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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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission
File Registrant; State of Incorporation; IRS Employer
Number Address; and Telephone Number Identification No.
---------- ----------------------------------- ------------------
1-11375 UNICOM CORPORATION 36-3961038
(an Illinois corporation)
37th Floor, 10 South Dearborn Street
Post Office Box A-3005
Chicago, Illinois 60690-3005
312/394-7399
1-1839 COMMONWEALTH EDISON COMPANY
(an Illinois corporation) 36-0938600
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, 1999:
Unicom Corporation 217,208,006 shares
Commonwealth Edison Company 213,972,004 shares
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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, 1999
This document contains the Quarterly Reports on Form 10-Q for the quarterly
period ended March 31, 1999 for each of Unicom Corporation and Commonwealth
Edison Company. Information contained herein relating to an individual
registrant is filed by such registrant on its own behalf. Accordingly, except
for its subsidiaries, Commonwealth Edison Company makes no representation as
to information relating to Unicom Corporation or to any other companies
affiliated with Unicom Corporation. In addition, several portions of these
Quarterly Reports contain forward-looking statements; and reference is made to
pages 58-59 for the location and character of such statements.
INDEX
Page
-----
Definitions.............................................................. 3
PART I. FINANCIAL INFORMATION
Unicom Corporation and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 4
Statements of Consolidated Operations for the three months and twelve
months ended March 31, 1999 and 1998................................ 5
Consolidated Balance Sheets--March 31, 1999 and December 31, 1998.... 6-7
Statements of Consolidated Capitalization--March 31, 1999 and
December 31, 1998 .................................................. 8
Statements of Consolidated Retained Earnings (Deficit) for the three
months and twelve months ended March 31, 1999 and 1998.............. 9
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1999 and 1998................................ 10
Notes to Financial Statements........................................ 11-38
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 39-59
Commonwealth Edison Company and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 60
Statements of Consolidated Operations for the three months and twelve
months ended March 31, 1999 and 1998................................ 61
Consolidated Balance Sheets--March 31, 1999 and December 31, 1998.... 62-63
Statements of Consolidated Capitalization--March 31, 1999 and
December 31, 1998................................................... 64
Statements of Consolidated Retained Earnings (Deficit) for the three
months and twelve months ended March 31, 1999 and 1998.............. 65
Statements of Consolidated Cash Flows for the three months and twelve
months ended March 31, 1999 and 1998................................ 66
Notes to Financial Statements........................................ 67-71
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 72
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 73
Item 6. Exhibits and Reports on Form 8-K............................... 74
SIGNATURES............................................................... 75
2
DEFINITIONS
The following terms are used in this document with the following meanings:
Term Meaning
---------------------- -------------------------------------------------------
1997 Act Illinois Electric Service Customer Choice and Rate
Relief Law of 1997
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
CERCLA Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended
City City of Chicago
ComEd Commonwealth Edison Company
ComEd Funding ComEd Funding, LLC, a ComEd subsidiary
ComEd Funding Trust ComEd Transitional Funding Trust, a ComEd Funding
subsidiary
Congress U.S. Congress
Cotter Cotter Corporation, a ComEd subsidiary
CTC Non-bypassable "competitive transition charge"
DOE U.S. Department of Energy
EEI Edison Electric Institute
EME Edison Mission Energy, an Edison International
subsidiary
EPRI Electric Power Research Institute
EPS Earnings (Loss) per Common Share
ESPP Employee Stock Purchase Plan
FAC Fuel adjustment clause
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fossil plants ComEd's six coal-fired generating plants, an oil and
gas-fired plant, and nine peaking unit sites
GAAP Generally Accepted Accounting Principles
ICC Illinois Commerce Commission
IDR Illinois Department of Revenue
Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd
subsidiary
INPO Institute of Nuclear Power Operations
ISO Independent System Operator
MAIN Mid-America Interconnected Network
MGP Manufactured gas plant
NEI Nuclear Electric Institute
NEIL Nuclear Electric Insurance Limited
NERC North American Electric Reliability Council
NPL National Priorities List
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SPEs Special purpose entities
S&P Standard & Poor's
Trusts ComEd Financing I and ComEd Financing II, ComEd
subsidiaries
Trust Securities ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely ComEd's
subordinated debt securities
Unicom Unicom Corporation
Unicom Energy Services Unicom Energy Services Inc., a Unicom Enterprises
subsidiary
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
Unicom Investment Unicom Investment Inc., a Unicom subsidiary
Unicom Thermal Unicom Thermal Technologies Inc., a UT Holdings
subsidiary
U.S. EPA U.S. Environmental Protection Agency
UT Holdings UT Holdings Inc., a Unicom Enterprises subsidiary
3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Unicom Corporation:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Unicom Corporation (an Illinois corporation)
and subsidiary companies as of March 31, 1999 and December 31, 1998, and the
related statements of consolidated operations, retained earnings (deficit) and
cash flows for the three-month and twelve-month periods ended March 31, 1999
and 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with 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, 1999 and December 31, 1998, and the
results of their operations and their cash flows for the three-month and
twelve-month periods ended March 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
May 12, 1999
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, 1999 and 1998 reflect the results of past
operations and are not intended as any representation as to results of
operations for any future period. Future operations will necessarily be
affected by various and diverse factors and developments, including changes in
electric prices, regulation, population, business activity, asset
dispositions, competition, taxes, environmental control, energy use, fuel,
cost of labor, purchased power and other matters, the nature and effect of
which cannot now be determined.
Three Months Ended Twelve Months Ended
March 31 March 31
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
(Thousands Except per Share Data)
Operating Revenues............ $1,537,804 $1,664,897 $6,977,431 $ 7,032,367
---------- ---------- ---------- -----------
Operating Expenses and Taxes:
Fuel......................... $ 234,834 $ 222,293 $1,070,069 $ 1,125,902
Purchased power.............. 71,682 173,392 646,306 464,400
Operation and maintenance.... 555,402 568,996 2,272,742 2,437,711
Depreciation and
amortization................ 231,332 248,902 925,571 1,000,313
Taxes (except income)........ 132,360 207,426 624,709 807,114
Income taxes................. 63,264 55,146 377,280 318,037
Investment tax credits
deferred--net .............. (7,021) (7,160) (27,591) (30,278)
---------- ---------- ---------- -----------
$1,281,853 $1,468,995 $5,889,086 $ 6,123,199
---------- ---------- ---------- -----------
Operating Income.............. $ 255,951 $ 195,902 $1,088,345 $ 909,168
---------- ---------- ---------- -----------
Other Income and (Deductions):
Interest on long-term debt,
net of interest
capitalized................. $ (142,558) $ (112,754) $ (471,526) $ (473,819)
Interest on notes payable.... (3,952) (5,809) (20,392) (12,992)
Allowance for funds used
during construction......... 4,211 3,160 17,515 36,353
Income taxes applicable to
nonoperating activities..... (1,416) 13,951 3,747 36,986
Provision for dividends and
redemption premiums--
Preferred and preference
stocks of ComEd........... (15,297) (14,547) (57,634) (59,506)
ComEd-obligated mandatorily
redeemable preferred
securities of subsidiary
trusts holding solely
ComEd's subordinated debt
securities................ (7,428) (7,428) (29,710) (29,640)
Loss on nuclear plant
closure..................... -- -- -- (885,611)
Income tax effect of nuclear
plant closure............... -- -- -- 362,952
Miscellaneous--net........... 7,638 (18,760) 23,273 (135,107)
---------- ---------- ---------- -----------
$ (158,802) $ (142,187) $ (534,727) $(1,160,384)
---------- ---------- ---------- -----------
Net Income (Loss) before
Extraordinary Items.......... $ 97,149 $ 53,715 $ 553,618 $ (251,216)
Extraordinary Losses, less
Applicable Income Taxes...... (27,506) -- (27,506) (810,335)
---------- ---------- ---------- -----------
Net Income (Loss)............. $ 69,643 $ 53,715 $ 526,112 $(1,061,551)
========== ========== ========== ===========
Basic and diluted earnings
(loss) per common share:
Earnings (loss) per common
share before
extraordinary items......... $ 0.45 $ 0.25 $ 2.55 $ (1.15)
Extraordinary losses, less
applicable income taxes..... (0.13) -- (0.13) (3.75)
---------- ---------- ---------- -----------
Earnings (loss) per common
share....................... $ 0.32 $ 0.25 $ 2.42 $ (4.90)
========== ========== ========== ===========
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 1999 1998
------ ----------- ------------
(Thousands of Dollars)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $827 million and
$858 million, respectively)....................... $28,008,632 $27,801,246
Less--Accumulated provision for depreciation....... 15,438,922 15,234,320
----------- -----------
$12,569,710 $12,566,926
Nuclear fuel, at amortized cost.................... 860,729 874,979
----------- -----------
$13,430,439 $13,441,905
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds...................... $ 2,374,908 $ 2,267,317
Subsidiary companies............................... 42,127 41,643
Other, at cost..................................... 284,890 292,737
----------- -----------
$ 2,701,925 $ 2,601,697
----------- -----------
Current Assets:
Cash............................................... $ 60,672 $ 28,743
Temporary cash investments......................... 27,471 26,935
Cash held for redemption of securities............. 761,492 3,062,816
Special deposits................................... 297 271
Receivables--
Customers........................................ 1,224,511 1,369,701
Forward share repurchase contract................ 675,841 --
Other............................................ 87,947 136,663
Provisions for uncollectible accounts............ (49,038) (48,645)
Coal and fuel oil, at average cost................. 153,558 135,415
Materials and supplies, at average cost............ 236,385 232,246
Deferred income taxes related to current assets and
liabilities....................................... 37,846 24,339
Prepayments and other.............................. 39,029 20,301
----------- -----------
$ 3,256,011 $ 4,988,785
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 4,518,346 $ 4,578,427
Other.............................................. 82,808 96,266
----------- -----------
$ 4,601,154 $ 4,674,693
----------- -----------
$23,989,529 $25,707,080
=========== ===========
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 1999 1998
------------------------------ ----------- ------------
(Thousands of Dollars)
Capitalization (see accompanying statements):
Common stock equity................................. $ 5,065,469 $ 5,099,444
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements......... 74,482 74,488
Subject to mandatory redemption requirements...... 69,475 69,475
ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
ComEd's subordinated debt securities*.............. 350,000 350,000
Long-term debt...................................... 7,677,109 7,809,109
----------- -----------
$13,236,535 $13,402,516
----------- -----------
Current Liabilities:
Notes payable....................................... $ 220,814 $ 292,963
Current portion of long-term debt, redeemable
preference stock and capitalized lease obligations
of subsidiary companies............................ 923,834 2,314,443
Accounts payable.................................... 465,277 604,936
Accrued interest.................................... 179,966 180,674
Accrued taxes....................................... 266,154 134,976
Dividends payable................................... 92,563 105,133
Customer deposits................................... 62,204 56,954
Accrued plant closing costs......................... 66,197 78,430
Other............................................... 133,870 155,262
----------- -----------
$ 2,410,879 $ 3,923,771
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,771,885 $ 3,805,460
Nuclear decommissioning liability for retired
plants............................................. 1,237,300 1,215,400
Accumulated deferred investment tax credits......... 553,436 562,285
Accrued spent nuclear fuel disposal fee and related
interest........................................... 736,644 728,413
Obligations under capital leases of subsidiary
companies.......................................... 289,426 333,653
Regulatory liabilities.............................. 594,320 595,005
Other............................................... 1,159,104 1,140,577
----------- -----------
$ 8,342,115 $ 8,380,793
----------- -----------
Commitments and Contingent Liabilities (Note 21)
$23,989,529 $25,707,080
=========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
7
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
March 31, December 31,
1999 1998
----------- ------------
(Thousands of Dollars)
Common Stock Equity:
Common stock, without par value--
Outstanding (excluding treasury stock)--217,156,444
shares and 217,094,560 shares, respectively....... $ 4,951,002 $ 4,966,630
Preference stock expense of ComEd................... (429) (3,199)
Retained earnings................................... 124,991 142,813
Treasury stock--264,406 shares and 178,982 shares,
respectively....................................... (10,095) (6,800)
----------- -----------
$ 5,065,469 $ 5,099,444
----------- -----------
Preferred and Preference Stocks of ComEd--
Without Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--3,000,000 shares and 13,499,549
shares, respectively............................ $ 72,638 $ 504,957
Current redemption requirements for preference
stock included in current liabilities............ -- (432,320)
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--58,003 shares and 58,211 shares,
respectively.................................... 1,844 1,851
Prior preferred stock, cumulative, $100 par value
per share-- No shares outstanding................ -- --
----------- -----------
$ 74,482 $ 74,488
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--700,000 shares and 1,720,345 shares,
respectively.................................... $ 69,475 $ 171,348
Current redemption requirements for preference
stock included in current liabilities............ -- (101,873)
----------- -----------
$ 69,475 $ 69,475
----------- -----------
ComEd-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
ComEd's Subordinated Debt Securities................. $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1999 through 2003--6 3/8% to 9 3/8%...... $ 672,345 $ 1,080,000
Maturing 2004 through 2013--4.40% to 8 3/8%....... 1,305,400 1,485,400
Maturing 2014 through 2023--5.85% to 9 7/8%....... 1,609,453 1,981,000
----------- -----------
$ 3,587,198 $ 4,546,400
Transitional trust notes, due 2000 through 2008--
5.29% to 5.74%..................................... 3,400,000 3,400,000
Sinking fund debentures, due 1999 through 2011--2
3/4% to 7 5/8%..................................... 36,159 94,159
Pollution control obligations, due 2007 through
2014--2.90% to 5 7/8%.............................. 140,700 140,700
Other long-term debt................................ 1,308,190 1,275,811
Deposit for retirement of long-term debt............ (2,762) --
Current maturities of long-term debt included in
current liabilities................................ (737,666) (1,585,281)
Unamortized net debt discount and premium........... (54,710) (62,680)
----------- -----------
$ 7,677,109 $ 7,809,109
----------- -----------
$13,236,535 $13,402,516
=========== ===========
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
------------------- ---------------------
1999 1998 1999 1998
--------- --------- -------- -----------
(Thousands of Dollars)
Balance at Beginning of Period..... $ 142,813 $ (21,184) $(54,207) $ 1,353,931
Add--Net income (loss)............. 69,643 53,715 526,112 (1,061,551)
--------- --------- -------- -----------
$ 212,456 $ 32,531 $471,905 $ 292,380
--------- --------- -------- -----------
Deduct--
Cash dividends declared on com-
mon stock...................... $ 86,865 $ 86,739 $347,287 $ 346,479
Other capital stock transac-
tions--net..................... 600 (1) (373) 108
--------- --------- -------- -----------
$ 87,465 $ 86,738 $346,914 $ 346,587
--------- --------- -------- -----------
Balance at End of Period (Includes
$477 million and $298 million of
appropriated retained earnings at
March 31, 1999 and 1998,
respectively)..................... $ 124,991 $ (54,207) $124,991 $ (54,207)
========= ========= ======== ===========
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
---------------------- ------------------------
1999 1998 1999 1998
----------- --------- ----------- -----------
(Thousands of Dollars)
Cash Flow from Operating Ac-
tivities:
Net income (loss)........... $ 69,643 $ 53,715 $ 526,112 $(1,061,551)
Adjustments to reconcile
net income (loss) to net
cash provided by operating
activities:
Depreciation and amortiza-
tion..................... 246,312 262,010 979,162 1,050,280
Deferred income taxes and
investment tax credits--
net...................... (53,656) 26,681 (8,639) (310,389)
Extraordinary loss related
to write-off of certain
net regulatory assets.... -- -- -- 810,335
Loss on nuclear plant clo-
sure..................... -- -- -- 885,611
Provisions/(payments) for
revenue refunds--net..... (22,493) (34,504) (10,856) 10,966
Equity component of
allowance for funds used
during construction...... (1,753) (1,584) (7,128) (20,274)
Provisions/(payments) for
liability for separation
costs--net............... (8,780) 7,425 (6,448) 24,037
Net effect on cash flows
of changes in:
Receivables............. 194,299 61,451 (336,548) (16,142)
Coal and fuel oil....... (18,143) (36,186) 3,292 15,787
Materials and supplies.. (4,139) (5,221) 20,887 36,468
Accounts payable
excluding nuclear fuel
lease principal
payments and separation
costs--net............. (130,879) (37,367) 2,373 8,752
Accrued interest and
taxes.................. 148,474 1,734 117,073 (71,534)
Other changes in certain
current assets and
liabilities............ 27,850 18,790 154,592 276,415
Other--net................ 80,639 49,495 24,221 136,546
----------- --------- ----------- -----------
$ 527,374 $ 366,439 $ 1,458,093 $ 1,775,307
----------- --------- ----------- -----------
Cash Flow from Investing Ac-
tivities:
Construction expenditures... $ (231,075) $(172,951) $ (981,905) $ (981,782)
Nuclear fuel expenditures... (50,085) (60,549) (155,705) (197,149)
Sales of generating plants.. -- 177,454 -- 238,245
Equity component of
allowance for funds used
during construction........ 1,753 1,584 7,128 20,274
Contributions to nuclear
decommissioning funds...... (39,426) (80,077) (96,120) (114,721)
Other investments and spe-
cial deposits.............. (4,815) (17,519) 1,073 (827)
----------- --------- ----------- -----------
$ (323,648) $(152,058) $(1,225,529) $(1,035,960)
----------- --------- ----------- -----------
Cash Flow from Financing Ac-
tivities:
Issuance of securities--
Transitional trust notes... $ -- $ -- $ 3,382,629 $ --
Other long-term debt....... 35,000 25,000 392,270 90,000
Capital stock.............. 824 4,223 13,245 14,223
Retirement and redemption
of securities--
Long-term debt............. (1,055,655) (366,509) (1,304,998) (599,366)
Capital stock.............. (564,213) (133) (604,946) (44,045)
Deposits and securities
held for retirement and
redemption of securities... -- (4,064) -- (1,733)
Prepayment of forward share
repurchase contract........ (675,841) -- (675,841) --
Cash dividends paid on com-
mon stock.................. (86,806) (86,610) (347,150) (346,225)
Proceeds from
sale/leaseback of nuclear
fuel....................... -- 16,565 84,473 122,049
Nuclear fuel lease princi-
pal payments............... (53,745) (32,186) (277,163) (149,048)
Increase/(decrease) in
short-term borrowings...... (72,149) 221,500 (158,836) 249,900
----------- --------- ----------- -----------
$(2,472,585) $(222,214) $ 503,683 $ (664,245)
----------- --------- ----------- -----------
Cash, Temporary Cash Invest-
ments and Cash Held for Re-
demption of Securities...... $(2,268,859) $ (7,833) $ 736,247 $ 75,102
Change in Net Cash Balance:
Balance at Beginning of
Period..................... 3,118,494 121,221 113,388 38,286
----------- --------- ----------- -----------
Balance at End of Period.... $ 849,635 $ 113,388 $ 849,635 $ 113,388
=========== ========= =========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
10
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies.
Corporate Structure and Basis of Presentation. Unicom is the parent holding
company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility,
is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated
subsidiary of Unicom and is engaged, through its subsidiaries, in energy
service activities.
The consolidated financial statements include the accounts of Unicom, ComEd,
Indiana Company, the Trusts, ComEd Funding, ComEd Funding Trust and Unicom's
unregulated subsidiaries. All significant intercompany transactions have been
eliminated. Although the accounts of ComEd Funding and ComEd Funding Trust,
which are SPEs, are included in the consolidated financial statements, as
required by GAAP, ComEd Funding and ComEd Funding Trust are legally separated
from Unicom and ComEd. The assets of the SPEs are not available to creditors
of Unicom or ComEd and the transitional property held by the SPEs are not
assets of Unicom or ComEd.
Use of Estimates. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Due to the transition to a new
customer information and billing system, a larger portion of customer revenues
and receivables were based on estimates in the latter part of 1998 and the
first quarter of 1999 than in previous years.
Regulation. ComEd is subject to regulation as to accounting and ratemaking
policies and practices by the ICC and FERC. ComEd's accounting policies and
the accompanying consolidated financial statements conform to GAAP applicable
to rate-regulated enterprises for the non-generation portion of its business,
including the effects of the ratemaking process in accordance with SFAS No.
71, Accounting for the Effects of Certain Types of Regulation. Such effects on
the non-generation portion of its business concern mainly the time at which
various items enter into the determination of operating results in order to
follow the principle of matching costs with the applicable revenues collected
from or returned to customers through future rates. See Note 2 for information
regarding the write-off of generation-related regulatory assets and
liabilities in December 1997.
ComEd's investment in generation-related, net utility plant, including
construction work in progress and nuclear fuel, and excluding the
decommissioning costs included in the accumulated provision for depreciation,
not subject to cost-based rate regulation, was $9.2 billion as of March 31,
1999 and December 31, 1998. See "Regulatory Assets and Liabilities" below
regarding the plant impairment recorded by ComEd in the second quarter of
1998.
11
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Regulatory Assets and Liabilities. Regulatory assets are incurred costs
which have been deferred and are amortized for ratemaking and accounting
purposes. Regulatory liabilities represent amounts to be settled with
customers through future rates. Regulatory assets and liabilities reflected on
the Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 were
as follows:
March 31, December 31,
1999 1998
---------- ------------
(Thousands of Dollars)
Regulatory assets:
Impaired production plant............................. $2,922,215 $2,955,154
Deferred income taxes (1)............................. 677,397 680,356
Nuclear decommissioning costs--Dresden Unit 1......... 207,890 255,031
Nuclear decommissioning costs--Zion Units 1 and 2..... 490,555 443,130
Coal reserves......................................... 178,038 197,975
Unamortized loss on reacquired debt (2)............... 42,251 46,781
---------- ----------
$4,518,346 $4,578,427
========== ==========
Regulatory liabilities:
Deferred income taxes (1)............................. $ 594,320 $ 595,005
========== ==========
- --------
(1) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for
non-generation related temporary differences.
(2) Amortized over the remaining lives of the non-generation related long-term
debt issued to finance the reacquisition. See "Loss on Reacquired Debt"
below for additional information.
ComEd performed a SFAS No. 121 impairment analysis in 1998 which concluded
that future revenues, excluding the collection of the CTC expected to be
recovered from electric supply services, would be insufficient to cover the
costs of its generating assets. Because future regulated cash flows, which
include the CTC, tariff revenues and gains from the disposition of assets, are
expected to provide recovery of the impaired plant assets, a regulatory asset
was recorded for the same amount. The regulatory asset is currently being
amortized as it is recovered through regulated cash flows. Regulatory assets
related to impaired production plant and coal reserves are expected to be
substantially recovered through regulated cash flows at the completion of the
fossil plants sale. See Note 4 for additional information regarding the sale
of the fossil plants.
Recovery of the regulatory asset for Dresden Unit 1 and Zion Units 1 and 2
represents unrecovered nuclear decommissioning costs, which will be recovered
over the periods 1999-2011 and 1999-2013, respectively, through a separate
rate recovery rider provided for by the 1997 Act. See "Depreciation,
Amortization of Regulatory Assets and Decommissioning" below for additional
information.
Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on
the quantity of heat produced using the unit of production method. As
authorized by the ICC, provisions for spent nuclear fuel disposal costs have
been recorded at a level required to recover the fee payable on the current
nuclear-generated and sold electricity and the current interest accrual on the
one-time fee payable to the DOE for nuclear generation prior to April 7, 1983.
The one-time fee and interest thereon have been recovered and the current fee
and interest on the one-time fee are presently being recovered through base
rates. See Note 13 for additional information concerning the disposal of spent
nuclear fuel, one-
12
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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 $89 million and $58 million for the three months ended March 31,
1999 and 1998, respectively, and $321 million and $249 million for the twelve
months ended March 31, 1999 and 1998, respectively.
Customer Receivables and Revenues. ComEd is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of residential, commercial, industrial and wholesale customers.
ComEd's electric service territory has an area of approximately 11,300 square
miles and an estimated population of approximately eight million as of March
31, 1999. It includes the City, an area of about 225 square miles with an
estimated population of approximately three million from which ComEd derived
approximately 30 percent of its ultimate consumer revenues in the three months
and twelve months ended March 31, 1999. ComEd had 3.5 million electric
customers at March 31, 1999. See Notes 2, 3 and 18 for additional information.
Depreciation, Amortization of Regulatory Assets and Decommissioning.
Depreciation, decommissioning and amortization of regulatory assets for the
three months and twelve months ended March 31, 1999 and 1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- -------------------
1999 1998 1999 1998
--------- --------- -------- ----------
(Thousands of Dollars)
Depreciation expense.................... $ 177,438 $ 221,747 $743,601 $ 880,238
Decommissioning expense................. 20,955 27,155 83,820 108,621
Amortization of regulatory assets....... 32,939 -- 98,150 11,454
--------- --------- -------- ----------
$ 231,332 $ 248,902 $925,571 $1,000,313
========= ========= ======== ==========
Depreciation is provided on a straight-line basis by amortizing the cost of
depreciable plant and equipment over estimated service lives for each class of
plant. Provisions for depreciation, including nuclear plant, were at average
annual rates of 2.65% and 2.83% for the three months and twelve months ended
March 31, 1999, respectively, of average depreciable utility plant and
equipment. Provisions for depreciation, including nuclear plant, 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. The decrease for the periods in 1999, compared to 1998, in the
average depreciation rates relates primarily to a reduction in nuclear
depreciation rates due to the partial impairment of production plant, which
was recorded as a component of accumulated depreciation, partially offset by
shortened depreciable lives for certain nuclear stations. The annual rate for
nuclear plant and equipment, excluding separately collected decommissioning
costs and depreciation related to the replacement of the steam generators, was
2.88% for periods ending prior to July 1, 1998. The nuclear depreciation rate
applied to gross depreciable nuclear plant, beginning July 1, 1998, is 2.16%
reflecting the partial impairment of production plant and shortened
depreciable lives for certain nuclear stations. See "Regulatory Assets and
Liabilities" above for additional information on the partial impairment of
production plant.
Nuclear plant decommissioning costs are accrued over the current NRC license
lives of the related nuclear generating units. The accrual is based on an
annual levelized cost of the unrecovered portion of estimated decommissioning
costs, which are escalated for expected inflation to the expected time of
decommissioning and are net of expected earnings on the trust funds. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Results of Operations--Decommissioning," for a
discussion of questions raised by the
13
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
staff of the SEC and a FASB review regarding the electric utility industry's
method of accounting for decommissioning costs. Dismantling is expected to
occur relatively soon after the end of the current NRC license life of each
generating station currently operating. The accrual for decommissioning is
based on the prompt removal method authorized by NRC guidelines. ComEd's ten
operating units have remaining current NRC license lives ranging from 7 to 29
years. ComEd's Zion Station and its first nuclear unit, Dresden Unit 1, are
retired and expected to be dismantled beginning in the years 2014 and 2012,
respectively, which is consistent with the regulatory treatment for the
related decommissioning costs.
Based on ComEd's most recent study, decommissioning costs are estimated to
be $5.4 billion in current-year (1999) dollars, including a contingency
allowance. This estimate includes $515 million of non-radiological costs,
which are included in ComEd's proposed rider for recovery, as discussed below.
ComEd estimates that it will expend approximately $13.8 billion, including a
contingency allowance and non-radiological costs, for decommissioning costs
primarily during the period from 2007 through 2034. All such costs are
expected to be funded by the external decommissioning trusts, which ComEd
established in compliance with Illinois law and into which ComEd has been
making annual contributions. Future decommissioning cost estimates may be
significantly affected by the adoption of or changes to NRC regulations, as
well as changes in the assumptions used in making such estimates, including
changes in technology, available alternatives for the disposal of nuclear
waste and inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider to its tariffs. The rider allows annual adjustments
to decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. The current estimated
decommissioning costs include a contingency allowance, but, except at Dresden
Unit 1, exclude amounts for spent fuel storage installations, which may be
necessary to store spent fuel during the period beginning at the end of the
NRC license lives of the plants to the date when the DOE accepts the spent
fuel for permanent storage. Contingency allowances used in decommissioning
cost estimates provide for currently unspecifiable costs that are likely to
occur after decommissioning begins and generally range from 20% to 25% of the
currently specifiable costs. Under its most recent annual rider, filed with
the ICC on February 26, 1999, ComEd has proposed to increase its estimated
annual decommissioning cost accrual from $84 million to $130 million. The
increase primarily reflects an increase in low-level waste disposal cost
escalation, the inclusion of $209 million in current-year (1999) dollars for
safety-related costs of maintaining Zion Station in a mothballed condition
until dismantlement begins, and the inclusion of non-radiological costs in the
decommissioning cost estimates for recovery under the rider.
In February 1998, the ICC authorized a reduction in the annual
decommissioning cost accrual from $109 million to $84 million. The reduction
primarily reflected stronger than expected after-tax returns on the external
trust funds and lower than expected escalation in low-level waste disposal
costs, partially offset by the higher current-year cost estimates, including a
contingency allowance.
The proposed annual decommissioning cost accrual of $130 million was
determined using the following assumptions: the decommissioning cost estimate
of $5.4 billion in current-year (1999) dollars, after-tax earnings on the tax-
qualified and nontax-qualified decommissioning funds of 7.49% and 6.83%,
respectively, and an escalation rate for future decommissioning costs of
4.84%. The annual accrual provided over the current NRC license lives of the
nuclear plants, coupled with the expected fund earnings and amounts previously
recovered in rates, is expected to aggregate to approximately $13.8 billion.
For the ten operating nuclear units, decommissioning cost accruals are
recorded as portions of depreciation expense and accumulated provision for
depreciation on the Statements of Consolidated
14
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Operations and the Consolidated Balance Sheets, respectively, as such costs
are recovered through rates. As of March 31, 1999, the total decommissioning
costs included in the accumulated provision for depreciation were $1,938
million.
For ComEd's retired nuclear units, the total estimated liability for nuclear
decommissioning in current-year (1999) dollars is recorded as a liability. The
unrecovered portion of the liability was also recorded as a regulatory asset.
The nuclear decommissioning liability for retired plants as of March 31, 1999
was as follows:
Zion
Dresden Units
Unit 1 1 and 2 Total
-------- -------- ----------
(Thousands of Dollars)
Amounts recovered through rates and investment
fund earnings.................................... $109,810 $429,045 $ 538,855
Unrecovered portion of the liability.............. 207,890 490,555 698,445
-------- -------- ----------
Nuclear decommissioning liability for retired
plants.......................................... $317,700 $919,600 $1,237,300
======== ======== ==========
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts. Consequently, such collections do not add to
the cash flows available for general corporate purposes. The ICC has approved
ComEd's funding plan, which provides for annual contributions of current
accruals and ratable contributions of past accruals over the remaining current
NRC license lives of the nuclear plants. The fair value of funds accumulated
in the external trusts at March 31, 1999 was $2,375 million, which includes
pre-tax unrealized appreciation of $670 million. The earnings on the external
trusts for operating plants accumulate in the fund balance and accumulated
provision for depreciation. Nuclear decommissioning funding as of March 31,
1999 was as follows:
(Thousands of Dollars)
Amounts recovered through rates and investment fund
earnings for operating plants (included in the accumu-
lated provision for depreciation)...................... $1,937,716
Amounts recovered through rates and investment fund
earnings for retired plants............................ 538,855
Less past accruals not yet contributed to the trusts.... 101,663
----------
Fair value of external trust funds..................... $2,374,908
==========
Income Taxes. Deferred income taxes are provided for income and expense
items recognized for financial accounting purposes in periods that differ from
those for income tax purposes. Income taxes deferred in prior years are
charged or credited to income as the book/tax temporary differences reverse.
Prior years' deferred investment tax credits are amortized through credits to
income generally over the lives of the related property. Income tax credits
resulting from interest charges applicable to nonoperating activities,
principally construction, are classified as other income.
AFUDC and Interest Capitalized. In accordance with the uniform systems of
accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC,
compounded semiannually, which represents the estimated cost of funds used to
finance its construction program for the non-generation portion of its
business. The equity component of AFUDC is recorded on an after-tax basis and
the borrowed funds component of AFUDC is recorded on a pre-tax basis. The
average annual capitalization rates were 8.02% and 8.96% for the three months
ended March 31, 1999 and 1998, respectively, and 8.11% and 9.29% for the
twelve months ended March 31, 1999 and 1998, respectively. ComEd discontinued
SFAS No. 71 regulatory accounting practices in December 1997 for the
generation portion of its business, and as a result began capitalizing
interest in 1998. ComEd capitalized $6 million and $2 million for the three
months ended March 31, 1999 and 1998, respectively, and $32 million and $2
million for the twelve months ended March 31, 1999 and 1998,
15
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
respectively, in interest costs on its generation-related construction work in
progress and nuclear fuel in process. AFUDC and interest capitalized do not
contribute to the current cash flow of Unicom or ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations were $165 million and $140 million for the three months ended
March 31, 1999 and 1998, respectively, and $570 million and $584 million for
the twelve months ended March 31, 1999 and 1998, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt of ComEd are being amortized over the lives of the respective
issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from ComEd's reacquisition, in connection with the refinancing of first
mortgage bonds, sinking fund debentures and pollution control obligations
prior to their scheduled maturity dates, is deferred and amortized over the
lives of the long-term debt issued to finance the reacquisition for non-
generation related financings. See "Regulatory Assets and Liabilities" above
and Note 2 for additional information.
Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to
adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure
purposes only. Unicom accounts for its stock option awards and ESPP under APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 for
additional information.
Average Common Shares Outstanding. Unicom adopted SFAS No. 128, Earnings per
Share, which established standards for computing and presenting EPS. Unicom
has presented basic and diluted EPS on the Statements of Consolidated
Operations for the three months and twelve months ended March 31, 1999 and
1998. The number of average outstanding common shares used to compute basic
and diluted EPS for the three months and twelve months ended March 31, 1999
and 1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands of Shares)
Average Number of Common Shares Out-
standing:
Average Number of Common Shares--Ba-
sic.................................. 217,081 216,707 217,036 216,493
Potentially Dilutive Common Shares--
Treasury Method:
Stock Options........................ 614 585 653 320
Other Convertible Securities......... 85 94 85 94
--------- --------- --------- ---------
Average Number of Common Shares--Di-
luted................................ 217,780 217,386 217,774 216,907
========= ========= ========= =========
Energy Risk Management Contracts. In the normal course of business, ComEd
utilizes contracts for the forward sale and purchase of energy to manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap arrangements to limit
the market price risk associated with the forward commodity contracts. As
ComEd does not currently utilize financial or commodity instruments for
trading or speculative purposes, any gains or losses on forward commodity
contracts are recognized when the underlying transactions affect earnings.
Revenues and expenses associated with market price risk management contracts
are amortized over the terms of such contracts.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards requiring that
16
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
every derivative instrument, including certain derivative instruments embedded
in other contracts, be recorded on the Consolidated Balance Sheets as either
an asset or liability measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings,
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item on the Statements of Consolidated Operations, and
requires Unicom and ComEd to formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
SFAS No. 133 may be implemented prior to June 15, 1999, but such
implementation cannot be applied retroactively. SFAS No. 133 must be applied
to (i) derivative instruments and (ii) certain derivative instruments embedded
in hybrid contracts that were issued, acquired, or substantively modified
after December 31, 1997 (and, at the company's election, before January 1,
1998).
Unicom and ComEd have not yet quantified the effects on their financial
statements of adopting SFAS No. 133 and have not determined the timing or
method of adopting SFAS No. 133. However, adoption of SFAS No. 133 could
increase volatility in earnings and other comprehensive income.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on operating results.
Cash Held for Redemption of Securities. This Consolidated Balance Sheets
line item includes the unused cash proceeds of approximately $597 million
resulting from the issuance of the transitional trust notes and $164 million
of pending instrument funding charges collected from ComEd customers to secure
payment of the principal and interest on the transitional trust notes, as of
March 31, 1999. See Note 2 for additional information.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months and
twelve months ended March 31, 1999 and 1998 was as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands of Dollars)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capital-
ized)............................ $ 161,651 $ 154,881 $475,122 $ 506,003
Income taxes (net of refunds)..... $ (25,921) $ -- $ 246,555 $ 258,803
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Capital lease obligations incurred
by subsidiary companies............ $ 1,162 $ 17,996 $ 89,537 $ 130,011
(2) Accounting Effects Related to the 1997 Act. In December 1997, the
Governor of Illinois signed into law the 1997 Act, which established a phased
process to introduce competition into the electric industry in Illinois under
a less regulated structure. Major provisions of the 1997 Act applicable to
ComEd include a 15% residential base rate reduction which became effective
August 1, 1998, an additional 5% residential base rate reduction commencing on
May 1, 2002 and gradual customer access to other electric suppliers. Access
for commercial and industrial customers will occur over a period from October
1999 to December 2000, and access for residential customers will occur after
May 1, 2002. ComEd's operating revenues were reduced by approximately $170
million in 1998 due to the rate reduction. ComEd expects that the 15%
residential base rate reduction will
17
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
reduce ComEd's operating revenues by approximately $380 million in 1999,
compared to 1997 rate levels. ComEd's operating revenues were reduced by
approximately $90 million for the first quarter of 1999 for the residential
rate reduction.
As a result of the 1997 Act and FERC rules, prices for the supply of
electric energy are expected to change from cost-based, regulated rates to
rates determined by competitive market forces. Accordingly, the 1997 Act
provides for the collection of a CTC from customers who choose another
electric service provider during a transition period that extends through
2006, and can be extended through 2008 with ICC approval. The CTC will be
established in accordance with a formula defined in the 1997 Act. The CTC,
which will be applied on a cents per kilowatthour basis, considers the revenue
which would have been collected from a customer under tariffed rates, reduced
by the revenue the utility will receive for providing delivery services to the
customer, the market price for electricity and a defined mitigation factor,
which represents the utility's opportunity to develop new revenue sources and
achieve cost savings. The CTC allows ComEd to recover some of its costs which
might otherwise be unrecoverable under market-based rates. Nonetheless, ComEd
will need to take steps to address the portion of such costs which are not
recoverable through the CTC. Such steps may include cost control efforts,
developing new sources of revenue and asset dispositions. See Note 4 for
additional information.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. A utility may
request a rate increase during the rate freeze period only when necessary to
ensure the utility's financial viability, but not before January 1, 2000.
Under the earnings provision of the 1997 Act, if the earned return on common
equity of a utility during this period exceeds an established threshold, one-
half of the excess earnings must be refunded to customers. The threshold rate
of return on common equity is based on the 30-Year Treasury Bond rate, plus
5.5% in the years 1998 through 1999 and plus 6.5% in the years 2000 through
2004. The utility's earned return on common equity and the threshold return on
common equity are each calculated on a two-year average basis. The earnings
sharing provision is applicable only to utility earnings. Increased
amortization of regulatory assets may be recorded, thereby reducing the earned
return on common equity, if earnings otherwise would have exceeded the maximum
allowable rate of return. The potential for earnings sharing or increased
amortization of regulatory assets could limit earnings in future periods.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based,
regulated rates. On March 1, 1999, ComEd filed with the ICC its Non-
Residential Delivery Services Implementation Plan and associated tariffs for
the provision of delivery and other services related to ComEd's implementation
for retail open access, as called for by the 1997 Act. The ICC is required to
issue a final order in the third quarter of 1999.
The 1997 Act also allows a portion of ComEd's future revenues to be
segregated and used to support the issuance of securities by ComEd or a SPE.
The proceeds, net of transaction costs, from such securities issuances must be
used to refinance outstanding debt and equity or for certain other limited
purposes. The total amount of such securities that may be issued is
approximately $6.8 billion; approximately one-half of that amount can be
issued in the twelve-month period which commenced
18
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
on August 1, 1998. In December 1998, ComEd initiated the issuance of $3.4
billion of transitional trust notes through its SPEs, ComEd Funding and ComEd
Funding Trust. The proceeds from the transitional trust notes, net of
transaction costs, must be used to redeem or repurchase debt and equity to
lower ComEd's overall cost of capital. Accordingly, in early 1999 ComEd
redeemed $788 million of long-term debt and $534 million of preference stock,
and reacquired $229 million of outstanding ComEd long-term debt through a
tender offer. In addition, $500 million of the proceeds was used to reduce
ComEd's outstanding short-term debt. In the first quarter of 1999, ComEd
recorded an extraordinary loss related to the early redemptions and the tender
offer of the above-mentioned first mortgage bonds and sinking fund debentures,
which reduced net income on common stock by approximately $27 million (after-
tax), or $0.13 per common share. ComEd also recorded $10 million (after-tax),
or $0.04 per common share, for premiums paid in connection with the redemption
of the above-mentioned preference stock. The preference stock premiums were
included in the provision for dividends for preference stocks of ComEd on the
Statements of Consolidated Operations. Unicom has announced plans to
repurchase approximately $750 million of Unicom common stock using the
proceeds it receives from ComEd's repurchase of its common stock held by
Unicom. The remaining proceeds will be used for the payment of fees and
additional debt and equity redemptions. See Note 6 for additional information
regarding Unicom's share repurchase plans.
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, certain generation-related regulatory
assets and liabilities were written off in the fourth quarter of 1997,
resulting in an extraordinary charge of $810 million (after-tax), or $3.75 per
common share (diluted). The fourth quarter of 1997 also reflected charges
totaling $44 million (after-tax), or $0.20 per common share (diluted), as a
result of ComEd's elimination of its FAC pursuant to an option in the 1997
Act, and a charge of $60 million (after-tax), or $0.28 per common share
(diluted), for a write down of ComEd's investment in uranium-related
properties to realizable value. Projections of the market price for uranium
indicated that the expected incremental costs of mining and milling uranium at
the properties would exceed the expected market price for uranium and such
cost are not expected to be recoverable in a competitive market.
The 1997 Act also requires utilities to establish or join an ISO that will
independently manage and control utility transmission systems. Additionally,
the 1997 Act includes the leveling of certain regulatory requirements to
permit operational flexibility, the leveling of certain regulatory and tax
provisions as applied to various electric suppliers and a new, more stringent,
liability standard applicable to ComEd in the event of a major outage.
(3) Rate Matters. Final ICC orders have been issued in fuel reconciliation
proceedings related to ComEd's FAC collections for all years. During the
fourth quarter of 1998, the ICC issued an order in the proceeding for the year
1994 providing for a refund of approximately $3 million and an order for the
1996 fuel reconciliation proceeding requiring ComEd to refund approximately
$19 million. Both orders were related to nuclear station performance. Both
refunds were made in the first quarter of 1999. The 1997 Act provides that,
because ComEd eliminated its FAC effective January 1, 1997, the ICC shall not
conduct a fuel reconciliation proceeding for the year 1997 and subsequent
years. See Note 2 for information regarding the 1997 Act and the elimination
of ComEd's FAC.
19
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Three of ComEd's wholesale municipal customers filed a complaint and request
for refund with the FERC alleging that ComEd failed to properly adjust their
rates, as provided for under the terms of their electric service contracts, to
track certain refunds made to ComEd's retail customers in the years 1992
through 1994. In the third quarter of 1998, the FERC granted the complaint and
directed that refunds be made, with interest. ComEd filed and was granted a
request for rehearing for purposes of reconsideration with the FERC. If the
order is upheld, ComEd must make refunds within 15 days of the resolution for
rehearing. ComEd's management believes an adequate reserve has been
established in connection with this case.
(4) Closure and Sale of Plants. In January 1998, the Boards of Directors of
Unicom and ComEd authorized the permanent cessation of nuclear generation
operations and retirement of facilities at ComEd's 2,080 megawatt Zion nuclear
generating station. Such retirement resulted in a charge in the fourth quarter
of 1997 of $523 million (after-tax), or $2.42 per common share (diluted).
The write-off included a liability for future closing costs associated with
the retirement of Zion Station, excluding severance costs, resulting in a
charge of $117 million (after-tax). ComEd recorded a reduction to the
liability for future closing costs of $15 million (after-tax), or $0.07 per
common share (diluted), in the year 1998 to reflect lower than expected
closing costs due to employees being reassigned or removed from the payroll
sooner than expected, and lower than anticipated support costs and use of
contractors. See Note 16 for information regarding costs of voluntary employee
separation plans.
ComEd completed the sale of two of its coal-fired generating stations,
representing 1,598 megawatts of generating capacity, and has exclusive 15-year
purchased power agreements for the output of the stations. The sales of State
Line and Kincaid Stations were completed in December 1997 and February 1998,
respectively. The net proceeds of the sales, after income tax effects and
closing costs, were approximately $190 million. The proceeds were used to
retire or redeem existing debt in the first quarter of 1998.
On March 22, 1999, ComEd entered into an Asset Sale Agreement providing for
the sale of substantially all of the assets of its fossil plants to EME for a
cash purchase price of $4.813 billion. The fossil plants represent an
aggregate generating capacity of approximately 9,772 megawatts. Completion of
the sale is subject to certain regulatory filings and approvals and is
expected to occur during the fourth quarter of 1999.
Just prior to the consummation of the sale of the fossil plants, ComEd
expects to transfer these assets to Unicom Investment. In consideration for
the transferred assets, Unicom Investment will pay ComEd consideration
totaling $4.813 billion in the form of a Demand Note in the amount of
approximately $2.350 billion and an interest-bearing Note with a maturity of
twelve years. Unicom Investment will immediately sell the fossil plants to
EME, in consideration of which Unicom Investment will receive $4.813 billion
in cash from EME. Immediately after its receipt of the cash payment from EME,
Unicom Investment will pay the $2.350 billion aggregate principal due to ComEd
under the Demand Note. Unicom Investment will use the remainder of the cash
received from EME to fund other business opportunities. Of the cash received
by ComEd, $1.68 billion is expected to be used to pay the costs and taxes
associated with the sale of the fossil plants. The remainder of such receipt
will be available to ComEd to fund, among other things, transmission and
distribution projects, nuclear generation station projects, and environmental
and other initiatives.
20
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The sale is expected to produce an after-tax gain of approximately $1.7
billion, after settling commitments associated with certain coal contracts and
recognizing employee-related costs. Additionally, certain of the funding
initiatives contemplated with the proceeds received by ComEd could reduce the
gain by up to $150 million (after-tax). The gain on the sale, after reflecting
the effects of the funding initiatives, will be utilized to recover certain
regulatory assets and as a result, the sale is not expected to have a
significant impact on net income in 1999. See Note 1, under "Regulatory Assets
and Liabilities," for additional information.
As part of the sale transaction, ComEd will enter into transitional power
purchase agreements with the buyer. The agreement regarding the coal-fired
units would cover a declining number of generating units over a five-year
term, subject to an option in favor of ComEd to restore some or all of the
units in later years of the agreement. The agreements regarding the oil and
gas-fired plant and the peaking units cover the entire capacity of such
generating units for a five-year term, subject to ComEd's option commencing in
year three to terminate the agreements as to some or all of the generating
units. The options will provide some flexibility to ComEd to adjust its power
purchase needs to match its obligations to its customers during the transition
period to open access for customers. Each of the agreements provides for a
monthly capacity charge, based upon the capacity of the generating units under
contract and subject to adjustment based upon the availability of those
generating units, as well as charges for delivered energy.
(5) Authorized Shares, Voting Rights and Stock Rights of Capital Stock. At
March 31, 1999, 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, 1999 were: preference stock--10,510,451 shares; $1.425
convertible preferred stock--58,003 shares; and prior preferred stock--850,000
shares. The preference and prior preferred stocks are issuable in series and
may be issued with or without mandatory redemption requirements. Holders of
outstanding Unicom shares are entitled to one vote for each share held on each
matter submitted to a vote of such shareholders; and holders of outstanding
ComEd shares are entitled to one vote for each share held on each matter
submitted to a vote of such shareholders. All such shares have the right to
cumulate votes in elections for the directors of the corporation which issued
the shares.
Pursuant to a plan adopted by the Unicom Board of Directors on February 2,
1998, each share of Unicom's common stock carries the right (referred to
herein as a "Right") to purchase one-thousandth of one share of Unicom's
common stock at a purchase price of $100 per whole share of common stock,
subject to adjustment. The Rights are tradable only with Unicom's common stock
until they become exercisable. The Rights become exercisable upon the earlier
of ten days following a public announcement that a person (an "Acquiring
Person") has acquired 15% or more of Unicom's outstanding common stock or ten
business days (or such later date as may be determined by action of the Board
of Directors) following the commencement of a tender or exchange offer which,
if consummated, would result in a person or group becoming an Acquiring
Person. The Rights are subject to redemption by Unicom at a price of $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
21
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
earning power is sold or transferred, each holder of a Right shall then have
the right to receive, upon exercise, common stock of the acquiring company at
a 50% discount from the then current market price of such common stock. Rights
held by an Acquiring Person become void upon the occurrence of such events.
(6) Common Equity. In the fourth quarter of 1998, Unicom entered into a
forward purchase arrangement for the repurchase of $200 million of its common
stock. This contract, which was accounted for as an equity instrument as of
December 31, 1998, was settled on a net cash basis in February 1999, resulting
in a $16 million reduction to common stock equity on the Consolidated Balance
Sheets.
In February 1999, Unicom also entered into a prepaid forward purchase
agreement with a financial institution for the repurchase of approximately 15
million shares of Unicom common stock. This forward purchase arrangement was
amended to also include the repurchase of approximately 5.1 million shares for
a total of 20.1 million shares, subsequent to the net cash settlement of the
$200 million repurchase program, as described above. The repurchase
arrangement, as amended, provides for final settlement no later than February
2000, on either a physical (share) basis, or a net cash basis. The amount at
which the arrangement can be settled is dependent principally upon the average
market price at which the financial institution purchases such shares,
compared to the forward price per share. The share repurchases will not reduce
shares outstanding for purposes of EPS calculations or reduce common stock
equity, and resulting return on common equity calculations, until the date of
physical settlement. Unicom does not currently anticipate that settlement will
occur in 1999. The repurchase arrangement has been recorded as a receivable on
the Consolidated Balance Sheets and will be adjusted at the end of each
reporting period to reflect the aggregate market value of the shares
deliverable under the arrangement. Consequently, the arrangement could
increase earnings volatility in 1999. In the first quarter of 1999, an
unrealized gain of $14 million (after-tax), or $0.06 per common share
(diluted), related to the arrangement was recorded.
At March 31, 1999, shares of Unicom common stock were reserved for the
following purposes:
Long-Term Incentive Plan........................................ 2,534,451
Employee Stock Purchase Plan.................................... 413,297
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 88,945
1996 Directors' Fee Plan........................................ 165,736
---------
3,602,429
=========
22
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Common stock for the three months and twelve months ended March 31, 1999 and
1998 was issued as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Shares of Common Stock Issued:
Long-Term Incentive Plan.......... 148,813 174,287 468,828 337,247
Employee Stock Purchase Plan...... -- -- 94,270 196,003
Employee Savings and Investment
Plan............................. -- -- -- 71,503
Exchange for ComEd common stock
not held by Unicom............... (3,749) 3,477 5,531 9,178
1996 Directors' Fee Plan.......... 2,244 4,074 10,903 14,300
--------- --------- --------- ---------
147,308 181,838 579,532 628,231
========= ========= ========= =========
(Thousands of Dollars)
Changes in Common Stock Accounts:
Total shares issued............... $ 681 $ 4,198 $ 13,330 $ 14,239
Net cash settlement of forward
share repurchase contract........ (16,454) -- (16,454) --
Shares held by trustee for Unicom
Stock Bonus Deferral Plan........ -- (1,997) 8,772 (2,129)
Other............................. 145 25 (83) (15)
--------- --------- --------- ---------
$ (15,628) $ 2,226 $ 5,565 $ 12,095
========= ========= ========= =========
As of March 31, 1999 and December 31, 1998, 264,406 shares and 178,982
shares, respectively, of Unicom common stock were reacquired and held as
treasury stock at a cost of $10 million and $7 million, respectively.
At March 31, 1999 and December 31, 1998, 75,976 and 76,079, respectively, of
ComEd common stock purchase warrants were outstanding. The warrants entitle
the holders to convert such warrants into common stock of ComEd at a
conversion rate of one share of common stock for three warrants.
As of March 31, 1999 and December 31, 1998, $477 million and $494 million,
respectively, of retained earnings had been appropriated for future dividend
payments.
(7) Stock Option Awards/Employee Stock Purchase Plan. Unicom has a
nonqualified stock option awards program under its Long-Term Incentive Plan.
The stock option awards program was adopted by Unicom in July 1996 to reward
valued employees responsible for, or contributing to, the management, growth
and profitability of Unicom and its subsidiaries. The stock options granted
expire ten years from their grant date. One-third of the shares subject to the
options vest 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.
23
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Stock option transactions through March 31, 1999 are summarized as follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Outstanding as of January 1, 1997................... 1,188,000 $25.500
Granted during the year............................. 1,339,350 22.313
Exercised during the year........................... (23,423) 25.500
Expired/cancelled during the year................... (212,549) 23.632
---------
Outstanding as of December 31, 1997................. 2,291,378 23.810
Granted during the year............................. 1,379,525 35.234
Exercised during the year........................... (404,082) 24.244
Expired/cancelled during the year................... (123,928) 25.715
---------
Outstanding as of December 31, 1998................. 3,142,893 28.694
Granted during the first quarter.................... 1,711,050 35.750
Exercised during the first quarter.................. (26,055) 24.382
Expired/cancelled during the first quarter.......... (39,196) 31.731
---------
Outstanding as of March 31, 1999.................... 4,788,692 31.213
=========
Of the stock options outstanding at March 31, 1999, 1,023,460 have vested
with a weighted average exercise price of $25.094.
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
Stock Option Grant Date
---------------------------
1999 1998 1997
------- ------- -------
Expected option life.............................. 7 years 7 years 7 years
Dividend yield.................................... 4.50% 4.54% 7.20%
Expected volatility............................... 23.02% 21.95% 22.29%
Risk-free interest rate........................... 4.83% 5.58% 6.25%
The estimated weighted average fair value for each stock option granted in
the first quarter of 1999 and in the years 1998 and 1997 was $6.48, $6.62, and
$2.79, respectively.
The ESPP allows employees to purchase Unicom common stock at a 10% discount
from market value. Substantially all of the employees of Unicom, ComEd and
certain subsidiaries are eligible to participate in the ESPP. Unicom issued
94,270 shares and 196,003 shares of common stock for the twelve months ended
March 31, 1999 and 1998, respectively, under the ESPP at a weighted average
annual purchase price of $33.11 and $19.15, 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 $3 million (after-tax), or
$0.01 per common share (diluted), and $2 million (after-tax), or $0.01 per
common share (diluted), for the twelve months ended March 31, 1999 and 1998,
respectively.
(8) ComEd Preferred and Preference Stocks Without Mandatory Redemption
Requirements. During the twelve months ended March 31, 1999, 10,499,549 shares
of preferred or preference stock
24
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
without mandatory redemption requirements were redeemed and no shares were
issued. No shares of ComEd preferred or preference stocks without mandatory
redemption requirements were issued or redeemed during the twelve months ended
March 31, 1998. There are 3,000,000 shares of Series $2.425 preference stock
outstanding at March 31, 1999, at an aggregate stated value of $73 million
with a redemption price and involuntary liquidation price of $25 per share
plus accrued and unpaid dividends, if any.
The outstanding shares of ComEd's $1.425 convertible preferred stock are
convertible at the option of the holders thereof, at any time, into common
stock of ComEd at the rate of 1.02 shares of common stock for each share of
convertible preferred stock, subject to future adjustment. The convertible
preferred stock may be redeemed by ComEd at $42 per share, plus accrued and
unpaid dividends, if any. The involuntary liquidation price of the $1.425
convertible preferred stock is $31.80 per share, plus accrued and unpaid
dividends, if any.
(9) ComEd Preference Stock Subject to Mandatory Redemption Requirements.
During the twelve months ended March 31, 1999 and 1998, no shares of ComEd
preference stock subject to mandatory redemption requirements were issued.
During the twelve months ended March 31, 1999 and 1998, 1,358,560 shares and
438,215 shares, respectively, of ComEd preference stock subject to mandatory
redemption requirements were reacquired to meet sinking fund requirements or
were part of the early redemption in January 1999. There are 700,000 shares of
Series $6.875 preference stock outstanding at March 31, 1999, at an aggregate
stated value of $69 million. This series is non-callable and is required to be
redeemed on May 1, 2000. The sinking fund price is $100 and the involuntary
liquidation price is $99.25 per share plus accrued and unpaid dividends, if
any.
Sinking fund requirements due within one year are included in current
liabilities.
(10) ComEd-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities. In
September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd,
issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred
securities. The sole asset of ComEd Financing I is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust
of ComEd, issued 150,000 of its 8.50% ComEd-obligated mandatorily redeemable
capital securities. The sole asset of ComEd Financing II is $154.6 million
principal amount of ComEd's 8.50% subordinated deferrable interest debentures
due January 15, 2027. There is a full and unconditional guarantee by ComEd of
the Trusts' obligations under the securities issued by the Trusts. However,
ComEd's obligations are subordinate and junior in right of payment to certain
other indebtedness of ComEd. ComEd has the right to defer payments of interest
on the subordinated deferrable interest notes by extending the interest
payment period, at any time, for up to 20 consecutive quarters. Similarly,
ComEd has the right to defer payments of interest on the subordinated
deferrable interest debentures by extending the interest payment period, at
any time, for up to ten consecutive semi-annual periods. If interest payments
on the subordinated deferrable interest notes or debentures are so deferred,
distributions on the preferred securities will also be deferred. During any
deferral, distributions will continue to accrue with interest thereon. In
addition, during any such deferral, ComEd may not declare or pay any dividend
or other distribution on, or redeem or purchase, any of its capital stock.
The subordinated deferrable interest notes are redeemable by ComEd, in whole
or in part, from time to time, on or after September 30, 2000, and with
respect to the subordinated deferrable interest
25
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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.
(11) Long-Term Debt. ComEd initiated the issuance of $3.4 billion of
transitional trust notes through its SPEs, ComEd Funding and ComEd Funding
Trust, in the fourth quarter of 1998, as follows:
Series Principal Amount
------------------------ ----------------------
(Thousands of Dollars)
5.38% due March 25, 2000........................... $ 424,967
5.29% due June 25, 2001............................ 425,033
5.34% due March 25, 2002........................... 258,861
5.39% due June 25, 2003............................ 421,139
5.44% due March 25, 2005........................... 598,511
5.63% due June 25, 2007............................ 761,489
5.74% due December 25, 2008........................ 510,000
----------
$3,400,000
==========
For accounting purposes, the liabilities of ComEd Funding Trust for the
transitional trust notes are reflected as long-term debt on the Consolidated
Balance Sheets of Unicom and ComEd.
The proceeds, net of transaction costs, from the transitional trust notes
must be used to redeem debt and equity. During the first quarter of 1999,
ComEd redeemed or reacquired $959 million of first mortgage bonds and $58
million of sinking fund debentures.
Sinking fund requirements and scheduled maturities remaining through 2003
for ComEd's first mortgage bonds, transitional trust notes, sinking fund
debentures and other long-term debt outstanding at March 31, 1999, after
deducting deposits made for the retirement of sinking fund debentures, are
summarized as follows: 1999--$478 million; 2000--$727 million; 2001--$346
million; 2002--$645 million; and 2003--$445 million. Unicom Enterprises' note
payable to bank of $120 million will mature in 1999.
At March 31, 1999, ComEd's outstanding first mortgage bonds maturing through
2003 were as follows:
Series Principal Amount
------------------------ ----------------------
(Thousands of Dollars)
9 3/8% due February 15, 2000....................... $ 42,345
6 1/2% due April 15, 2000.......................... 230,000
6 3/8% due July 15, 2000........................... 100,000
7 3/8% due September 15, 2002...................... 200,000
6 5/8% due July 15, 2003........................... 100,000
----------
$ 672,345
==========
26
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Other long-term debt outstanding at March 31, 1999 is summarized as follows:
Principal
Debt Security Amount Interest Rate
- --------------- ---------- ---------------------------------------------------
(Thousands
of
Dollars)
Unicom--
Loans Payable:
Loan due Janu-
ary 1, 2003 $ 5,519 Interest rate of 8.31%
Loan due Janu-
ary 1, 2004 6,371 Interest rate of 8.44%
----------
$ 11,890
----------
ComEd--
Notes:
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%
Notes due July
15, 2018 225,000 Interest rate of 6.95%
----------
$1,056,000
----------
Purchase Con-
tract Obliga-
tion
due April 30,
2005 $ 300 Interest rate of 3.00%
----------
Total ComEd $1,056,300
----------
Unicom Enter-
prises--
Long-Term Note
Payable to
Bank
due November
15, 1999 $ 120,000 Prevailing interest rate of 5.87% at March 31, 1999
----------
Unicom Ther-
mal--
Guaranteed
Senior Note
due May 30,
2012 $ 120,000 Interest rate of 7.38%
----------
Total Unicom $1,308,190
==========
Long-term debt maturing within one year has been included in current
liabilities.
ComEd's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by ComEd.
In July 1998, Unicom Thermal issued a $120 million 7.38% unsecured
guaranteed senior Note due May 2012, the proceeds of which were used to
refinance existing debt. The Note is guaranteed by Unicom and includes certain
covenants with respect to Unicom and Unicom Thermal's operations. Such
covenants include, among other things, (i) a requirement that Unicom and its
consolidated subsidiaries maintain a tangible net worth at least $10 million
greater than that of ComEd and its consolidated subsidiaries, (ii) a
requirement that Unicom's consolidated debt to consolidated capitalization not
exceed 0.65 to 1, (iii) restrictions on the indebtedness for borrowed money
that Unicom Thermal may incur, and (iv) a requirement that Unicom own,
directly or indirectly, 51% of the outstanding stock of Unicom Thermal and at
least 80% of the outstanding stock of ComEd.
(12) Lines of Credit. ComEd had total unused bank lines of credit of $1
billion at March 31, 1999. Of that amount, $500 million expires on October 7,
1999 and $500 million expires on October 8, 2003. The interest rate is set at
the time of a borrowing and is based on several floating rate bank indices
27
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
plus a spread, which is dependent upon the credit rating of ComEd's
outstanding first mortgage bonds or on a prime interest rate. ComEd is
obligated to pay commitment fees with respect to the unused portion of such
lines of credit.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $80 million was unused as of March 31, 1999. The
credit facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings and Unicom Energy
Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Such covenants include, among other things,
(i) a requirement that Unicom and its consolidated subsidiaries maintain a
tangible net worth at least $10 million over that of ComEd and its
consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt
to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the
indebtedness for borrowed money that Unicom (excluding ComEd) and Unicom
Enterprises may incur, and (iv) a requirement that Unicom own 100% of the
outstanding stock of Unicom Enterprises and at least 80% of the outstanding
stock of ComEd; and provide that Unicom may not declare or pay dividends
during the continuance of an event of default. Interest rates for borrowings
under the credit facility are set at the time of a borrowing and are based on
either a prime interest rate or a floating rate bank index plus a spread which
varies with the credit rating of ComEd's outstanding first mortgage bonds.
Unicom Enterprises is obligated to pay commitment fees with respect to the
unused portion of such lines of credit.
(13) Disposal of Spent Nuclear Fuel. Under the Nuclear Waste Policy Act of
1982, the DOE is responsible for the selection and development of repositories
for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
ComEd, as required by that Act, has signed a contract with the DOE to provide
for the disposal of spent nuclear fuel and high-level radioactive waste from
ComEd's nuclear generating stations.The contract with the DOE requires ComEd
to pay the DOE a one-time fee applicable to nuclear generation through April
6, 1983 of $277 million, with interest to date of payment, and a fee payable
quarterly equal to one mill per kilowatthour of nuclear-generated and sold
electricity after April 6, 1983. Pursuant to the contract, ComEd has elected
to pay the one-time fee, with interest, just prior to the first delivery of
spent nuclear fuel to the DOE. The liability for the one-time fee and the
related interest is reflected on the Consolidated Balance Sheets. That
contract also provided for acceptance by the DOE of such materials to begin in
January 1998; however, that date was not met by the DOE and is expected to be
delayed significantly. The DOE's current estimate for opening a facility to
accept such waste is 2010. This extended delay in spent nuclear fuel
acceptance by the DOE has led to ComEd's consideration of additional dry
storage alternatives. On July 30, 1998, ComEd filed a complaint against the
United States in the United States Court of Federal Claims seeking to recover
damages caused by the DOE's failure to honor its contractual obligation to
begin disposing of spent nuclear fuel in January 1998.
(14) Fair Value of Financial Instruments. The following methods and
assumptions were used to estimate the fair value of financial instruments
either held or issued and outstanding. The disclosure of such information does
not purport to be a market valuation of Unicom and subsidiary companies as a
whole. The impact of any realized or unrealized gains or losses related to
such financial instruments on the financial position or results of operations
of Unicom and subsidiary companies is primarily dependent on the treatment
authorized under future ComEd ratemaking proceedings.
28
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, 1999 and
December 31, 1998 was as follows:
March 31, 1999 December 31, 1998
-------------------------------- --------------------------------
Unrealized Unrealized
Cost Basis Gains Fair Value Cost Basis Gains Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Short-term investments. $ 51,344 $ 59 $ 51,403 $ 40,907 $ 42 $ 40,949
U.S. Government and
Agency issues......... 194,188 11,103 205,291 197,240 20,213 217,453
Municipal bonds........ 406,328 20,033 426,361 416,121 24,124 440,245
Corporate bonds........ 187,341 2,308 189,649 241,111 8,790 249,901
Common stock........... 732,729 629,128 1,361,857 740,956 565,630 1,306,586
Other.................. 133,063 7,284 140,347 11,345 838 12,183
---------- -------- ---------- ---------- -------- ----------
$1,704,993 $669,915 $2,374,908 $1,647,680 $619,637 $2,267,317
========== ======== ========== ========== ======== ==========
At March 31, 1999, the debt securities held by the nuclear decommissioning
funds had the following maturities:
Cost Basis Fair Value
----------- -----------
(Thousands of Dollars)
Within 1 year................................... $ 39,331 $ 39,239
1 through 5 years............................... 217,807 222,968
5 through 10 years.............................. 247,912 260,579
Over 10 years................................... 428,654 445,793
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, 1999 and 1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- -----------
(Thousands of Dollars)
Gross proceeds from sales of securi-
ties............................... $ 385,688 $ 428,003 $1,753,169 $ 2,020,756
Less cost based on specific identi-
fication........................... 382,027 394,333 1,715,785 1,925,126
--------- --------- ---------- -----------
Realized gains on sales of securi-
ties............................... $ 3,661 $ 33,670 $ 37,384 $ 95,630
Other realized fund earnings net of
expenses........................... 10,574 3,614 47,337 34,267
--------- --------- ---------- -----------
Total realized net earnings of the
funds.............................. $ 14,235 $ 37,284 $ 84,721 $ 129,897
Unrealized gains.................... 50,278 114,038 126,743 326,836
--------- --------- ---------- -----------
Total net earnings of the funds.... $ 64,513 $ 151,322 $ 211,464 $ 456,733
========= ========= ========== ===========
Current Assets. Cash, temporary cash investments, cash held for redemption
of securities and other cash investments, which include U.S. Government
obligations and other short-term marketable securities, and special deposits,
which primarily includes cash deposited for the redemption, refund or
discharge of debt securities, are stated at cost, which approximates their
fair value because of the short maturity of these instruments. The securities
included in these categories have been classified as "available for sale"
securities.
Capitalization. The estimated fair values of ComEd preferred and preference
stocks, ComEd- obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely ComEd's subordinated debt securities,
transitional trust notes, and long-term debt were obtained from an
29
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
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, 1999 and December 31, 1998 were as
follows:
March 31, 1999 December 31, 1998
-------------------------------- --------------------------------
Unrealized
Carrying Losses/ Carrying Unrealized
Value (Gains) Fair Value Value Losses Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
ComEd preferred and
preference stocks...... $ 143,957 $ 4,536 $ 148,493 $ 678,156 $ 11,500 $ 689,656
ComEd-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely ComEd's
subordinated debt
securities............. $ 350,000 $ 24,652 $ 374,652 $ 350,000 $ 20,678 $ 370,678
Transitional trust
notes.................. $3,383,973 $(13,027) $3,370,946 $3,382,821 $ 67,168 $3,449,989
Long-term debt.......... $4,901,374 $311,788 $5,213,162 $5,911,757 $451,240 $6,362,997
Long-term notes payable, which are not included in the above table, amounted
to $132 million and $100 million at March 31, 1999 and December 31, 1998,
respectively. Such notes, for which interest is paid at fixed and prevailing
rates, are included in the consolidated financial statements at cost, which
approximates their fair value.
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
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, 1999 and December 31, 1998; therefore, the carrying value is equal
to the fair value.
(15) Pension and Postretirement Benefits. As of March 31, 1999, ComEd had a
qualified non-contributory defined benefit pension plan which covers all
regular employees of ComEd and certain of Unicom's subsidiaries. Benefits
under this plan reflect each employee's compensation, years of service and age
at retirement. Funding is based upon actuarially determined contributions that
take into account the amount deductible for income tax purposes and the
minimum contribution required under the Employee Retirement Income Security
Act of 1974, as amended. The March 31, 1999 and December 31, 1998 pension
liabilities and related data were determined using the January 1, 1998
actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental
retirement plan which covers any excess pension benefits that would be payable
to management employees under the qualified plan but which are limited by the
Internal Revenue Code. In 1998, Indiana Company's qualified defined benefit
pension plan was merged into ComEd's pension plan as a result of the sale of
Indiana Company's State Line Station and the transfer of its remaining
employees to ComEd.
ComEd, Indiana Company and certain of Unicom's subsidiaries provide certain
postretirement medical, dental and vision care, and life insurance for
retirees and their dependents and for the surviving dependents of eligible
employees and retirees. The employees become eligible for postretirement
benefits when they reach age 55 with ten years of service. The liability for
postretirement benefits is funded through trust funds based upon actuarially
determined contributions that take into account the amount deductible for
income tax purposes. The health care plans are contributory, funded jointly by
the companies and the participating retirees. The March 31, 1999 and December
31, 1998 postretirement benefit liabilities and related data were determined
using the January 1, 1998 actuarial valuations.
30
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Reconciliations of the beginning and ending balances of the projected
pension benefit obligation and the accumulated postretirement benefit
obligation and the funded status of these plans for the three months ended
March 31, 1999 and the twelve months ended December 31, 1998 are as follows:
Three Months Ended Twelve Months Ended
March 31, 1999 December 31, 1998
-------------------------- --------------------------
Other Other
Pension Postretirement Pension Postretirement
Benefits Benefits Benefits Benefits
---------- -------------- ---------- --------------
(Thousands of Dollars)
Change in benefit
obligation
- -----------------
Benefit obligation at
beginning of period.... $4,327,000 $1,249,000 $4,010,000 $1,139,000
Service cost............ 31,000 10,000 115,000 38,000
Interest cost........... 71,000 21,000 273,000 78,000
Plan participants' con-
tributions............. -- 1,000 -- 3,000
Actuarial loss.......... -- -- 166,000 38,000
Benefits paid........... (57,000) (12,000) (237,000) (47,000)
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,372,000 $1,269,000 $4,327,000 $1,249,000
---------- ---------- ---------- ----------
Change in plan assets
- ---------------------
Fair value of plan as-
sets at beginning of
period................. $4,015,000 $ 865,000 $3,706,000 $ 767,000
Actual return on plan
assets................. 47,000 10,000 535,000 122,000
Employer contribution... -- -- 11,000 20,000
Plan participants' con-
tributions............. -- 1,000 -- 3,000
Benefits paid........... (57,000) (12,000) (237,000) (47,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $4,005,000 $ 864,000 $4,015,000 $ 865,000
---------- ---------- ---------- ----------
Plan assets less than
benefit obligation..... $ (367,000) $ (405,000) $ (312,000) $ (384,000)
Unrecognized net actuar-
ial loss (gain)........ 79,000 (346,000) 37,000 (358,000)
Unrecognized prior serv-
ice cost (asset)....... (59,000) 47,000 (60,000) 48,000
Unrecognized transition
obligation (asset)..... (98,000) 317,000 (101,000) 323,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (445,000) $ (387,000) $ (436,000) $ (371,000)
========== ========== ========== ==========
The assumed discount rate used to determine the benefit obligation as of
March 31, 1999 and December 31, 1998 was 6.75%. The fair value of pension plan
assets excludes $22 million and $21 million held in grantor trust as of March
31, 1999 and December 31, 1998, respectively, for the payment of benefits
under the supplemental plan.
31
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of pension and other postretirement benefit costs, portions
of which were recorded as components of construction costs, for the three
months and twelve months ended March 31, 1999 and 1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- --------------------
1999 1998 1999 1998
Pension Benefit Costs --------- --------- --------- ---------
- --------------------- (Thousands of Dollars)
Service cost...................... $ 31,000 $ 31,000 $ 115,000 $ 106,000
Interest cost on projected benefit
obligation....................... 71,000 70,000 274,000 266,000
Expected return on plan assets.... (90,000) (86,000) (346,000) (318,000)
Amortization of transition asset.. (3,000) (3,000) (12,000) (13,000)
Amortization of prior service as-
set.............................. (1,000) (1,000) (4,000) (4,000)
Recognized loss................... 1,000 -- 3,000 2,000
Curtailment gain.................. -- -- -- (5,000)
--------- --------- --------- ---------
Net periodic benefit cost........ $ 9,000 $ 11,000 $ 30,000 $ 34,000
========= ========= ========= =========
Other Postretirement Benefit Costs
- ----------------------------------
Service cost...................... $ 10,000 $ 9,000 $ 39,000 $ 34,000
Interest cost on accumulated bene-
fit obligation................... 21,000 19,000 80,000 75,000
Expected return on plan assets.... (19,000) (17,000) (71,000) (63,000)
Amortization of transition obliga-
tion............................. 6,000 5,000 23,000 22,000
Amortization of prior service
cost............................. 1,000 1,000 4,000 4,000
Recognized gain................... (3,000) (5,000) (12,000) (15,000)
Severance plan cost............... -- 1,000 5,000 8,000
--------- --------- --------- ---------
Net periodic benefit cost........ $ 16,000 $ 13,000 $ 68,000 $ 65,000
========= ========= ========= =========
In accounting for the pension costs and other postretirement benefit costs
under the plans, the following weighted average actuarial assumptions were
used for the periods during 1999, 1998 and 1997:
Other
Pension Benefits Postretirement Benefits
----------------- -----------------------
1999 1998 1997 1999 1998 1997
----- ----- ----- ------- ------- -------
Annual discount rate................. 6.75% 7.00% 7.50% 6.75% 7.00% 7.50%
Annual long-term rate of return on
plan assets......................... 9.25% 9.50% 9.75% 8.97% 9.20% 9.40%
Annual rate of increase in future
compensation levels................. 4.00% 4.00% 4.00% -- -- --
The pension curtailment gain in December 1997 represents the recognition of
prior service costs, the transition asset and the decrease in the projected
benefit obligation related to the reduction in the number of employees due to
Indiana Company's sale of State Line Station.
The health care cost trend rates used to measure the expected cost of the
postretirement medical benefits are assumed to be 8.5% for pre-Medicare
recipients and 6.5% for Medicare recipients for 1998. Those rates are assumed
to decrease in 0.5% annual increments to 5% for the years 2005 and 2001,
respectively, and to remain level thereafter. The health care cost trend
rates, used to measure the expected cost of postretirement dental and vision
benefits, are a level 3.5% and 2.0% per year, respectively. Assumed health
care cost trend rates have a significant effect on the amounts reported for
the health care plans. A one percentage point change in the assumed health
care cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(Thousands of Dollars)
Effect on total annual service and interest cost
components...................................... $ 27,000 $ (21,000)
Effect on postretirement benefit obligation...... 232,000 (182,000)
32
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay. The participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $7 million and $8
million for the three months ended March 31, 1999 and 1998, respectively, and
$31 million and $32 million for the twelve months ended March 31, 1999 and
1998, respectively.
(16) Separation Plan Costs. O&M expenses included $0.3 million and $16
million for the three months ended March 31, 1999 and 1998, respectively, and
$33 million and $52 million for the twelve months ended March 31, 1999 and
1998, respectively, for costs related to voluntary separation offers to
certain employees of ComEd and Indiana Company, as well as certain other
employee-related costs. Such costs resulted in charges of $0.2 million (after-
tax), or less than $0.01 per common share (diluted), and $10 million (after-
tax), or $0.04 per common share (diluted), for the three months ended March
31, 1999 and 1998, respectively, and $20 million (after-tax), or $0.09 per
common share (diluted), and $31 million (after-tax), or $0.15 per common share
(diluted), for the twelve months ended March 31, 1999 and 1998, respectively.
(17) Income Taxes. The components of the net deferred income tax liability
at March 31, 1999 and December 31, 1998 were as follows:
March 31, December 31,
1999 1998
---------- ------------
(Thousands of Dollars)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs.......................... $4,014,750 $4,028,351
Overheads capitalized................................ 139,633 140,922
Repair allowance..................................... 230,941 233,861
Regulatory assets recoverable through future rates... 677,397 680,356
Deferred income tax assets:
Postretirement benefits.............................. (341,438) (331,651)
Unamortized investment tax credits................... (187,998) (191,135)
Regulatory liabilities to be settled through future
rates............................................... (594,320) (595,005)
Nuclear plant closure................................ (33,414) (38,354)
Other--net........................................... (171,512) (146,224)
---------- ----------
Net deferred income tax liability..................... $3,734,039 $3,781,121
========== ==========
The $47 million decrease in the net deferred income tax liability from
December 31, 1998 to March 31, 1999 is comprised of a $45 million credit to
net deferred income tax expense and a $2 million decrease in regulatory assets
net of regulatory liabilities pertaining to income taxes for the period. The
amount of accelerated cost recovery and liberalized depreciation included in
deferred income tax liabilities for both periods includes amounts related to
the regulatory asset for impaired production plant. The amount of regulatory
assets included in deferred income tax liabilities primarily relates to the
equity component of AFUDC which is recorded on an after-tax basis, the
borrowed funds component of AFUDC which was previously recorded net of tax and
other temporary differences for which the related tax effects were not
previously recorded. The amount of other regulatory liabilities included in
deferred income tax assets primarily relates to deferred income taxes provided
at rates in excess of the current statutory rate.
33
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of net income tax expense charged (credited) to continuing
operations for the three months and twelve months ended March 31, 1999 and
1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ----------
(Thousands of Dollars)
Operating income:
Current income taxes............ $ 108,879 $ 60,543 $ 367,363 $ 264,552
Deferred income taxes........... (45,615) (5,397) 9,917 53,485
Investment tax credits
deferred--net.................. (7,021) (7,160) (27,591) (30,278)
Other (income) and deductions:
Current income taxes............ 2,668 (53,067) (10,496) (62,367)
Deferred income taxes........... 837 46,749 13,546 (339,134)
Investment tax credits.......... (1,828) (7,472) (6,463) (29,997)
--------- --------- --------- ----------
Net income taxes charged
(credited) to continuing
operations...................... $ 57,920 $ 34,196 $ 346,276 $ (143,739)
========= ========= ========= ==========
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, 1999
and 1998:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ----------
(Thousands of Dollars)
Net income (loss) before
extraordinary items ............ $ 97,149 $ 53,715 $ 553,618 $ (251,216)
Net income taxes charged
(credited) to continuing
operations...................... 57,920 34,196 346,276 (143,739)
Provision for dividends on ComEd
preferred and preference stocks. 15,297 14,547 57,634 59,506
--------- --------- --------- ----------
Pre-tax net income (loss) before
extraordinary items and
provision for dividends......... $ 170,366 $ 102,458 $957,528 $ (335,449)
========= ========= ========= ==========
Effective income tax rate........ 34.0% 33.4% 36.2% 42.8%
========= ========= ========= ==========
The principal differences between net income taxes charged (credited) to
continuing operations and the amounts computed at the federal statutory rate
of 35% for the three months and twelve months ended March 31, 1999 and 1998
were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ----------
(Thousands of Dollars)
Federal income taxes computed at
statutory rate................... $ 59,628 $ 35,860 $ 335,135 $ (117,408)
Equity component of AFUDC which
was excluded from taxable income. (98) (89) (399) (6,630)
Amortization of investment tax
credits, net of deferred income
taxes............................ (5,711) (9,210) (22,006) (32,328)
State income taxes, net of federal
income taxes..................... 7,910 5,838 42,932 (862)
Unrealized gain on forward share
repurchase contract.............. (4,805) -- (4,805) --
Differences between book and tax
accounting, primarily
property-related deductions...... 996 1,797 (4,581) 13,489
--------- --------- --------- ----------
Net income taxes charged
(credited) to continuing
operations....................... $ 57,920 $ 34,196 $346,276 $ (143,739)
========= ========= ========= ==========
34
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1999 and 1998 were as
follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands of Dollars)
Illinois public utility revenue......... $ 1,495 $ 57,682 $ 70,295 $ 234,276
Illinois invested capital............... -- -- -- 73,314
Illinois electricity distribution tax... 28,337 26,718 111,644 26,718
Municipal utility gross receipts........ 24,300 42,551 134,628 169,542
Real estate............................. 33,394 39,991 123,424 152,331
Municipal compensation.................. 18,269 19,871 76,407 79,047
Other--net.............................. 26,565 20,613 108,311 71,886
--------- --------- --------- ---------
$ 132,360 $ 207,426 $ 624,709 $ 807,114
========= ========= ========= =========
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
Effective August 1, 1998, as provided for by the 1997 Act, the Illinois
electricity excise tax, replacing the Illinois public utility revenue tax, and
certain municipal utility taxes are recorded as liabilities. Previously,
similar taxes were presented on the Statements of Consolidated Operations as
revenue and expense. The reduction in operating revenues and taxes, except
income taxes, due to the change in presentation for such taxes was
approximately $68 million and $163 million for the three months and twelve
months ended March 31, 1999, respectively. This change in the presentation for
such taxes did not have an effect on results of operations.
See Note 21 for additional information regarding Illinois invested capital
taxes.
(19) Lease Obligations of Subsidiary Companies. Under its nuclear fuel lease
arrangement, ComEd may sell and lease back nuclear fuel from a lessor who may
borrow an aggregate of $627 million, consisting of $300 million of commercial
paper/bank borrowings and $327 million of intermediate term notes, to finance
the transactions. The commercial paper/bank borrowing portion will expire on
November 23, 1999. With respect to the intermediate term notes, $60 million
expires on November 23, 1999, and an additional portion each November 23
thereafter through November 23, 2003. At March 31, 1999, ComEd's obligation to
the lessor for leased nuclear fuel amounted to approximately $476 million.
ComEd has agreed to make lease payments which cover the amortization of the
nuclear fuel used in ComEd's reactors plus the lessor's related financing
costs. ComEd has an obligation for spent nuclear fuel disposal costs of leased
nuclear fuel.
As of March 31, 1999, future minimum rental payments, net of executory
costs, for capital leases are estimated to aggregate to $526 million,
including $163 million in 1999, $162 million in 2000, $99 million in 2001, $53
million in 2002, $28 million in 2003 and $21 million in 2004-2005. The
estimated interest component of such rental payments aggregates $55 million.
The estimated portions of obligations due within one year under capital leases
of $186 million and $195 million at March 31, 1999 and December 31, 1998,
respectively, were included in current liabilities on the Consolidated Balance
Sheets.
35
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Future minimum rental payments at March 31, 1999 for operating leases are
estimated to aggregate to $312 million, including $31 million in 1999, $38
million in 2000, $31 million in 2001, $27 million in 2002, $24 million in 2003
and $161 million in 2004-2043.
(20) Joint Plant Ownership. ComEd has a 75% undivided ownership interest in
the Quad Cities nuclear generating station. Further, ComEd is responsible for
75% of all costs which are charged to appropriate investment and O&M accounts,
and provides its own financing. ComEd's net plant investment, including
construction work in progress, in Quad Cities Station on the Consolidated
Balance Sheets was $7 million at March 31, 1999, after reflecting the
accounting impairment recorded in the second quarter of 1998. See Note 1,
under "Regulatory Assets and Liabilities," for additional information.
(21) Commitments and Contingent Liabilities. Purchase commitments,
principally related to construction and nuclear fuel, approximated $400
million at March 31, 1999, comprised of $355 million for ComEd, $37 million
for UT Holdings and $8 million for Unicom Energy Services. In addition, ComEd
has substantial commitments for the purchase of coal. Upon completion of the
Asset Sale Agreement, ComEd expects to enter into arrangements to assign or
settle a substantial portion of the coal purchase commitments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--
Construction Program," for additional information regarding ComEd's purchase
commitments.
ComEd is a member of NEIL which provides insurance coverage against property
damage and associated replacement power costs occurring at members' nuclear
generating facilities. All companies insured with NEIL are subject to
retrospective premium adjustments if losses exceed accumulated reserve funds.
Capital has been accumulated in the reserve funds such that ComEd would not be
liable for any single incident. However, ComEd could be subject to assessments
in any policy year for each of three types of coverage provided. The maximum
assessments are approximately $53 million for primary property damage, $73
million for excess property damage and $22 million for replacement power.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses,
ComEd would currently be subject to a maximum assessment of $1,145 million in
the event of an incident, limited to a maximum of $130 million in any calendar
year.
In addition, ComEd participates in the American Nuclear Insurers Master
Worker Program, which provides coverage for worker tort claims filed for
bodily injury caused by the nuclear energy hazard. This program was modified,
effective January 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
36
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Cotter has permitted radioactive and other hazardous material to be released
from its mill into areas owned or occupied by the plaintiffs resulting in
property damage and potential adverse health effects. With respect to Cotter,
in 1994 a federal jury returned nominal dollar verdicts against Cotter on
eight bellwether plaintiffs' claims in the 1989 cases, which verdicts were
upheld on appeal. The remaining claims in the 1989 actions have been settled
and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v.
Cotter (United States District Court for the District of Colorado, Civil
Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991
cases. The verdict against Cotter and in favor of the plaintiff, after an
amended judgement was issued March 11, 1999, totaled approximately $6 million,
including compensatory and punitive damages, interest, and medical monitoring.
The matter is currently on appeal. Although the other 1991 cases will
necessarily involve the resolution of numerous contested issues of fact and
law, Unicom and ComEd's determination is that these actions will not have a
material impact on their financial position or results of operations.
ComEd is involved in administrative and legal proceedings concerning air
quality, water quality and other matters. The outcome of these proceedings may
require increases in future construction expenditures and operating expenses
and changes in operating procedures. ComEd and its subsidiaries are or are
likely to become parties to proceedings initiated by the U.S. EPA, state
agencies and/or other responsible parties under CERCLA with respect to a
number of sites, including MGP sites, or may voluntarily undertake to
investigate and remediate sites for which they may be liable under CERCLA.
ComEd generally did not operate MGPs as a corporate entity but did, however,
acquire MGP sites as part of the absorption of smaller utilities.
Approximately half of these sites were transferred to Northern Illinois Gas
Company as part of a general conveyance in 1954. ComEd also acquired former
MGP sites as vacant real estate on which ComEd facilities have been
constructed. To date, ComEd has identified 44 former MGP sites for which it
may be liable for remediation. ComEd presently estimates that its costs of
former MGP site investigation and remediation will aggregate from $25 million
to $150 million in current-year (1999) dollars. It is expected that the costs
associated with investigation and remediation of former MGP sites will be
incurred over a period not to exceed 30 years. Because ComEd is not able to
determine the most probable liability for such MGP costs, in accordance with
accounting standards, a reserve of $25 million has been included in other
noncurrent liabilities on the Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998, 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, 1999 and December 31, 1998, a reserve of $8 million has been
included in other noncurrent liabilities on the Consolidated Balance Sheets,
representing ComEd's estimate of the liability associated with cleanup costs
of remediation sites other than former MGP sites. Approximately half of this
reserve relates to anticipated cleanup costs associated with a property
formerly used as a tannery which was purchased by ComEd in 1973. Unicom and
ComEd presently estimate that ComEd's costs of investigating and remediating
the former MGP and other remediation sites, pursuant to CERCLA and state
environmental laws, will not have a material impact on the financial position
or results of operations of Unicom or ComEd. These cost estimates are based on
currently available information regarding the responsible parties likely to
share in the costs of responding to site contamination, the extent of
contamination at sites for which the investigation has not yet been completed
and the cleanup levels to which sites are expected to have to be remediated.
The IDR has issued Notices of Tax Liability to ComEd alleging deficiencies
in Illinois invested capital tax payments for the years 1988 through 1996. The
alleged deficiencies, including interest and penalties, totaled approximately
$46 million as of March 31, 1999. ComEd has protested the notices,
37
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Concluded
and the matter is currently pending before the IDR's Office of Administrative
Hearings. Interest will continue to accrue on the alleged tax deficiencies.
On March 22, 1999, ComEd reached a settlement agreement with the City to end
the arbitration proceeding between ComEd and the City regarding the January 1,
1992 franchise agreement and a supplemental agreement between them. Under the
terms of the settlement agreement, the pending arbitration is to be dismissed
with prejudice and the City is to release ComEd from all claims the City may
have under the supplemental agreement. The settlement agreement was approved
by the City Council on May 12, 1999.
As part of the settlement agreement, ComEd and the City have agreed to a
revised combination of ongoing work under the franchise agreement and new
initiatives that will result in defined transmission and distribution
expenditures by ComEd to improve electric service in the City. The settlement
agreement provides that ComEd will be subject to liquidated damages if the
projects are not completed by various dates, unless it is prevented from doing
so by events beyond its reasonable control. ComEd's current construction
budget considers these projects, and therefore, no changes to that budget are
expected. In addition, ComEd and the City have agreed to establish an Energy
Reliability and Capacity Account, into which ComEd would deposit $25 million
following the effectiveness of the settlement agreement and up to $25 million
at the end of each of the years 2000, 2001 and 2002, to help ensure an
adequate and reliable electric supply for the City. ComEd recorded a charge to
earnings of approximately $15 million (after-tax), in the first quarter of
1999, related to its obligation to establish and contribute to the Reliability
Account.
38
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. These
changes are attributable to changes in technology and regulation. Federal law
and regulations have been amended to provide for open transmission system
access, and various states, including Illinois, are considering, or have
adopted, new regulatory structures to allow access by some or all customers to
energy suppliers in addition to the local utility.
Electric Utility Industry. The electric utility industry historically has
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serve customers within relatively
defined service territories; and operate under extensive regulation with
respect to rates, operations and other matters. Utilities have operated under
a regulatory compact with the state, with a statutory obligation to serve all
of the electricity needs within their service territory in a nondiscriminatory
manner. Historically, investment and operating decisions have been made based
upon the utilities' respective assessment of the current and projected needs
of their customers. In view of this obligation, regulation has focused on
investment and operating costs, and rates have been based on a recovery of
some or all of such prudently incurred costs plus a return on invested
capital. Such rate regulation, and the ability of utilities to recover
investment and other costs through rates, have provided the basis for
recording certain costs as regulatory assets. These assets represent costs
which are allocated over future periods reflecting related regulatory
treatment, rather than expensed in the current period.
Federal Regulation. The Energy Policy Act of 1992, among other things,
empowered the FERC to introduce a greater level of competition into the
wholesale marketplace for electric energy. Under FERC Order No. 888, utilities
are required to file open access tariffs with regard to their transmission
systems. These tariffs set forth the terms, including prices, under which
other parties and the utility's wholesale marketing function may use the
utility's transmission system. ComEd has an approved open access tariff with
the FERC. A companion FERC rule, Order No. 889, requires the separation of the
transmission operations and wholesale marketing functions so as to ensure that
unaffiliated third parties have access to the same information as to system
availability and other requirements. The FERC Order further requires utilities
to operate an electronic bulletin board to make transmission price and access
data available to all potential users. A key feature of the FERC Order No. 888
is that it contemplates full recovery of a utility's costs "stranded" by
competition. These costs are "stranded" or "strandable" to the extent market-
based rates would be insufficient to allow for their full recovery. To recover
stranded costs, the utility must show that it had a reasonable expectation
that it would continue to serve the customer in question under its regulatory
compact. In addition, some government entities, such as cities, may elect to
"municipalize" a utility's distribution facilities through condemnation
proceedings. Such municipalities would then be able to purchase electric power
on a wholesale basis and resell it to customers over the newly acquired
facilities. The FERC Order provides for the recovery of a utility's investment
stranded by municipalization.
The 1997 Act. In December 1997, the Governor of Illinois signed into law the
1997 Act, which established a phased process to introduce competition into the
electric industry in Illinois under a less regulated structure. Major
provisions of the 1997 Act applicable to ComEd include a 15% residential base
rate reduction which became effective August 1, 1998, an additional 5%
residential base rate reduction commencing on May 1, 2002 and gradual customer
access to other electric suppliers. Access for commercial and industrial
customers will occur over a period from October 1999 to December 2000, and
access for residential customers will occur after May 1, 2002. ComEd's
39
operating revenues were reduced by approximately $170 million in 1998 due to
rate reduction. ComEd expects that the 15% residential base rate reduction
will reduce ComEd's operating revenues by approximately $380 million in 1999,
compared to 1997 rate levels. ComEd's operating revenues were reduced by
approximately $90 million for the first quarter of 1999 for the residential
rate reduction.
As a result of the 1997 Act and FERC rules, prices for the supply of
electric energy are expected to change from cost-based, regulated rates to
rates determined by competitive market forces. Accordingly, the 1997 Act
provides for the collection of a CTC from customers who choose another
electric service provider during a transition period that extends through
2006, and can be extended through 2008 with ICC approval. The CTC will be
established in accordance with a formula defined in the 1997 Act. The CTC,
which will be applied on a cents per kilowatthour basis, considers the revenue
which would have been collected from a customer under tariffed rates, reduced
by the revenue the utility will receive for providing delivery services to the
customer, the market price for electricity and a defined mitigation factor,
which represents the utility's opportunity to develop new revenue sources and
achieve cost savings. The CTC allows ComEd to recover some of its costs which
might otherwise be unrecoverable under market-based rates. Nonetheless, ComEd
will need to take steps to address the portion of such costs which are not
recoverable through the CTC. Such steps may include cost control efforts,
developing new sources of revenue and asset dispositions. See "Response to
Regulatory Changes" and "Sale of Fossil Plants" below for additional
information.
Notwithstanding these rate reductions, and subject to certain earnings
tests, a rate freeze will generally be in effect until at least January 1,
2005. During this period, utilities may reorganize, sell or assign assets,
retire or remove plants from service, and accelerate depreciation or
amortization of assets with limited ICC regulatory review. A utility may
request a rate increase during the rate freeze period only when necessary to
ensure the utility's financial viability, but not before January 1, 2000.
Under the earnings provision of the 1997 Act, if the earned return on common
equity of a utility during this period exceeds an established threshold, one-
half of the excess earnings must be refunded to customers. The threshold rate
of return on common equity is based on the 30-Year Treasury Bond rate, plus
5.5% in the years 1998 through 1999 and plus 6.5% in the years 2000 through
2004. The utility's earned return on common equity and the threshold return on
common equity are each calculated on a two-year average basis. The earnings
sharing provision is applicable only to utility earnings. Increased
amortization of regulatory assets may be recorded, thereby reducing the earned
return on common equity, if earnings otherwise would have exceeded the maximum
allowable rate of return. The potential for earnings sharing or increased
amortization of regulatory assets could limit earnings in future periods.
Under the 1997 Act, utilities are required to continue to offer delivery
services, including the transmission and distribution of electric energy, such
that customers who select an alternative energy supplier can receive electric
energy from that supplier using existing transmission and distribution
facilities. Such services will continue to be offered under cost-based,
regulated rates. On March 1, 1999, ComEd filed with the ICC its Non-
Residential Delivery Services Implementation Plan and associated tariffs for
the provision of delivery and other services related to ComEd's implementation
for retail open access, as called for by the 1997 Act. The ICC is required to
issue a final order in the third quarter of 1999.
The 1997 Act also allows a portion of ComEd's future revenues to be
segregated and used to support the issuance of securities by ComEd or a SPE.
The proceeds, net of transaction costs, from such securities issuances must be
used to refinance outstanding debt and equity or for certain other limited
purposes. The total amount of such securities that may be issued is
approximately $6.8 billion; approximately one-half of that amount can be
issued in the twelve-month period which commenced on August 1, 1998. In
December 1998, ComEd initiated the issuance of $3.4 billion of transitional
trust
40
notes through its SPEs, ComEd Funding and ComEd Funding Trust. See "Liquidity
and Capital Resources," subcaption "UTILITY OPERATIONS--Capital Resources,"
and Notes 2 and 6 of Notes to Financial Statements, for additional information
regarding the redemptions and repurchases of debt and equity.
The 1997 Act also requires utilities to establish or join an ISO that will
independently manage and control utility transmission systems. Additionally,
the 1997 Act includes the leveling of certain regulatory requirements to
permit operational flexibility, the leveling of certain regulatory and tax
provisions as applied to various electric suppliers and a new, more stringent,
liability standard applicable to ComEd in the event of a major outage. See
"Response to Regulatory Changes" below for additional information.
See Notes 1, under "Regulatory Assets and Liabilities," and 2 of Notes to
Financial Statements for the accounting effects related to the 1997 Act.
Response to Regulatory Changes. Unicom has announced several business and
operational objectives designed to focus efforts in responding to the energy
market changes that are expected to develop from the 1997 Act. These
objectives contemplate that ComEd will seek additional improvements in its
transmission and distribution operations in order to meet customers'
expectations for reliable delivery and will seek to refocus its generation
activities, with a concentration on improved nuclear generation, and that
Unicom and ComEd will seek to expand their offerings of energy-related
products and services. See Unicom and ComEd's Current Report on Form 8-K dated
July 6, 1998 for more information regarding the objectives announced by
Unicom.
Under the 1997 Act, the role of electric utilities in the supply and
delivery of energy is expected to change. Utilities, such as ComEd,
traditionally have been responsible for providing both adequate supply and
reliable delivery of electricity to customers within their service areas. In
the future, ComEd will continue to be obligated to provide a reliable delivery
system. However, ComEd will be obligated to supply electricity only to those
customers that it continues to serve under tariffs for electricity, but not to
those customers who choose to rely on the marketplace. Nonetheless, during the
transition period to a competitive supply marketplace, ComEd must provide both
an adequate supply and reliable delivery of electricity. Given the tight
capacity situation in ComEd's market, ComEd will continue working to restore
and maintain its available capacity, as well as working to assist in the
development of a competitive supply marketplace in Illinois.
ComEd has a significant commitment to, and investment in, nuclear generating
capacity. ComEd has installed a new management team responsible for improving
nuclear operations. Such improvements are aimed at increasing levels of energy
generation, or capacity factors, at ComEd's nuclear generating units while
simultaneously improving ComEd's record of meeting NRC requirements and INPO
performance standards. Increased capacity factors generally result in lower
unit production costs and an improved opportunity to generate and sell
electricity in a competitive marketplace. Efforts are also being made to
control capital and operating costs through increased efficiencies, such as
the reduction of downtime and expenses associated with generating unit
maintenance and refueling outages.
ComEd also evaluated the recoverability of its generating plant investment
in 1998 as a result of the 1997 Act. See Note 1 of Notes to Financial
Statements, under "Regulatory Assets and Liabilities," for additional
information. Notwithstanding these efforts, there continues to be an ongoing
analysis of the ability of ComEd's various nuclear plants to generate and
deliver electric energy safely at competitive prices in the competitive market
for energy. Although short-term system reliability and capacity constraints
are likely to support the continued operation of ComEd's nuclear units in the
near term, expected longer term developments are likely to make decision-
making a function of economic considerations. In the absence of short-term
reliability and capacity constraints, if a generating plant
41
cannot produce power safely at a cost below the competitive market price, it
will be disposed of or closed. Plant impairment adjustments have reduced the
carrying value of nuclear plants, and depreciation rates reflecting shortened
estimated useful lives for certain stations will reduce the carrying value
further during the next several years. However, closure of a plant could
involve additional charges associated with the write-off of its then-current
carrying value. In January 1998, Unicom and ComEd announced its decision to
permanently cease nuclear generating operations at ComEd's Zion Station. The
related retirement resulted in a charge in 1997 of $523 million (after-tax),
or $2.42 per common share (diluted), reflecting both a write down of the
plant's carrying value and a liability for future closing costs. A portion of
Zion Station is used to provide voltage support in the transmission system
that serves ComEd's northern region. See Note 4 of Notes to Financial
Statements for additional information.
In response to customer expectations and more stringent reliability
standards provided for by the 1997 Act, ComEd's Board of Directors approved a
$307 million increase in capital expenditures on its transmission and
distribution systems over the next three years. See "Liquidity and Capital
Resources," subcaption "UTILITY OPERATIONS--Construction Program" below, for
additional information regarding capital spending for the transmission and
distribution systems.
ComEd joined with other Midwestern utilities to form a regional Midwest ISO
in January 1998. Presently, a number of these utilities, including ComEd, have
agreed to place their transmission systems under the control of the Midwest
ISO. The Midwest ISO is a key element in accommodating the restructuring of
the electric industry and will promote enhanced reliability of the
transmission system, equal access to the transmission system and increased
competition. The Midwest ISO has established an independent body that will
ultimately direct the planning and operation of the transmission system for
the utilities involved. The Midwest ISO will direct the control of the
transmission system and will have authority to require modification in the
operation of generators connected to that system during system emergencies.
ComEd will retain ownership of its transmission system. The formation of the
Midwest ISO was approved by FERC in September 1998, subject to certain
conditions. The Midwest ISO members elected a Board of Directors in December
1998.
Sale of Fossil Plants. On March 22, 1999, ComEd entered into an Asset Sale
Agreement providing for the sale of substantially all of the assets of its
fossil plants to EME for a cash purchase price of $4.813 billion. The fossil
plants represent an aggregate generating capacity of approximately 9,772
megawatts. Completion of the sale is subject to certain regulatory filings and
approvals and is expected to occur during the fourth quarter of 1999.
Just prior to the consummation of the sale of the fossil plants, ComEd
expects to transfer these assets to Unicom Investment. In consideration for
the transferred assets, Unicom Investment will pay ComEd consideration
totaling $4.813 billion in the form of a Demand Note in the amount of
approximately $2.350 billion and an interest-bearing Note with a maturity of
twelve years. Unicom Investment will immediately sell the fossil plants to
EME, in consideration of which Unicom Investment will receive $4.813 billion
in cash from EME. Immediately after its receipt of the cash payment from EME,
Unicom Investment will pay the $2.350 billion aggregate principal due to ComEd
under the Demand Note. Unicom Investment will use the remainder of the cash
received from EME to fund other business opportunities. Of the cash received
by ComEd, $1.68 billion is expected to be used to pay the costs and taxes
associated with the sale of the fossil plants. The remainder of such receipt
will be available to ComEd to fund, among other things, transmission and
distribution projects, nuclear generation station projects, and environmental
and other initiatives.
The sale is expected to produce an after-tax gain of approximately $1.7
billion, after settling commitments associated with certain coal contracts and
recognizing employee-related costs. Additionally, certain of the funding
initiatives contemplated with the proceeds received by ComEd
42
could reduce the gain by up to $150 million (after-tax). The gain on the sale,
after reflecting the effects of the funding initiatives, will be utilized to
recover certain regulatory assets and as a result, the sale is not expected to
have a significant impact on net income in 1999. See Note 1 of Notes to
Financial Statements, under "Regulatory Assets and Liabilities," for
additional information.
As part of the sale transaction, ComEd will enter into transitional power
purchase agreements with the buyer. The agreement regarding the coal-fired
units will cover a declining number of generating units over a five-year term,
subject to an option in favor of ComEd to restore some or all of the units in
later years of the agreement. The agreements regarding the oil and gas-fired
plant and the peaking units cover the entire capacity of such generating units
for a five-year term, subject to ComEd's option commencing in year three to
terminate the agreements as to some or all of the generating units. The
options will provide some flexibility to ComEd to adjust its power purchase
needs to match its obligations to its customers during the transition period
to open access for customers. Each of the agreements provides for a monthly
capacity charge, based upon the capacity of the generating units under
contract and subject to adjustment based upon the availability of those
generating units, as well as charges for delivered energy. Such charges will
increase ComEd's purchased power costs. However, the disposition of the fossil
generation business will reduce ComEd's O&M and fuel expenditures, and its
depreciation charges.
Liquidity and Capital Resources
UTILITY OPERATIONS
Construction Program. ComEd has a construction program for the years 1999-
2001, which consists principally of improvements to its existing nuclear and
fossil production, and transmission and distribution facilities. The program,
as currently approved by ComEd, includes the following estimated expenditures
(excluding nuclear fuel expenditures of approximately $676 million).
1999 2000 2001 Total
------ ---- ---- ------
(Millions of Dollars)
Nuclear............................................. $ 265 $158 $167 $ 590
Fossil.............................................. 155 106 66 327
Transmission and Distribution....................... 515 527 529 1,571
General............................................. 109 83 80 272
------ ---- ---- ------
$1,044 $874 $842 $2,760
====== ==== ==== ======
The above fossil construction expenditures may not be required after the
sale of the plants is completed.
This program includes an increase in capital expenditures on ComEd's
transmission and distribution systems of approximately $307 million over the
next three years, in addition to the estimated $1.3 billion previously planned
to be spent on these systems over the same time period. A significant portion
of such additional expenditures is intended to increase the reliability of
ComEd's distribution system by replacing certain equipment and increasing
automation to identify distribution problems faster and restore power to
customers more quickly.
ComEd's forecasts of peak load indicate a need for additional resources to
meet demand, either through generating capacity, equivalent purchased power
and/or the development of additional demand-side management resources, in 1999
and each year thereafter for the foreseeable future. However, ComEd believes
that adequate resources, including cost-effective, demand-side management
resources, non-utility generation resources and other-utility power purchases,
could be obtained in sufficient quantities to meet such forecasted needs.
43
Purchase commitments for ComEd, principally related to construction and
nuclear fuel, approximated $355 million at March 31, 1999. In addition,
ComEd's estimated commitments for the purchase of coal are as follows:
Contract Period Commitment(1)
-------- --------- -------------
Black Butte Coal Co. ................................ 1999-2000 $358
Decker Coal Co. ..................................... 1999-2012 452
Other commitments ................................... 1999 13
----
$823
====
--------
(1)In millions of dollars, excluding transportation costs. No estimate of
future cost escalation has been made.
Upon completion of the Asset Sale Agreement, ComEd expects to enter into
arrangements to assign or settle a substantial portion of the coal purchase
commitments. See "Changes in the Electric Utility Industry," subcaption "Sale
of Fossil Plants," for additional information.
Capital Resources. In December 1998, ComEd initiated the issuance of $3.4
billion of transitional trust notes through its SPEs, ComEd Funding and ComEd
Funding Trust. The proceeds from the transitional trust notes, net of
transaction costs, must be used to redeem or repurchase debt and equity to
lower ComEd's overall cost of capital. Accordingly, in early 1999 ComEd
redeemed $788 million of long-term debt and $534 million of preference stock,
and reacquired $229 million of outstanding ComEd long-term debt through a
tender offer. In addition, $500 million of the proceeds was used to reduce
ComEd's outstanding short-term debt. In the first quarter of 1999, ComEd
recorded an extraordinary loss related to the early redemptions and the tender
offer of the above-mentioned first mortgage bonds and sinking fund debentures,
which reduced net income on common stock by approximately $27 million (after-
tax), or $0.13 per common share. ComEd also recorded $10 million (after-tax),
or $0.04 per common share, for premiums paid in connection with the redemption
of the above-mentioned preference stock. As more fully described below, Unicom
has announced plans to repurchase approximately $750 million of Unicom common
stock using the proceeds it receives from ComEd's repurchase of its common
stock held by Unicom. The remaining proceeds will be used for the payment of
fees and additional debt and equity redemptions and repurchases.
In the fourth quarter of 1998, Unicom entered into a forward purchase
arrangement for the repurchase of $200 million of its common stock. This
contract, which was accounted for as an equity instrument as of December 31,
1998, was settled on a net cash basis in February 1999.
In February 1999, Unicom also entered into a prepaid forward purchase
agreement with a financial institution for the repurchase of approximately 15
million shares of Unicom common stock. This forward purchase arrangement was
amended to also include the repurchase of approximately 5.1 million shares for
a total of 20.1 million shares, subsequent to the net cash settlement of the
$200 million repurchase program, as described above. The repurchase
arrangement, as amended, provides for final settlement no later than February
2000, on either a physical (share) basis, or a net cash basis. The amount at
which the arrangement can be settled is dependent principally upon the average
market price at which the financial institution purchases such shares,
compared to the forward price per share. The share repurchases will not reduce
shares outstanding for purposes of EPS calculations or reduce common stock
equity, and resulting return on common equity calculations, until the date of
physical settlement. Unicom does not currently anticipate that settlement will
occur in 1999. The repurchase arrangement has been recorded as a receivable on
the Consolidated Balance Sheets and will be adjusted at the end of each
reporting period to reflect the aggregate market value of the shares
deliverable under the arrangement. Consequently, the arrangement could
increase earnings volatility in 1999.
See Notes 2 and 6 of Notes to Financial Statements for additional
information regarding the redemptions and repurchases of debt and equity.
ComEd forecasts that internal sources will provide approximately three-
fourths of the funds required for ComEd's 1999-2001 construction program and
other capital requirements, including
44
nuclear fuel expenditures, contributions to nuclear decommissioning funds,
sinking fund obligations and scheduled debt maturities, and excluding the
effects of the fossil plants sale. See Notes 9 and 11 of Notes to Financial
Statements for the summaries of the annual sinking fund requirements and
scheduled maturities for ComEd preference stock and long-term debt,
respectively. The forecast takes into consideration the effects of the 1997
Act, and the issuance by ComEd Funding Trust of $3.4 billion of transitional
trust notes in 1998 to refinance debt and equity, as discussed above.
See "Changes in the Electric Utility Industry," subcaption "Sale of Fossil
Plants," for a description of ComEd's planned uses of the fossil plants sale
proceeds.
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of ComEd at the time of such
financing. A portion of ComEd's financing may be provided through the
continued sale and leaseback of nuclear fuel through ComEd's existing nuclear
fuel lease facility. During the first quarter of 1999, ComEd did not sell or
leaseback any nuclear fuel through its existing nuclear fuel lease facility.
See Note 19 of Notes to Financial Statements for additional information
concerning ComEd's nuclear fuel lease facility. ComEd had $1 billion of unused
bank lines of credit at March 31, 1999, which may be borrowed at various
interest rates. The interest rate is set at the time of a borrowing and is
based on several floating rate bank indices plus a spread, which is dependent
upon the credit rating of ComEd's outstanding first mortgage bonds or on a
prime interest rate. See Note 12 of Notes to Financial Statements for
additional information concerning lines of credit. See the Statements of
Consolidated Cash Flows for the construction expenditures and cash flow from
operating activities for the three months and twelve months ended March 31,
1999 and 1998. Cash flows from operating activities decreased temporarily for
the twelve months ended March 31, 1999, compared to the same period ended
March 31, 1998, as a result of an increase in customer receivables due to the
transition to a new customer information and billing system in the latter part
of 1998.
As of May 14, 1999, ComEd has an effective "shelf" registration statement
with the SEC for the future sale of up to an additional $280 million of debt
securities and cumulative preference stock for general corporate purposes of
ComEd, including the discharge or refund of other outstanding securities.
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 BB+ BBB-
Preference stock.................................... baa3 BB+ BBB-
Trust Securities.................................... baa3 BB+ BBB-
Commercial paper.................................... P-2 A-2 D-2
ComEd Funding Trust's securities are currently rated by three principal
securities rating agencies as follows:
Standard Duff &
Moody's & Poor's Phelps
------- -------- ------
Transitional trust notes............................ Aaa AAA AAA
As of May 1999, S&P's current rating outlook on ComEd's securities is
"Positive" and ComEd's securities are on CreditWatch with positive
implications. Duff & Phelps has placed ComEd's securities on "Rating Watch-Up"
and, as of May 1999, Moody's rating outlook on ComEd's securities was also
"Positive."
45
In February 1999, S&P revised the general ratings scale for evaluating
preferred and preference stock issues of corporations. As a result of this
change in scale, ratings on ComEd's preferred and preference stocks, and Trust
Securities were lowered in February 1999.
Capital Structure. ComEd's ratio of long-term debt to total capitalization
has decreased to 57.7% at March 31, 1999 from 58.0% at December 31, 1998. As of
March 31, 1999 and December 31, 1998, $477 million and $494 million,
respectively, of retained earnings had been appropriated for Unicom's future
dividend payments. As of March 31, 1999 and December 31, 1998, $586 million and
$580 million, respectively, of retained earnings had been appropriated for
ComEd's future dividend payments.
Year 2000 Conversion. Unicom, including ComEd, uses various software
applications and embedded systems throughout its businesses that will be
affected by the so-called "Year 2000 issues." These issues may prevent an
application or system from correctly processing dates up to the year 2000 and
beyond. A failure to correct any critical Year 2000 processing problems prior
to January 1, 2000 could have material adverse operational and financial
consequences if the affected systems either cease to function or produce
erroneous data. At this time, Unicom believes the major risks associated with
the inability of systems and software to process Year 2000 data correctly are a
system failure or miscalculation causing disruption of operations, including
among other things, an inability to operate ComEd's nuclear or fossil
generating plants, disruption in the operation of its transmission and
distribution systems or an inability to access interconnections with the
systems of neighboring utilities. Such failures could materially and adversely
affect Unicom's results of operations, financial position and cash flows.
Unicom management established a Year 2000 project team to address Year 2000
issues. The Year 2000 project team is currently composed of approximately 200
members, including members of Unicom's senior management. The team is focused
on three elements that are integral to the project: business continuity,
project management and risk management. Business continuity involves the
continuation of reliable electric supply and service in a safe, cost-effective
manner. Project management involves defining and meeting the project scope,
schedule and budget. Risk management involves customer communications,
contingency planning and legal issues.
In addition to its internal efforts, Unicom is working with various industry
groups, including NERC, EPRI and EEI to coordinate electric utility industry
Year 2000 efforts with the Clinton Administration's Year 2000 Conversion
Council, the DOE and Congress. The DOE has asked NERC to report on the
integrity of the transmission system for North America and to coordinate and
assess the preparation of the electric systems in North America for the Year
2000. NERC submitted its initial status report and coordination plan to the DOE
in September 1998 and a second report in January 1999; a full status report is
due by July 1999.
Since July 1996, Unicom has been working to identify and address Year 2000
issues. Unicom's approach to identifying and addressing noncompliant software
applications and embedded systems consists of the following stages: inventory,
analysis, renovation, testing and deployment. The first stage is to inventory
all applications and systems. The analysis stage involves assessing whether
software applications and embedded systems are Year 2000 compliant. The
renovation stage involves remediating or upgrading applications and systems to
make them Year 2000 ready. The testing stage determines whether the renovated
applications and systems are Year 2000 ready. The deployment stage is when the
tested applications and systems are implemented. In addition, Unicom is engaged
in contingency planning for Year 2000 problems. Unicom is developing
contingency plans to address the possibility that the applications and systems
may not be Year 2000 ready at the end of this process. An independent
consultant has been engaged to assist Unicom in the assessment of the process
being used to address the Year 2000 issue.
Unicom's Year 2000 project focuses on those facets of its business that are
required to deliver reliable electric service. The project encompasses the
computer systems that support core business
46
functions, such as customer information and billing, finance, procurement,
supply and personnel, as well as the components of metering, transmission,
distribution and generation support. The project also focuses on embedded
systems, instrumentation and control systems in facilities and plants. In
accordance with business plans, Unicom has replaced certain of its financial,
human resources and payroll and customer service and billing software, with
new software that is Year 2000 compliant, and that addresses Unicom's
strategic needs as it enters a less regulated environment.
The following table summarizes the status, as of April 16, 1999, of Unicom's
progress toward achieving Year 2000 readiness. The figures set forth in the
table represent the estimated extent to which Unicom has completed each phase
of the Year 2000 project for software applications and embedded systems.
Software Embedded
Applications Systems
------------ --------
Inventory........................................... 100% 100%
Analysis............................................ 100% 99%
Renovation.......................................... 97% 84%
Testing............................................. 92% 85%
Deployment.......................................... 85% 99%
The renovation and testing phases include only those software applications
and embedded systems which are not Year 2000 compliant, and require renovation
and testing. The deployment phase includes all inventoried applications and
systems, including those applications and systems that are Year 2000 compliant
and required no renovation or testing. Accordingly, the percentage of
completion for testing and renovation may be lower than the percentage of
completion for deployment.
The following is a brief summary of estimates of the progress of the Year
2000 project and certain projected completion dates in each of Unicom's four
critical business areas--nuclear generation, fossil generation, transmission
and distribution, and corporate information services:
. Nuclear Generation--Software applications analysis is 100% complete and
embedded systems analysis is 99% complete. Testing of software
applications is 68% complete and 75% complete for embedded systems.
Deployment of software applications is 43% complete and embedded systems
are 97% complete. All ten operating nuclear units are expected to be Year
2000 ready by June 30, 1999.
. Fossil Generation--Analysis is 100% complete for software applications
and 99% complete for embedded systems. Testing of software applications
is 100% complete and 63% complete for embedded systems. Deployment of
software applications is 83% complete and embedded systems are 98%
complete and both are expected to be completed by June 30, 1999.
. Transmission and Distribution--Analysis is 100% complete for software
applications and embedded systems. Testing of software applications is
99% complete and 100% complete for embedded systems. Deployment of
software applications is 99% complete and 100% complete for embedded
systems. Deployment of software applications and embedded systems is
expected to be completed by June 30, 1999.
. Corporate Information Services--Inventory and analysis are 100% complete.
Renovation, testing and deployment are 99% complete. Enterprise-wide
mainframe applications and systems are 100% complete.
Unicom's current schedule is subject to change, depending on developments
that may arise through unforeseen business circumstances, and through the
remediation and testing phases of its compliance effort. Unicom also depends
upon third parties, including customers, suppliers, government agencies and
financial institutions, to reliably deliver its products and services. Unicom
has implemented additional initiatives to assess the degree to which third
parties with whom it has business relationships are addressing Year 2000
issues. These initiatives include analysis of the Year
47
2000 compliance programs of Unicom's critical vendors and obtaining Year 2000
warranties in certain new contracts and licenses. Unicom also has introduced
protocols for assuring that software and embedded systems remain Year 2000
compliant on a continuing basis. Unicom's contingency planning is addressing
mechanisms for preventing or mitigating interruption caused by its suppliers.
Unicom also has an outreach program in place for communicating Year 2000
project information to residential and business customers.
Unicom estimates that the total cost of remediating or upgrading software,
which would not otherwise be replaced in accordance with its business plans,
is approximately $20 million, and the total cost of remediating or upgrading
embedded systems is approximately $20-$40 million. As of March 31, 1999,
approximately $29 million has been expended for external labor, hardware and
software costs, and for the costs of Unicom employees who are dedicated full-
time to the Year 2000 project. All such costs are expensed as incurred. The
foregoing amounts do not include the cost of new software applications
installed as a result of strategic replacement projects described earlier.
Such replacement projects were not accelerated because of Year 2000 issues.
The cost of the project and the dates on which Unicom plans to complete its
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third parties' Year 2000
readiness and other factors.
Unicom has existing contingency plans in place for events such as extreme
heat, storms, equipment failures and accidents. Unicom is preparing Year 2000
contingency plans based on the framework of existing emergency management
system preparation and scenario development.
Unicom has developed contingency plans to address the most reasonably likely
worst case scenarios that could occur in the event that various Year 2000
issues are not resolved in a timely manner. Unicom submitted the first draft
of contingency plans to NERC prior to December 31, 1998, as requested by NERC.
In addition, the first draft contingency plans were also submitted to MAIN.
Final plans are due to be submitted to NERC by June 30, 1999. Contingency
planning is an ongoing process and will continue through the fourth quarter of
1999.
Unicom is using an approach in its contingency planning process that has
been recognized by NERC and NEI. The phases of the process include: business
impact analysis, contingency planning and testing. Unicom's business impact
analysis requires business unit personnel to evaluate the impact of mission-
critical systems failures on Unicom's core business operations, focusing on
specific failure scenarios and how they can be mitigated. The necessary
conditions for enacting the plans will be documented along with the
appropriate personnel responsible in each of the business units should a Year
2000 failure occur. Additionally, Unicom participated in an industry-wide NERC
readiness drill on April 9, 1999. The drill simulated the partial loss of
communications and tested Unicom's ability to maintain bulk power system
operations. The successful completion of the drill demonstrated Unicom's
ability to continue its bulk power operations in the event that communications
are not possible through normal means during the Year 2000 rollover period.
Unicom will participate in the second industry-wide NERC readiness drill on
September 9, 1999, which is scheduled to be a "dress rehearsal" for the Year
2000 rollover.
Based on Unicom's current schedule for completion of Year 2000 tasks, it
believes that its planning is adequate to secure Year 2000 readiness of its
critical systems. Nevertheless, achieving Year 2000 readiness is subject to
various risks and uncertainties, many of which are described above. Unicom is
not able to predict all the factors that could cause actual results to differ
materially from its current expectations as to its Year 2000 readiness.
However, if Unicom or third parties, with whom it has significant business
relationships, fail to achieve Year 2000 readiness with respect to critical
systems, there could be a material adverse effect on Unicom's results of
operations, financial position and cash flows.
48
Market Risks. ComEd is exposed to market risk due to changes in interest
rates and the market price for electricity. Exposure for interest rate changes
relates to its long-term debt and preferred equity obligations. Exposure to
electricity market price risk relates to forward activities taken to manage
effectively the supply of, and demand for, the electric generation capability
of ComEd's generating plants. ComEd has implemented an integrated risk
management framework to manage such risks. A corporate Risk Management
Committee defines the Company's risk tolerance and establishes appropriate
position limits, and corporate policies and procedures have been implemented
to minimize the exposure to market risk. ComEd does not currently utilize
derivative commodity or financial instruments for trading or speculative
purposes. The estimated fair value of the forward energy contracts, including
options at March 31, 1999, was approximately $70 million. The estimated fair
value is based on the estimated net settlement value of the contracts derived
from forward price curves and market quotes, discounted at a ten percent rate.
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 February 19, 1999. There has not been a material change in
ComEd's exposure to interest rate or market price risk since December 31,
1998. See "Energy Risk Management Contracts" in Note 1 of Notes to Financial
Statements regarding the accounting for energy risk management contracts.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through subsidiaries, in energy service
activities which are not subject to utility regulation by federal or state
agencies. One of these subsidiaries, UT Holdings, provides district cooling
and related services to offices and other buildings in the central business
district of the City and in other cities in North America, generally working
with local utilities. District cooling involves, in essence, the production of
chilled water at one or more central locations and its circulation to
customers' buildings through a closed circuit of supply and return piping.
Such water is circulated through customers' premises primarily for air
conditioning. This process is used by customers in lieu of self-generated
cooling.
Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged
in providing energy services, including gas services, performance contracting,
distributed energy and active energy management systems. In 1997, Unicom
Energy Services entered into a joint venture with Sonat Marketing Company L.P.
to market natural gas and related services to larger gas purchasers within
ComEd's service area in Northern Illinois and within other Midwestern areas.
As an entry into the distributed energy market, Unicom Energy Services also
entered into an alliance with AlliedSignal Power Systems, Inc., a subsidiary
of AlliedSignal Inc., to market, install and service an electric energy
generator developed by AlliedSignal, known as a TurboGeneratorTM, in a 12-
state region, the province of Ontario, Canada and Puerto Rico.
Construction Program. Unicom has approved capital expenditures for 1999 of
approximately $88 million for the UT Holdings, primarily related to an
expansion of two of its four Chicago district cooling facilities and the
related distribution piping and plants in other cities. As of March 31, 1999,
UT Holdings' purchase commitments, principally related to construction, were
approximately $37 million.
Unicom has approved capital expenditures for 1999 of approximately $47
million for Unicom Energy Services. As of March 31, 1999, Unicom Energy
Services had purchase commitments of approximately $8 million.
Capital Resources. Unicom expects to obtain funds to invest in its
unregulated subsidiaries principally from the fossil plants sale proceeds to
be received by Unicom Investment, although it may also obtain funds from
dividends received on its ComEd common stock and from bank borrowings. The
availability of ComEd's dividends to Unicom is dependent on ComEd's financial
performance and
49
cash position, as well as legal restrictions on the payment of dividends by
public utilities. Other forms of financing by ComEd to Unicom or the
unregulated subsidiaries of Unicom, such as additional loans or additional
equity investments, which are not expected, would be subject to prior approval
by the ICC.
The fossil plants sale proceeds received by Unicom Investment, after the
payment of the Demand Note to ComEd, will be used to invest in business
opportunities.
Unicom Enterprises has a $200 million credit facility which will expire on
November 15, 1999, of which $80 million was unused as of March 31, 1999. The
credit facility can be used by Unicom Enterprises to finance investments in
unregulated businesses and projects, including UT Holdings and Unicom Energy
Services, and for general corporate purposes. The credit facility is
guaranteed by Unicom and includes certain covenants with respect to Unicom and
Unicom Enterprises' operations. Interest rates for borrowings under the credit
facility are set at the time of a borrowing and are based on either a prime
interest rate or a floating rate bank index plus a spread which varies with
the credit rating of ComEd's outstanding first mortgage bonds. The credit
facility is expected to be refinanced by Unicom Enterprises in the fourth
quarter of 1999. See Note 12 of Notes to Financial Statements for additional
information regarding certain covenants with respect to Unicom and Unicom
Enterprises' operations.
In July 1998, Unicom Thermal issued a $120 million 7.38% unsecured
guaranteed senior Note due May 2012, the proceeds of which were used to
refinance existing debt. The Note is guaranteed by Unicom and includes certain
covenants with respect to Unicom and Unicom Thermal's operations.
S&P's current rating on Unicom's senior debt obligations is BBB-. Ratings
have not been obtained from Moody's or Duff & Phelps.
Regulation
ComEd and Indiana Company are subject to federal and state regulation in the
conduct of their respective businesses, including the operations of Cotter.
Such regulation includes rates, securities issuance, nuclear operations,
environmental and other matters. Particularly in the cases of nuclear
operations and environmental matters, such regulation can and does affect
operational and capital expenditures.
Rate Matter. See "Changes in the Electric Utility Industry," subcaption "The
1997 Act" above, for information regarding the effects of the 1997 Act on rate
matters. See Note 3 of Notes to Financial Statements for information regarding
fuel reconciliation proceedings for the years 1994 and 1996.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd. ComEd operates five nuclear power plants--Braidwood, Byron,
Dresden, LaSalle and Quad Cities Stations, and is committed to safe, reliable
and efficient operation. See "Changes in the Electric Utility Industry,"
subcaption "Response to Regulatory Changes" above, for information regarding
ComEd's permanent cessation of nuclear generation operations at its Zion
Station.
On May 6, 1999, ComEd's LaSalle Station was officially removed from the
NRC's listing of plants that require increased regulatory scrutiny. LaSalle
Station had been on this list since January 1997. Concurrent with the LaSalle
Station action, the NRC announced the formal removal of the Quad Cities
Station from its list of plants with declining performance trends. Quad Cities
Station had been on the declining trend list since January 1998. With these
actions, all of ComEd's nuclear plants are now placed in the NRC's "routine
oversight" category. This represents the first time since 1990 that none of
ComEd's nuclear generating units are under special NRC oversight.
The NRC and representatives of ComEd's management have met, and will
continue to meet periodically in the future, to discuss the overall
performance of the ComEd nuclear program.
50
ComEd has devoted, and intends to continue to devote, significant resources
to the management and operations of its nuclear generating stations. In recent
years, it has increased and reinforced Nuclear Generation Group executive
leadership and station management with executives and managers drawn from
other utilities that have resolved similar operational and performance issues.
These efforts include the appointment of a new Chief Nuclear Officer in late
1997. ComEd has also 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. The improvements are expected to result in improved
operational performance. LaSalle Units 1 and 2 were shutdown for extensive
improvement work in September 1996. Following the completion of a number of
material condition improvements, LaSalle Unit 1 was returned to service in
August 1998. LaSalle Unit 2 was returned to service on April 11, 1999,
following the resolution of material condition issues similar to those
resolved earlier on Unit 1. The improved availability of ComEd's nuclear
plants is expected to significantly reduce ComEd's purchased power
requirements.
Based on ComEd's most recent study, decommissioning costs are estimated to
be $5.4 billion in current-year (1999) dollars, including a contingency
allowance. This estimate includes $515 million of non-radiological costs,
which are included in ComEd's proposed rider for recovery, as discussed below.
ComEd estimates that it will expend approximately $13.8 billion, including a
contingency allowance and non-radiological costs, for decommissioning costs
primarily during the period from 2007 through 2034. All such costs are
expected to be funded by the external decommissioning trusts, which ComEd
established in compliance with Illinois law and into which ComEd has been
making annual contributions. Future decommissioning cost estimates may be
significantly affected by the adoption of or changes to NRC regulations, as
well as changes in the assumptions used in making such estimates, including
changes in technology, available alternatives for the disposal of nuclear
waste and inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider to its tariffs. The rider allows annual adjustments
to decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. The current estimated
decommissioning costs include a contingency allowance, but, except at Dresden
Unit 1, exclude amounts for spent fuel storage installations, which may be
necessary to store spent fuel during the period beginning at the end of the
NRC license lives of the plants to the date when the DOE accepts the spent
fuel for permanent storage. Contingency allowances used in decommissioning
cost estimates provide for currently unspecifiable costs that are likely to
occur after decommissioning begins and generally range from 20% to 25% of the
currently specifiable costs. Under its most recent annual rider, filed with
the ICC on February 26, 1999, ComEd has proposed to increase its estimated
annual decommissioning cost accrual from $84 million to $130 million. The
increase primarily reflects an increase in low-level waste disposal cost
escalation, the inclusion of $209 million in current-year (1999) dollars for
safety-related costs of maintaining Zion Station in a mothballed condition
until dismantlement begins, and the inclusion of non-radiological costs in the
decommissioning cost estimates for recovery under the rider. See Note 1 of
Notes to Financial Statements, under "Depreciation, Amortization of Regulatory
Assets and Decommissioning," for additional information regarding
decommissioning costs.
Environmental Matters. ComEd is involved in administrative and legal
proceedings concerning air quality, water quality and other matters. The
outcome of these proceedings may require increases in future construction
expenditures and operating expenses, and changes in operating procedures. See
Note 21 of Notes to Financial Statements for additional information.
51
Results of Operations
Unicom's basic and diluted earnings (loss) per common share for the three
months and twelve months ended March 31, 1999 and 1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ----------
Basic and Diluted Earnings (Loss) per
Common Share........................ $0.32 $0.25 $2.42 $(4.90)
========= ========= ========= ==========
Substantially all of the results of operations for Unicom are the results of
operations for ComEd. The results of Unicom's unregulated subsidiaries
currently are not material to the results of Unicom and subsidiary companies
as a whole. As such, the following section discusses the effect of ComEd's
operations on Unicom's financial results. All EPS computations shown below
reflect the impact on Unicom's diluted EPS.
Net Income for the Three Months Ended March 31, 1999. The increase in
ComEd's net income in the recent three-month period reflects, among other
factors, a significant reduction in energy costs and lower O&M expenses, which
helped to offset the impact of the 15% residential base rate reduction. The
first quarter of 1999 also included certain non-recurring charges.
Kilowatthour sales increased 7% during the first quarter of 1999, compared
to the same period in 1998, due to increases in sales to retail customers and
sales to other utilities. Both periods experienced milder than normal winter
weather. See "Operating Revenues" below for additional information.
Fuel and purchased power costs decreased 23% in the first quarter of 1999,
compared to the same period in 1998, reflecting strong performance from
ComEd's nuclear fleet, which reduced purchased power requirements. See "Fuel
Costs" and "Purchased Power" below for additional information.
O&M expenses decreased 4% for the first quarter of 1999, compared to the
first quarter of 1998, as discussed in "Operation and Maintenance Expenses"
below.
A 7% reduction in depreciation and amortization expense increased operating
results for the recent quarter. Also increasing the first quarter operating
results was an unrealized gain of $14 million (after-tax), or $0.06 per common
share, related to the forward share repurchase arrangement. Partially
offsetting the increases in earnings was a $37 million (after-tax), or $0.17
per common share, charge related to the early redemption of long-term debt,
sinking fund debentures and preference stock completed in the first quarter of
1999.
Net Income for the Twelve Months Ended March 31, 1999. The increase in
ComEd's net income in the recent twelve-month period was primarily due to
significant improvement in nuclear performance, which helped to offset the
impacts of a 15% residential base rate reduction that took effect August 1,
1998. Also increasing operating results were lower O&M expenses, lower
depreciation and amortization expense and gains from asset sales. The recent
twelve-month period also included certain non-recurring charges. The twelve
months ended March 31, 1998 included write downs associated with the
discontinuation of regulatory accounting practices for the generation
52
portion of its business and other charges recorded in response to the 1997
Act. The twelve months ended March 31, 1998 also included a write-off in
connection with the closure of Zion Station.
ComEd's kilowatthour sales increased 6% for the twelve months ended March
31, 1999, compared to the same period last year, as discussed in "Operating
Revenues" below. O&M expenses decreased 7% during the same period, as
discussed in "Operation and Maintenance Expenses" below.
Fuel and purchased power costs increased 8% for the twelve months ended
March 31, 1999, compared to the same period last year, due to increased
kilowatthour sales and purchased power costs, partially offset by overall
improved performance at ComEd's nuclear stations.
The twelve months ended March 31, 1999 also includes an 8% reduction in
depreciation and amortization expense, see "Depreciation and Amortization"
below, and a $15 million (after-tax), or $0.07 per common share, reduction in
the estimated liability for closing costs related to the Zion nuclear
generating station, both of which increased operating results.
Also, the twelve months ended March 31, 1999 reflects gains on the sales of
certain assets of $32 million (after-tax), or $0.15 per common share. The sold
assets consisted principally of surplus inventory of emission allowances. In
addition, operating results increased for the recent period due to an
unrealized gain of $14 million (after-tax), or $0.06 per common share,
recorded in the first quarter of 1999 related to the forward share repurchase
arrangement.
Partially offsetting the increases in earnings was a $37 million (after-
tax), or $0.17 per common share, charge related to the early redemption of
long-term debt, sinking fund debentures and preference stock completed in the
first quarter of 1999.
ComEd discontinued regulatory accounting practices for the generation
portion of its business in the fourth quarter of 1997 due to the expected
transition of electric generation services to market-based pricing as a result
of the 1997 Act. Accordingly, ComEd's generation-related net regulatory
assets, which represent assets and liabilities properly recorded under
regulatory accounting practices but which would not be recorded under GAAP for
non-regulated entities, were written off resulting in an extraordinary charge
for the twelve months ended March 31, 1998 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 for the twelve months ended
March 31, 1998 of $44 million (after-tax), or $0.20 per common share.
Also, the twelve months ended March 31, 1998 operating results included the
write down of ComEd's investment in uranium-related properties to reflect
costs which are not expected to be recovered in a competitive market. The
write down resulted in a charge of $60 million (after-tax), or $0.28 per
common share.
The twelve months ended March 31, 1998 also included a charge of $523
million (after-tax), or $2.42 per common share, reflecting the write-off of
the unrecoverable portion of the cost of ComEd's Zion Station plant and
inventories, and a liability for future closing costs, resulting from the
decision in January 1998 to permanently cease nuclear generation operations at
Zion Station.
Operating Revenues. ComEd's electric operating revenues reflect revenues
from sales to ultimate consumers (including residential, commercial and
industrial customers within its service territory) and revenues from sales for
resale (i.e., sales to wholesale customers, principally other electric
utilities). Operating revenues are affected by kilowatthour sales and rate
levels. Kilowatthour
53
sales, in turn, are affected by weather, the level of economic activity within
ComEd's service area, and off-system or wholesale sales to other utilities.
Off-system sales are affected by a number of factors, including nuclear
generating availability and performance.
Operating revenues decreased $133 million in the three months ended March
31, 1999, compared to the three months ended March 31, 1998, including $90
million due to the 15% residential base rate reduction that took effect August
1, 1998. Kilowatthour sales increased 7%, which partially offset the rate
reduction. Both periods experienced milder than normal winter weather.
Operating revenues were also reduced by approximately $68 million due to a
change in presentation for certain state and municipal taxes. Operating
revenues decreased $66 million in the twelve months ended March 31, 1999,
compared to the twelve months ended March 31, 1998. Kilowatthour sales
increased 6% for the twelve months ended March 31, 1999, compared to the same
period last year, due to increases in both sales to retail customers and sales
to other utilities. The increase in kilowatthour sales helped to offset the
approximately $260 million decrease in operating revenues due to the 15%
residential base rate reduction, which became effective August 1, 1998.
Operating revenues were also reduced by approximately $163 million due to a
change in presentation for certain state and municipal taxes.
Fuel Costs. Changes in fuel expense for the three months and twelve months
ended March 31, 1999, compared to the same periods ended March 31, 1998,
primarily resulted from changes in the average cost of fuel consumed, changes
in the mix of fuel sources of electric energy generated and changes in net
generation of electric energy. Fuel mix is determined primarily by system
load, the costs of fuel consumed and the availability of nuclear generating
units. The cost of fuel consumed, net generation of electric energy and fuel
sources of kilowatthour generation were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Cost of fuel consumed (per million Btu):
Nuclear...................................... $ 0.49 $ 0.63 $ 0.54 $ 0.59
Coal......................................... $ 2.33 $ 1.96 $ 2.47 $ 2.17
Oil.......................................... $ 3.05 $ 3.37 $ 3.59 $ 3.70
Natural gas.................................. $ 2.13 $ 2.39 $ 2.36 $ 2.58
Average all fuels............................ $ 0.97 $ 1.25 $ 1.16 $ 1.32
Net generation of electric energy (millions of
kilowatthours)............................... 23,160 17,327 89,135 80,869
Fuel sources of kilowatthour generation:
Nuclear...................................... 74% 58% 69% 56%
Coal......................................... 24 36 27 39
Oil.......................................... -- 1 -- --
Natural gas.................................. 2 5 4 5
--------- --------- --------- ---------
100% 100% 100% 100%
========= ========= ========= =========
The increase in net generation of electric energy and nuclear generation as
a percentage of total generation for the three months and twelve months ended
March 31, 1999, compared to the prior periods, is primarily due to significant
improvement in ComEd's nuclear fleet. The overall nuclear capacity factor was
85% for the first quarter of 1999, compared to 50% in the first quarter of
1998. See "Regulation," subcaption "Nuclear Matters" above, for information
regarding ComEd's nuclear generating stations.
Fuel Supply. Compared to other utilities, ComEd has relatively low average
fuel costs as a result of its reliance predominantly on lower cost nuclear
generation. ComEd's coal costs, however, are high compared to those of other
utilities. ComEd's western coal contracts and its rail contracts for delivery
of the western coal provide for the purchase of certain coal at prices
substantially above currently
54
prevailing market prices, and ComEd has significant purchase commitments under
its contracts. For additional information concerning ComEd's coal purchase
commitments, see "Liquidity and Capital Resources," subcaption "UTILITY
OPERATIONS--Construction Program," above and Note 21 of Notes to Financial
Statements. For additional information concerning ComEd's FAC, see Notes 2 and
3 of Notes to Financial Statements.
Purchased Power. Amounts of purchased power are primarily affected by system
load, the availability of ComEd's generating units and the availability and
cost of power from other utilities. Purchased power decreased $102 million and
increased $182 million for the three months and twelve months ended March 31,
1999, respectively, compared to the same periods in 1998. The decrease in
purchased power for the three months ended is primarily due to increased
output from ComEd's nuclear fleet, which reduced purchased power requirements.
The increase for the twelve months ended March 31, 1999 includes a $130
million increase in purchased power costs for the agreements entered into in
connection with the sales of State Line and Kincaid Stations in December 1997
and February 1998, respectively. The increase in purchased power costs for the
twelve months ended March 31, 1999 also reflects the effects of an
extraordinary combination of heat, storms and equipment problems experienced
throughout the Midwest in late June 1998 which resulted in unprecedented
purchased power price levels. The increase in the twelve months ended March
31, 1999 was partially offset by increased output from ComEd's nuclear fleet,
which reduced purchased power requirements. See "Regulation," subcaption
"Nuclear Matters" above, for information regarding ComEd's nuclear generating
stations.
The number and average cost of kilowatthours purchased were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Kilowatthours (millions)......... 1,953 8,685 13,972 21,905
Cost per kilowatthour............ 3.67c 2.54c 4.63c 2.54c
The market price for electricity is subject to price volatility associated
with changes in supply and demand in the electric supply markets. ComEd
utilizes energy put and call option contracts and energy swap arrangements to
limit market price risk associated with forward commodity contracts. See
"Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Market
Risks," for additional information.
Operation and Maintenance Expenses. O&M expenses include the expenses
associated with operating and maintaining ComEd's generation, transmission and
distribution assets, as well as administrative overhead and support. Given the
variety of expense categories covered, there are a number of factors which
affect the level of such expenses within any given period. Two major
components of such expenses, however, are the costs associated with operating
and maintaining ComEd's nuclear and fossil generating facilities. Generating
station expenses are affected by the cost of materials, regulatory
requirements and expectations, the age of facilities and cost control efforts.
During the three months and twelve months ended March 31, 1999, the
aggregate level of O&M expenses decreased 4% and 7%, respectively, compared to
the same periods ended March 31, 1998.
O&M expenses associated with nuclear generating stations decreased $7
million and $139 million during the three months and twelve months ended March
31, 1999, respectively, compared to the same periods ended March 31, 1998. The
decrease in the recent three-month period is due to shorter refueling outages
and fewer forced outages. The decrease in the recent twelve-month period was
primarily due to the permanent cessation of nuclear generation operations at
Zion Station, shorter refueling outages and fewer forced outages. See "Changes
in the Electric Utility Industry," subcaption "Response to Regulatory
Changes," regarding the permanent cessation of nuclear operations at Zion
Station.
55
During the three months and twelve months ended March 31, 1999, O&M expenses
associated with fossil generating stations decreased $6 million and $23
million, respectively, compared to the same periods ended March 31, 1998. The
decreases related to the fossil generating stations are primarily due to
reductions in personnel costs for the three months and twelve months ended
March 31, 1999. Also, the twelve months ended March 31, 1999 fossil O&M
expenses were lower due to the sale of State Line and Kincaid Stations in
December 1997 and February 1998, respectively.
O&M expenses associated with ComEd's transmission and distribution system
increased $11 million and $31 million for the three months and twelve months
ended March 31, 1999, respectively, compared to the same periods last year. The
increase for the recent three months ended March 31, 1999 was primarily due to
higher maintenance costs, which include an increase in tree trimming expenses
partially offset by a reduction in emergency storm restoration costs. The
increase for the recent twelve months ended reflects higher maintenance costs,
including emergency storm restoration of electric service and tree trimming.
O&M expenses associated with customer-related activities increased $5 million
and $19 million for the three months and twelve months ended March 31, 1999,
respectively, compared to the same periods ended March 31, 1998, primarily due
to the implementation of a new customer information and billing system and
increased marketing initiatives.
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, which included both current payments
and earlier eligibility for postretirement health care benefits, in addition to
certain other employee-related costs, resulted in charges of $0.3 million and
$16 million for the three months ended March 31, 1999 and 1998, respectively,
and $33 million and $52 million for the twelve months ended March 31, 1999 and
1998, respectively.
Other employee benefits expenses, excluding the effects of employee
separation plans and certain other employee-related costs, increased $3 million
and $51 million for the three months and twelve months ended March 31, 1999,
respectively, compared to the same periods ended March 31, 1998. The increase
for the twelve months ended March 31, 1999 is primarily due to an increase in
incentive compensation.
O&M expenses include a $25 million charge for the three months and twelve
months ended March 31, 1999 as a result of a settlement agreement with the City
during the first quarter of 1999. O&M expenses for the twelve months ended
March 31, 1999 also reflect a reduction of $34 million in certain nuclear
maintenance costs due to technological improvements, compared to the same
period last year. 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.
O&M expenses associated with certain administrative and general costs
decreased $36 million and $61 million for the three months and twelve months
ended March 31, 1999, respectively, compared to the same periods ended March
31, 1998. The decreases in the recent three-month and twelve-month periods are
due to a variety of reasons including reductions in nuclear insurance and
safety costs, and costs associated with 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 and Amortization. Depreciation and amortization expense
decreased $18 million and $76 million for the three months and twelve months
ended March 31, 1999, respectively, compared to the same periods ended March
31, 1998. The decrease in the recent three-month period is primarily due to
additional depreciation recorded in 1998 for the steam generators that were
replaced at Byron and Braidwood nuclear generating stations. The decrease in
the recent twelve-month period is primarily due to the retirement of Zion
Station in December 1997 and the sales of State Line and Kincaid Stations in
December 1997 and February 1998, respectively. See Note 1 of
56
Notes to Financial Statements, under "Depreciation, Amortization of Regulatory
Assets and Decommissioning," for additional information.
Interest on Debt. Changes in interest on long-term debt and notes payable for
the three months and twelve months ended March 31, 1999, compared to the same
periods ended March 31, 1998, were due to changes in average interest rates and
in the amounts of long-term debt and notes payable outstanding. Changes in
interest on ComEd's long-term debt also reflected new issues of debt, the
retirement and early redemption of debt, and the retirement and redemption of
issues which were refinanced at generally lower rates of interest. See Notes 2
and 6 of Notes to Financial Statements for information regarding the
redemptions and repurchases of debt and equity. 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
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Long-term debt outstanding:
Average amount (millions)......... $ 8,489 $ 5,961 $ 6,609 $ 6,102
Average interest rate............. 6.53% 7.55% 6.91% 7.64%
Notes payable outstanding:
Average amount (millions)......... $ 221 $ 213 $ 346 $ 172
Average interest rate............. 7.25% 5.95% 5.89% 5.99%
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. If current electric utility industry
accounting practices for such decommissioning costs are changed, annual
provisions for decommissioning could increase and the estimated cost for
decommissioning could be recorded as a liability rather than as accumulated
depreciation. Decommissioning costs of currently retired nuclear plants are
recorded as a liability. Unicom and ComEd do not believe that such changes, if
required, would have an adverse effect on results of operations due to ComEd's
ability to recover decommissioning costs through rates.
Other Items. The amounts of AFUDC reflect changes in the average levels of
investment subject to AFUDC and changes in the average annual capitalization
rates as discussed in Note 1 of Notes to Financial Statements, under "AFUDC and
Interest Capitalized." ComEd discontinued SFAS No. 71 regulatory accounting
practices in December 1997 for the generation-related portion of its business,
and as a result began capitalizing interest in 1998. ComEd capitalized $6
million and $2 million for the three months ended March 31, 1999 and 1998,
respectively, and $32 million and $2 million for the twelve months ended March
31, 1999 and 1998, respectively, in interest costs on its generation-related
construction work in progress and nuclear fuel in process. AFUDC and interest
capitalized do not contribute to the current cash flow of Unicom or ComEd.
ComEd's ratios of earnings to fixed charges for the twelve months ended March
31, 1999 and December 31, 1998 were 2.73 and 2.67, respectively. ComEd's ratios
of earnings to fixed charges and preferred and preference stock dividend
requirements for the twelve months ended March 31, 1999 and December 31, 1998
were 2.35 and 2.29, respectively.
Business corporations, in general, have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate to
replace, at increased costs, the productive assets consumed. Electric
utilities, in particular, have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental
57
requirements. Because the regulatory process limits the amount of depreciation
expense included in ComEd's revenue allowance to the original cost of utility
plant investment, the resulting cash flows are inadequate to provide for
replacement of that investment in future years or preserve the purchasing
power of common equity capital previously invested.
Forward-Looking Information. Except for historical data, the information
contained herein constitutes forward-looking statements. Forward-looking
statements are inherently uncertain and subject to risks. Such statements
should be viewed with caution. Actual results or experience could differ
materially from the forward-looking statements as a result of many factors.
Forward-looking statements in this report include, but are not limited to: (1)
statements regarding expectations of revenue reductions and collections of
future CTC revenues as a result of the 1997 Act in "Management's Discussion
and Analysis of Financial Condition and Results of Operations," subcaption
"Changes in the Electric Utility Industry--The 1997 Act," and in Note 2 of
Notes to Financial Statements, (2) statements regarding estimated capital
expenditures in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," subcaptions "Liquidity and Capital Resources--
UTILITY OPERATIONS--Construction Program," "Liquidity and Capital Resources--
UNREGULATED OPERATIONS--Construction Program" and "Changes in the Electric
Utility Industry--Response to Regulatory Changes," (3) statements regarding
the costs of decommissioning nuclear generating stations in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Regulation--Nuclear Matters," and in Note 1 of Notes to Financial
Statements, under "Depreciation, Amortization of Regulatory Assets and
Decommissioning," (4) statements regarding cleanup costs associated with MGPs
and other remediation sites in Note 21 of Notes to Financial Statements, (5)
statements regarding the estimated fair value of forward energy contracts in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--
Market Risks," (6) statements regarding the risks and uncertainties relating
to Year 2000 issues set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Liquidity and
Capital Resources--UTILITY OPERATIONS--Year 2000 Conversion," including the
projected completion dates in each of Unicom's four critical business areas,
Unicom's dependence upon the Year 2000 readiness of third parties with whom it
has significant business relationships, the estimated costs of remediating or
upgrading embedded systems and software that would not otherwise be replaced
in accordance with Unicom's business plans, and Unicom's Year 2000 contingency
planning process, and (7) statements regarding the sale of the fossil plants
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaptions "Changes in the Electric Utility Industry--Sale of
Fossil Plants," and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--
Capital Resources," and Note 4 of Notes to Financial Statements. Management
cannot predict the course of future events or anticipate the interaction of
multiple factors beyond management's control and their effect on revenues,
project timing and costs. The statements regarding revenue reductions and
collections of future CTC revenues are subject to unforeseen developments in
the market for electricity in Illinois resulting from regulatory changes. The
statements regarding estimated capital expenditures, decommissioning costs,
cleanup costs and Year 2000 conversion costs are subject to changes in the
scope of work and manner in which the work is performed and consequent changes
in the timing and level of the projected expenditure, and are also subject to
changes in laws and regulations or their interpretation or enforcement. The
statements regarding expectations for Year 2000 readiness and Unicom's Year
2000 contingency planning process are subject to the risk that Year 2000
remediation efforts of Unicom and other parties with whom it has significant
business relationships are not successful. The statements regarding the fair
value of forward energy contracts are subject to changes in generating
capability and a reduction in the demand for electricity. The statement
regarding the use of proceeds from the sale of the fossil plants is subject to
the possibility that regulatory action might affect the amount and use of such
proceeds and the possibility that, due to changing market conditions, Unicom
and ComEd may determine that other uses of the proceeds may
58
be in their best interest. Unicom and ComEd make no commitment to disclose any
revisions to the forward-looking statements, or any facts, events or
circumstances after the date hereof that may bear upon forward-looking
statements.
59
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Commonwealth Edison Company:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of Commonwealth Edison Company (an Illinois
corporation) and subsidiary companies as of March 31, 1999 and December 31,
1998, and the related statements of consolidated operations, retained earnings
(deficit) and cash flows for the three-month and twelve-month periods ended
March 31, 1999 and 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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, 1999 and December 31, 1998,
and the results of their operations and their cash flows for the three-month
and twelve-month periods ended March 31, 1999 and 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
May 12, 1999
60
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months and
twelve months ended March 31, 1999 and 1998 reflect the results of past
operations and are not intended as any representation as to results of
operations for any future period. Future operations will necessarily be
affected by various and diverse factors and developments, including changes in
electric prices, regulation, population, business activity, asset dispositions,
competition, taxes, environmental control, energy use, fuel, cost of labor,
purchased power and other matters, the nature and effect of which cannot now be
determined.
Three Months Ended Twelve Months Ended
March 31 March 31
---------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- -----------
(Thousands of Dollars)
Electric Operating Reve-
nues................... $1,528,800 $1,662,275 $6,955,066 $ 7,021,038
---------- ---------- ---------- -----------
Electric Operating Ex-
penses and Taxes:
Fuel................... $ 234,834 $ 222,293 $1,070,069 $ 1,125,902
Purchased power........ 71,682 173,392 646,306 464,400
Operation.............. 321,386 343,990 1,434,741 1,658,813
Maintenance............ 222,587 220,759 791,090 742,064
Depreciation and amor-
tization.............. 229,769 247,758 919,614 995,969
Taxes (except income).. 131,618 206,966 621,802 805,032
Income taxes--
Current--Federal..... 95,710 54,456 340,747 226,617
--State.............. 20,674 11,231 64,188 60,322
Deferred--Federal--
net................. (39,019) (7,016) (1,242) 45,782
--State--net......... (8,202) (563) 4,899 6,967
Investment tax cred-
its deferred--net... (7,021) (7,160) (27,591) (30,278)
---------- ---------- ---------- -----------
$1,274,018 $1,466,106 $5,864,623 $ 6,101,590
---------- ---------- ---------- -----------
Electric Operating In-
come................... $ 254,782 $ 196,169 $1,090,443 $ 919,448
---------- ---------- ---------- -----------
Other Income and (Deduc-
tions):
Interest on long-term
debt, net of interest
capitalized........... $ (138,559) $ (112,445) $ (456,718) $ (465,866)
Interest on notes pay-
able.................. (3,952) (3,119) (20,392) (10,302)
Allowance for funds
used during construc-
tion.................. 4,211 3,160 17,515 36,353
Income taxes applicable
to nonoperating
activities............ (1,416) 13,951 3,747 36,986
Provision for dividends
on company-obligated
mandatorily redeemable
preferred securities
of subsidiary trusts
holding solely the
Company's subordinated
debt securities....... (7,428) (7,428) (29,710) (29,640)
Loss on nuclear plant
closure............... -- -- -- (885,611)
Income tax effect of
nuclear plant closure. -- -- -- 362,952
Miscellaneous--net..... 14,269 (18,455) 39,395 (133,899)
---------- ---------- ---------- -----------
$ (132,875) $ (124,336) $ (446,163) $(1,089,027)
---------- ---------- ---------- -----------
Net Income (Loss) before
Extraordinary Items.... $ 121,907 $ 71,833 $ 644,280 $ (169,579)
Extraordinary Losses,
less Applicable Income
Taxes.................. (27,506) -- (27,506) (810,335)
---------- ---------- ---------- -----------
Net Income (Loss)....... $ 94,401 $ 71,833 $ 616,774 $ (979,914)
Provision for Dividends
on Preferred and
Preference Stocks...... 15,297 14,547 57,634 59,506
---------- ---------- ---------- -----------
Net Income (Loss) on
Common Stock........... $ 79,104 $ 57,286 $ 559,140 $(1,039,420)
========== ========== ========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
61
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
ASSETS 1999 1998
------ ----------- ------------
(Thousands of Dollars)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $827 million and
$858 million, respectively)....................... $28,008,632 $27,801,246
Less--Accumulated provision for depreciation....... 15,438,922 15,234,320
----------- -----------
$12,569,710 $12,566,926
Nuclear fuel, at amortized cost.................... 860,729 874,979
----------- -----------
$13,430,439 $13,441,905
----------- -----------
Investments:
Nuclear decommissioning funds...................... $ 2,374,908 $ 2,267,317
Subsidiary companies............................... 52,257 49,129
Other investments, at cost......................... 48,264 57,031
----------- -----------
$ 2,475,429 $ 2,373,477
----------- -----------
Current Assets:
Cash............................................... $ 14,337 $ 69
Temporary cash investments......................... 27,471 26,935
Cash held for redemption of securities............. 761,492 3,062,816
Special deposits................................... 297 271
Receivables--
Customers........................................ 1,215,242 1,364,760
Forward share repurchase contract................ 675,841 --
Other............................................ 85,448 138,594
Provisions for uncollectible accounts............ (48,401) (48,008)
Coal and fuel oil, at average cost................. 153,235 134,965
Materials and supplies, at average cost............ 233,672 229,532
Deferred income taxes related to current assets and
liabilities....................................... 39,996 26,486
Prepayments and other.............................. 36,535 18,387
----------- -----------
$ 3,195,165 $ 4,954,807
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets.................................. $ 4,518,346 $ 4,578,427
Other.............................................. 74,314 84,953
----------- -----------
$ 4,592,660 $ 4,663,380
----------- -----------
$23,693,693 $25,433,569
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
62
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
CAPITALIZATION AND LIABILITIES 1999 1998
------------------------------ ----------- ------------
(Thousands of Dollars)
Capitalization (see accompanying statements):
Common stock equity................................. $ 5,031,600 $ 5,055,837
Preferred and preference stocks without mandatory
redemption requirements............................ 74,482 74,488
Preference stock subject to mandatory redemption re-
quirements......................................... 69,475 69,475
Company-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely the
Company's subordinated debt securities* ........... 350,000 350,000
Long-term debt ..................................... 7,547,876 7,677,219
----------- -----------
$13,073,433 $13,227,019
----------- -----------
Current Liabilities:
Notes payable....................................... $ 204,207 $ 276,356
Current portion of long-term debt, redeemable pref-
erence stock and capitalized lease obligations..... 801,178 2,226,868
Accounts payable.................................... 459,383 605,712
Accrued interest.................................... 176,372 178,238
Accrued taxes....................................... 304,392 165,466
Dividends payable................................... 91,287 104,022
Customer deposits................................... 62,204 56,954
Accrued plant closing costs......................... 66,197 78,430
Other............................................... 127,246 149,304
----------- -----------
$ 2,292,466 $ 3,841,350
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................... $ 3,752,801 $ 3,787,978
Nuclear decommissioning liability for retired
plants............................................. 1,237,300 1,215,400
Accumulated deferred investment tax credits......... 553,436 562,285
Accrued spent nuclear fuel disposal fee and related
interest........................................... 736,644 728,413
Obligations under capital leases.................... 289,426 333,653
Regulatory liabilities.............................. 594,320 595,005
Other............................................... 1,163,867 1,142,466
----------- -----------
$ 8,327,794 $ 8,365,200
----------- -----------
Commitments and Contingent Liabilities (Note 21)
$23,693,693 $25,433,569
=========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
63
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
March 31, December 31,
1999 1998
----------- ------------
(Thousands of Dollars)
Common Stock Equity:
Common stock, $12.50 par value per share--
Outstanding (excluding treasury stock)--
213,971,988 shares and 214,057,171 shares,
respectively................................... $ 2,677,955 $ 2,677,952
Premium on common stock and other paid-in
capital......................................... 2,207,256 2,223,706
Capital stock and warrant expense................ (12,894) (15,664)
Retained earnings................................ 169,578 176,643
Treasury stock--264,406 shares and 178,982
shares, respectively............................ (10,295) (6,800)
----------- -----------
$ 5,031,600 $ 5,055,837
----------- -----------
Preferred and Preference Stocks Without Mandatory
Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--3,000,000 shares and 13,499,549
shares, respectively........................... $ 72,638 $ 504,957
Current redemption requirements for preference
stock included in current liabilities........... -- (432,320)
$1.425 convertible preferred stock, cumulative,
without par value--
Outstanding--58,003 shares and 58,211 shares,
respectively................................... 1,844 1,851
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding........................... -- --
----------- -----------
$ 74,482 $ 74,488
----------- -----------
Preference Stock Subject to Mandatory Redemption
Requirements:
Preference stock, cumulative, without par value--
Outstanding--700,000 shares and 1,720,345
shares, respectively........................... $ 69,475 $ 171,348
Current redemption requirements for preference
stock included in current liabilities........... -- (101,873)
----------- -----------
$ 69,475 $ 69,475
----------- -----------
Company-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely the
Company's Subordinated Debt Securities............ $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 1999 through 2003--6 3/8% to 9 3/8%... $ 672,345 $ 1,080,000
Maturing 2004 through 2013--4.40% to 8 3/8%.... 1,305,400 1,485,400
Maturing 2014 through 2023--5.85% to 9 7/8%.... 1,609,453 1,981,000
----------- -----------
$ 3,587,198 $ 4,546,400
Transitional trust notes, due 2000 through 2008--
5.29% to 5.74%.................................. 3,400,000 3,400,000
Sinking fund debentures, due 1999 through 2011--
2 3/4% to 7 5/8%................................ 36,159 94,159
Pollution control obligations, due 2007 through
2014--2.90% to 5 7/8%........................... 140,700 140,700
Other long-term debt............................. 1,056,300 1,056,346
Deposit for retirement of long-term debt......... (2,762) --
Current maturities of long-term debt included in
current liabilities............................. (615,009) (1,497,706)
Unamortized net debt discount and premium........ (54,710) (62,680)
----------- -----------
$ 7,547,876 $ 7,677,219
----------- -----------
$13,073,433 $13,227,019
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
64
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- --------------------
1999 1998 1999 1998
--------- --------- -------- ----------
(Thousands of Dollars)
Balance at Beginning of Period...... $ 176,643 $ (19,172) $(47,579) $1,334,714
Add--Net income (loss).............. 94,401 71,833 616,774 (979,914)
--------- --------- -------- ----------
$ 271,044 $ 52,661 $569,195 $ 354,800
--------- --------- -------- ----------
Deduct--
Dividends declared on--
Common stock.................... $ 85,589 $ 85,693 $342,672 $ 342,766
Preferred and preference stocks. 3,042 14,547 43,815 59,179
Preference stock redemption
premiums........................ 9,984 -- 9,984 --
Other capital stock
transactions--net............... 2,851 -- 3,146 434
--------- --------- -------- ----------
$ 101,466 $ 100,240 $399,617 $ 402,379
--------- --------- -------- ----------
Balance at End of Period (Includes
$586 million and $355 million of
appropriated retained earnings at
March 31, 1999 and 1998,
respectively)...................... $ 169,578 $ (47,579) $169,578 $ (47,579)
========= ========= ======== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
65
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended Twelve Months Ended
March 31 March 31
---------------------- -----------------------
1999 1998 1999 1998
----------- --------- ----------- ----------
(Thousands of Dollars)
Cash Flow from Operating Ac-
tivities:
Net income (loss)............ $ 94,401 $ 71,833 $ 616,774 $ (979,914)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortiza-
tion...................... 244,748 260,719 973,175 1,045,790
Deferred income taxes and
investment tax credits--
net....................... (55,261) 24,500 (16,965) (314,755)
Extraordinary loss related
to write-off of certain
net regulatory assets..... -- -- -- 810,335
Loss on nuclear plant
closure................... -- -- -- 885,611
Provisions/(payments) for
revenue refunds-net....... (22,493) (34,504) (10,856) 10,966
Equity component of
allowance for funds used
during construction....... (1,753) (1,584) (7,128) (20,274)
Provisions/(payments) for
liability for separation
costs--net................ (8,780) 7,425 (6,448) 24,037
Net effect on cash flows of
changes in:
Receivables.............. 203,057 64,285 (330,163) (17,513)
Coal and fuel oil........ (18,270) (36,186) 3,615 15,787
Materials and supplies... (4,140) (3,739) 22,118 37,950
Accounts payable
excluding nuclear fuel
lease principal payments
and separation costs--
net..................... (137,549) (21,958) (3,610) (4,901)
Accrued interest and tax-
es...................... 155,064 8,267 124,138 (59,590)
Other changes in certain
current assets and
liabilities............. 27,764 16,704 152,247 274,449
Other--net................. 80,969 58,166 70,850 170,179
----------- --------- ----------- ----------
$ 557,757 $ 413,928 $ 1,587,747 $1,878,157
----------- --------- ----------- ----------
Cash Flow from Investing Ac-
tivities:
Construction expenditures.... $ (228,416) $(170,986) $ (960,059) $ (930,905)
Nuclear fuel expenditures.... (50,085) (60,549) (155,705) (197,149)
Sales on generating plants... -- 177,454 -- 238,245
Equity component of
allowance for funds used
during construction......... 1,753 1,584 7,128 20,274
Contributions to nuclear
decommissioning funds....... (39,426) (80,077) (96,120) (114,721)
Other investments and spe-
cial deposits............... (288) (861) (602) 18,739
----------- --------- ----------- ----------
$ (316,462) $(133,435) $(1,205,358) $ (965,517)
----------- --------- ----------- ----------
Cash Flow from Financing Ac-
tivities:
Issuance of securities--
Transitional trust notes.... $ -- $ -- $ 3,382,629 $ --
Other long-term debt........ -- -- 222,068 --
Capital stock............... 6 133 117 222
Retirement and redemption of
securities--
Long-term debt.............. (1,053,080) (364,044) (1,187,221) (596,901)
Capital stock............... (564,213) (133) (604,946) (44,045)
Deposits and securities held
for retirement and redemp-
tion of
securities.................. -- (4,064) -- (1,733)
Prepayment of forward share
repurchase contract......... (675,841) -- (675,841) --
Cash dividends paid on capi-
tal stock................... (108,793) (110,854) (427,806) (432,314)
Proceeds from sale/leaseback
of nuclear fuel............. -- 16,565 84,473 122,049
Nuclear fuel lease principal
payments.................... (53,745) (32,186) (277,163) (149,048)
Increase/(decrease) in
short-term borrowings....... (72,149) 221,500 (175,443) 249,900
----------- --------- ----------- ----------
$(2,527,815) $(273,083) $ 340,867 $ (851,870)
----------- --------- ----------- ----------
Change in Net Cash Balance.... $(2,286,520) $ 7,410 $ 723,256 $ 60,770
Cash, Temporary Cash Invest-
ments and Cash Held for Re-
demption of Securities:
Balance at Beginning of Pe-
riod........................ 3,089,820 72,634 80,044 19,274
----------- --------- ----------- ----------
Balance at End of Period..... $ 803,300 $ 80,044 $ 803,300 $ 80,044
=========== ========= =========== ==========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
66
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies.
See Unicom's Note 1 of Notes to Financial Statements for a discussion of
significant accounting policies, except for the following specific policies
discussed below and the subcaption "Average Common Shares Outstanding" in
Unicom's Note 1.
Income Taxes. ComEd is included in the consolidated federal and state income
tax returns filed by Unicom. Current and deferred income taxes of the
consolidated group are allocated to ComEd as if ComEd filed separate tax
returns. Deferred income taxes are provided for income and expense items
recognized for financial accounting purposes in periods that differ from those
for income tax purposes. Income taxes deferred in prior years are charged or
credited to income as the book/tax temporary differences reverse. Prior years'
deferred investment tax credits are amortized through credits to income
generally over the lives of the related property. Income tax credits resulting
from interest charges applicable to nonoperating activities, principally
construction, are classified as other income.
Interest. Total interest costs incurred on debt, leases and other
obligations were $163 million and $137 million for the three months ended
March 31, 1999 and 1998, respectively, and $561 million and $573 million for
the twelve months ended March 31, 1999 and 1998, respectively.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, are considered to be
cash equivalents. Supplemental cash flow information for the three months and
twelve months ended March 31, 1999 and 1998 was as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands of Dollars)
Supplemental Cash Flow Information:
Cash paid during the period for:
Interest (net of amount capital-
ized)............................ $ 158,744 $ 150,537 $ 462,174 $ 495,062
Income taxes (net of refunds)..... $ (25,921) $ -- $ 276,368 $ 274,370
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Capital lease obligations incurred.. $ 1,162 $ 17,996 $ 89,537 $ 130,011
(2) Accounting Effects Related to the 1997 Act. See Unicom's Note 2 of Notes
to Financial Statements, except for EPS information.
(3) Rate Matters. See Unicom's Note 3 of Notes to Financial Statements.
(4) Closure and Sale of Plants. See Unicom's Note 4 of Notes to Financial
Statements, except for EPS information.
(5) Authorized Shares and Voting Rights of Capital Stock. At March 31, 1999,
the authorized shares of capital stock were: common stock--250,000,000 shares;
preference stock--10,510,451 shares; $1.425 convertible preferred stock--
58,003 shares; and prior preferred stock--850,000 shares. The preference and
prior preferred stocks are issuable in series and may be issued with or
without mandatory redemption requirements. Holders of shares at any time
outstanding, regardless of class, are entitled to one vote for each share held
on each matter submitted to a vote at a meeting of shareholders, with the
right to cumulate votes in all elections for directors.
67
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(6) Common Equity. In the fourth quarter of 1998, ComEd entered into a
forward purchase arrangement with Unicom for the repurchase of $200 million of
ComEd common stock. This contract, which was accounted for as an equity
instrument as of December 31, 1998, was settled on a net cash basis in February
1999 resulting in a $16 million reduction to common stock equity on the
Consolidated Balance Sheets.
In February 1999, ComEd also entered into a prepaid forward purchase
agreement with Unicom for the repurchase of approximately 15 million shares of
Unicom common stock. This forward purchase arrangement was amended to also
include the repurchase of approximately 5.1 million shares for a total of 20.1
million shares, subsequent to the net cash settlement of the $200 million
repurchase program, as described above. The repurchase arrangement, as amended,
provides for final settlement no later than February 2000, on either a physical
(share) basis, or a net cash basis. The terms of the repurchase agreement
between ComEd and Unicom are identical to the terms of Unicom's repurchase
agreement with the financial institution. The repurchase agreement between
ComEd and Unicom is expected to be settled on the same basis Unicom settles its
repurchase arrangements with the financial institution. The amount at which the
arrangement can be settled is dependent principally upon the average market
price at which Unicom common shares have been repurchased under its repurchase
agreement, compared to the forward price per share. The share repurchases will
not reduce shares outstanding or common stock equity, and resulting return on
common equity calculations, until the date of physical settlement. ComEd does
not currently anticipate that settlement will occur in 1999. The repurchase
arrangement has been recorded as a receivable on the Consolidated Balance
Sheets and will be adjusted at the end of each reporting period to reflect the
aggregate market value of the shares deliverable under the arrangement.
Consequently, the arrangement could increase earnings volatility in 1999. In
the first quarter of 1999, an unrealized gain of $14 million (after-tax)
related to the arrangement was recorded.
At March 31, 1999, shares of common stock were reserved for the following
purposes:
Conversion of $1.425 convertible preferred stock................... 59,163
Conversion of warrants............................................. 25,325
------
84,488
======
Shares of common stock issued for the three months and twelve months ended
March 31, 1999 and 1998 were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------ -------------------
1999 1998 1999 1998
------------------ --------- ---------
Conversion of $1.425 convertible
preferred stock........................ 212 4,269 3,791 7,148
Conversion of warrants.................. 29 84 173 265
-------- --------- --------- ---------
241 4,353 3,964 7,413
======== ========= ========= =========
As of March 31, 1999 and December 31, 1998, 264,406 shares and 178,982
shares, respectively, of ComEd common stock were reacquired and held as
treasury stock at a cost of $10 million and $7 million, respectively.
At March 31, 1999 and December 31, 1998, 75,976 and 76,079, respectively, of
common stock purchase warrants were outstanding. The warrants entitle the
holders to convert such warrants into common stock at a conversion rate of one
share of common stock for three warrants.
68
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
As of March 31, 1999 and December 31, 1998, $586 million and $580 million,
respectively, of retained earnings had been appropriated for future dividend
payments.
(7) Stock Option Awards/Employee Stock Purchase Plan. See Unicom's Note 7 of
Notes to Financial Statements, except for EPS information.
(8) Preferred and Preference Stocks Without Mandatory Redemption
Requirements. See Unicom's Note 8 of Notes to Financial Statements.
(9) Preference Stock Subject to Mandatory Redemption Requirements. See
Unicom's Note 9 of Notes to Financial Statements.
(10) Company-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securities.
See Unicom's Note 10 of Notes to Financial Statements.
(11) Long-Term Debt. See Unicom's Note 11 of Notes to Financial Statements,
except for the last paragraph regarding Unicom Thermal's senior Note.
(12) Lines of Credit. See the first paragraph of Unicom's Note 12 of Notes
to Financial Statements.
(13) Disposal of Spent Nuclear Fuel. See Unicom's Note 13 of Notes to
Financial Statements.
(14) Fair Value of Financial Instruments. See Unicom's Note 14 of Notes to
Financial Statements, except for the following section.
Capitalization. The estimated fair values of preferred and preference
stocks, company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely the Company's subordinated debt securities,
transitional trust notes, and long-term debt were obtained from an independent
consultant. The estimated fair values, which include the current portions of
redeemable preference stock and long-term debt but exclude accrued interest
and dividends, as of March 31, 1999 and December 31, 1998 were as follows:
March 31, 1999 December 31, 1998
-------------------------------- --------------------------------
Unrealized
Carrying Losses/ Carrying Unrealized
Value (Gains) Fair Value Value Losses Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
ComEd preferred and
preference stocks...... $ 143,957 $ 4,536 $ 148,493 $ 678,156 $ 11,500 $ 689,656
Company-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely the
Company's subordinated
debt securities........ $ 350,000 $ 24,652 $ 374,652 $ 350,000 $ 20,678 $ 370,678
Transitional trust
notes.................. $3,383,973 $(13,027) $3,370,946 $3,382,821 $ 67,168 $3,449,989
Long-term debt.......... $4,781,374 $302,665 $5,084,039 $5,791,757 $442,077 $6,233,834
(15) Pension and Postretirement Benefits. See Unicom's Note 15 of Notes to
Financial Statements.
(16) Separation Plan Costs. See Unicom's Note 16 of Notes to Financial
Statements, except for EPS information.
69
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(17) Income Taxes. The components of the net deferred income tax liability
at March 31, 1999 and December 31, 1998 were as follows:
March 31, December 31,
1999 1998
---------- ------------
(Thousands of Dollars)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized
depreciation, net of removal costs.................. $3,991,817 $4,007,681
Overheads capitalized................................ 139,633 140,922
Repair allowance..................................... 230,941 233,861
Regulatory assets recoverable through future rates... 677,397 680,356
Deferred income tax assets:
Postretirement benefits.............................. (341,350) (331,566)
Unamortized investment tax credits................... (187,998) (191,135)
Regulatory liabilities to be settled through future
rates............................................... (594,320) (595,005)
Nuclear plant closure................................ (33,414) (38,354)
Other--net........................................... (169,901) (145,268)
---------- ----------
Net deferred income tax liability..................... $3,712,805 $3,761,492
========== ==========
The $49 million decrease in the net deferred income tax liability from
December 31, 1998 to March 31, 1999 is comprised of a $47 million credit to
net deferred income tax expense and a $2 million decrease in regulatory assets
net of regulatory liabilities pertaining to income taxes for the period. The
amount of accelerated cost recovery and liberalized depreciation included in
deferred income tax liabilities for both periods includes amounts related to
the regulatory asset for impaired production plant. The amount of regulatory
assets included in deferred income tax liabilities primarily relates to the
equity component of AFUDC which is recorded on an after-tax basis, the
borrowed funds component of AFUDC which was previously recorded net of tax and
other temporary differences for which the related tax effects were not
previously recorded. The amount of other regulatory liabilities included in
deferred income tax assets primarily relates to deferred income taxes provided
at rates in excess of the current statutory rate.
The components of net income tax expense charged (credited) to continuing
operations for the three months and twelve months ended March 31, 1999 and
1998 were as follows:
Twelve Months
Three Months Ended Ended
March 31 March 31
-------------------- -------------------
1999 1998 1999 1998
--------- --------- -------- ---------
(Thousands of Dollars)
Electric operating income:
Current income taxes.............. $ 116,384 $ 65,687 $404,935 $ 286,939
Deferred income taxes............. (47,221) (7,579) 3,657 52,749
Investment tax credits deferred--
net.............................. (7,021) (7,160) (27,591) (30,278)
Other (income) and deductions:
Current income taxes.............. 2,668 (53,067) (10,496) (62,367)
Deferred income taxes............. 837 46,749 13,546 (339,134)
Investment tax credits............ (1,828) (7,472) (6,463) (29,997)
--------- --------- -------- ---------
Net income taxes charged (credited)
to continuing operations.......... $ 63,819 $ 37,158 $377,588 $(122,088)
========= ========= ======== =========
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, 1999
and 1998:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- ---------------------
1999 1998 1999 1998
--------- --------- ---------- ---------
Pre-tax book income (loss) (thou-
sands)........................... $ 185,726 $ 108,991 $1,021,868 $(291,667)
Effective income tax rate......... 34.4% 34.1% 37.0% 41.9%
70
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Concluded
The principal differences between net income taxes charged (credited) to
continuing operations and the amounts computed at the federal statutory rate
of 35% for the three months and twelve months ended March 31, 1999 and 1998
were as follows:
Three Months Ended Twelve Months Ended
March 31 March 31
-------------------- ---------------------
1999 1998 1999 1998
--------- --------- --------- ----------
(Thousands of Dollars)
Federal income taxes computed at
statutory rate................... $ 65,004 $ 38,147 $ 357,654 $ (102,083)
Equity component of AFUDC which
was excluded from taxable income. (98) (89) (399) (6,630)
Amortization of investment tax
credits, net of deferred income
taxes............................ (5,711) (931) (22,006) (24,049)
State income taxes, net of federal
income taxes..................... 8,465 6,134 45,991 1,272
Unrealized gain on forward share
repurchase contract.............. (4,805) -- (4,805) --
Differences between book and tax
accounting, primarily property-
related deductions............... 964 (6,103) 1,153 9,402
--------- --------- --------- ----------
Net income taxes charged
(credited) to continuing
operations....................... $ 63,819 $ 37,158 $ 377,588 $ (122,088)
========= ========= ========= ==========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes,
for the three months and twelve months ended March 31, 1999 and 1998 were as
follows:
Three Months Ended Twelve Months Ended
March 31 March 31
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
(Thousands of Dollars)
Illinois public utility revenue......... $ 1,495 $ 57,682 $ 70,295 $234,276
Illinois invested capital............... -- -- -- 73,314
Illinois electricity distribution tax... 28,337 26,718 111,644 26,718
Municipal utility gross receipts........ 24,300 42,551 134,628 169,542
Real estate............................. 33,027 39,631 122,027 150,642
Municipal compensation.................. 18,269 19,871 76,407 79,047
Other--net.............................. 26,190 20,513 106,801 71,493
--------- --------- --------- ---------
$ 131,618 $ 206,966 $ 621,802 $805,032
========= ========= ========= =========
Effective January 1, 1998, the Illinois invested capital tax was repealed
and the Illinois electricity distribution tax was enacted as a replacement.
The new tax is based on the kilowatthours delivered to ultimate consumers.
Effective August 1, 1998, as provided for by the 1997 Act, the Illinois
electricity excise tax, replacing the Illinois public utility revenue tax, and
certain municipal utility taxes are recorded as liabilities. Previously,
similar taxes were presented on the Statements of Consolidated Operations as
revenue and expense. The reduction in operating revenues and taxes, except
income taxes, due to the change in presentation for such taxes was
approximately $68 million and $163 million for the three months and twelve
months ended March 31, 1999, respectively. This change in the presentation for
such taxes did not have an effect on results of operations.
See Unicom's Note 21 for additional information regarding Illinois invested
capital taxes.
(19) Lease Obligations. See the first and second paragraphs of Unicom's Note
19 of Notes to Financial Statements.
Future minimum rental payments at March 31, 1999 for operating leases are
estimated to aggregate to $278 million, including $30 million in 1999, $36
million in 2000, $29 million in 2001, $25 million in 2002, $22 million in 2003
and $136 million in 2004-2024.
(20) Joint Plant Ownership. See Unicom's Note 20 of Notes to Financial
Statements.
(21) Commitments and Contingent Liabilities. See Unicom's Note 21 of Notes
to Financial Statements.
71
COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in the Electric Utility Industry. See Unicom's "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Changes in the Electric Utility Industry," which is incorporated
herein by this reference, except for EPS information.
Liquidity and Capital Resources. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Liquidity and Capital Resources--UTILITY OPERATIONS," which is incorporated
herein by this reference.
Regulation. See Unicom's "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Regulation," which is
incorporated herein by this reference.
Results of Operations. See Unicom's "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaption "Results of
Operations" (other than the first paragraph thereof), which is incorporated
herein by this reference, except for EPS information.
Forward-Looking Information. See Unicom's "Management's Discussion and
Analysis of Financial Condition and Results of Operations," subcaption
"Forward-Looking Information," which is incorporated herein by this reference.
72
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
During the first quarter of 1999, no civil penalties were imposed on ComEd
for violations of NRC regulations. To ComEd's knowledge, there are no current
enforcement issues outstanding or under review by the NRC.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that Cotter has permitted radioactive and other
hazardous material to be released from its mill into areas owned or occupied
by the plaintiffs resulting in property damage and potential adverse health
effects. With respect to Cotter, in 1994 a federal jury returned nominal
dollar verdicts on eight bellwether plaintiffs' claims in the 1989 cases,
which verdicts were upheld on appeal. The remaining claims in the 1989 actions
have been settled and dismissed. On July 15, 1998, a jury verdict was rendered
in Dodge v. Cotter (United States District Court for the District of Colorado,
Civil Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the
1991 cases. The verdict against Cotter and in favor of the plaintiff, after an
amended judgement was issued March 11, 1999, totaled approximately $6 million,
including compensatory and punitive damages, interest, and medical monitoring.
The matter is currently on appeal. Although the other 1991 cases will
necessarily involve the resolution of numerous contested issues of fact and
law, Unicom and ComEd's determination is that these actions will not have a
material impact on their financial position or results of operations.
CERCLA provides for immediate response and removal actions coordinated by
the U.S. EPA to releases of hazardous substances into the environment and
authorizes the U.S. Government either to clean up sites at which hazardous
substances have created actual or potential environmental hazards or to order
persons responsible for the situation to do so. Under CERCLA, generators and
transporters of hazardous substances, as well as past and present owners and
operators of hazardous waste sites, are made strictly, jointly and severally
liable for the cleanup costs of waste at sites, most of which are listed by
the U.S. EPA on the NPL. These responsible parties can be ordered to perform a
cleanup, can be sued for costs associated with a U.S. EPA directed cleanup,
may voluntarily settle with the U.S. Government concerning their liability for
cleanup costs, or may voluntarily begin a site investigation and site
remediation prior to listing on the NPL under state oversight. Various states,
including Illinois, have enacted statutes which contain provisions
substantially similar to CERCLA. ComEd and its subsidiaries are or are likely
to become parties to proceedings initiated by the U.S. EPA, state agencies
and/or other responsible parties under CERCLA with respect to a number of
sites, including MGP sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. See Note 21 of
Notes to Financial Statements for information regarding costs associated with
investigating and remediating former MGP sites.
From time to time, Unicom and its subsidiaries are, or are claimed to be, in
violation of or in default under orders, statutes, rules or regulations
relating to environmental controls and other matters, compliance plans imposed
upon or agreed to by them or permits issued by various state and federal
agencies for the construction or operation of their facilities. Unicom and
ComEd do not believe, so far as they now foresee, that such violations or
defaults will have a material adverse effect on their future business and
operating results, except for events otherwise described in Unicom and ComEd's
Annual Reports on Form 10-K for the year ended December 31, 1998 or in these
Quarterly Reports on Form 10-Q for the quarterly period ended March 31, 1999,
which could have such an effect.
73
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description of Exhibit
------- ------------------------------------------------------------------
(12) Statement computing Commonwealth Edison Company ratios of earnings
to fixed charges and ratios of earnings to fixed charges and
preferred and preference stock dividend requirements.
(23)-1 Consent of independent public accountants applicable to Unicom
Corporation.
(23)-2 Consent of independent public accountants applicable to
Commonwealth Edison Company.
(27)-1 Financial data schedule of Unicom Corporation.
(27)-2 Financial data schedule of Commonwealth Edison Company.
(b) Reports on Form 8-K
A Current Report on Form 8-K dated February 10, 1999 was filed by Unicom
and ComEd describing a prepaid forward purchase arrangement entered into by
Unicom with a financial institution for the repurchase of approximately 15
million shares of Unicom common stock, in addition to the previously
announced plan to repurchase 5.1 million shares of Unicom common stock.
A Current Report on Form 8-K dated February 19, 1999 was filed containing
Unicom's consolidated financial statements as of, and for the year ended,
December 31, 1998.
A Current Report on Form 8-K dated February 19, 1999 was filed containing
ComEd's consolidated financial statements as of, and for the year ended,
December 31, 1998.
A Current Report on Form 8-K dated March 22, 1999 was filed by Unicom and
ComEd announcing the agreement to sell ComEd's six coal-fired generating
plants, an oil and gas-fired plant, and nine peaking unit sites to Edison
Mission Energy for a purchase price of $4.813 billion.
A Current Report on Form 8-K dated March 23, 1999 was filed by Unicom and
ComEd announcing a settlement agreement with the City of Chicago to end the
arbitration proceeding between ComEd and the City regarding the January 1,
1992 franchise agreement and a supplemental agreement between them.
74
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 14th day of May 1999. The
signature for each undersigned company shall be deemed to relate only to
matters having reference to such company and its subsidiaries thereof.
Unicom Corporation
Registrant
By Robert E. Berdelle
_____________________________________
Robert E. Berdelle
Vice President and Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
Commonwealth Edison Company
Registrant
By Robert E. Berdelle
_____________________________________
Robert E. Berdelle
Vice President and Comptroller
(Chief accounting officer and
officer duly authorized to sign on
behalf of the registrant)
75