filed by Unicom
and ComEd describing the permanent cessation of nuclear operations and
retirement of ComEd's nuclear generating station located in Zion, Illinois.
A Current Report on Form 8-K dated January 30, 1998 was filed containing
Unicom's consolidated financial statements as of, and for the year ended,
December 31, 1997.
68
A Current Report on Form 8-K dated January 30, 1998 was filed containing
ComEd's consolidated financial statements as of, and for the year ended,
December 31, 1997.
A Current Report on Form 8-K dated February 2, 1998 was filed by Unicom
describing Unicom's Shareholder Rights Plan.
A Current Report on Form 8-K dated February 6, 1998 was filed by Unicom
and ComEd announcing the election of John W. Rowe as Chairman, President
and Chief Executive Officer.
69
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on the 11th day of May, 1998. The
signature for each undersigned company shall be deemed to relate only to
matters having reference to such company and its subsidiaries thereof.
Unicom Corporation
Registrant
Robert E. Berdelle
By __________________________________
Robert E. Berdelle
Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
Commonwealth Edison Company
Registrant
Robert E. Berdelle
By __________________________________
Robert E. Berdelle
Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
70
EXHIBIT INDEX
Exhibits filed with or incorporated by reference in Form 10-Q for the
quarterly period ended March 31, 1998;
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------------------------------------------------------
(10)-1 Retirement and Separation Agreement dated as of March 12, 1998 among
Unicom, ComEd and Samuel K. Skinner.
(10)-2 Retirement and Separation Agreement dated as of March 30, 1998 among
Unicom, ComEd and James J. O'Connor.
(10)-3 Employment Agreement among Unicom, ComEd and John W. Rowe dated as of
March 10, 1998.
(12) Statement computing Commonwealth Edison Company ratios of earnings to
fixed charges and ratios of earnings to fixed charges and preferred
and preference stock dividend requirements.
(23)-1 Consent of independent public accountants applicable to Unicom
Corporation.
(23)-2 Consent of independent public accountants applicable to Commonwealth
Edison Company.
(27)-1 Financial data schedule of Unicom Corporation.
(27)-2 Financial data schedule of Commonwealth Edison Company.