EX-99 4 0004.txt UNICOM CORPORATION QUARTERLY REPORT For the Quarterly Period Ended September 30, 2000 Unicom Corporation Quarterly Report for the Quarterly Period Ended September 30, 2000 This document contains a Quarterly Report for the quarterly period ended September 30, 2000 for Unicom Corporation. In addition, several portions of this 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, nine months and twelve months ended September 30, 2000 and 1999.......... 5 Consolidated Balance Sheets--September 30, 2000 and December 31, 1999................................................................ 6-7 Statements of Consolidated Capitalization--September 30, 2000 and December 31, 1999 .................................................. 8 Statements of Consolidated Retained Earnings for the three months, nine months and twelve months ended September 30, 2000 and 1999..... 9 Statements of Consolidated Comprehensive Income for the three months, nine months and twelve months ended September 30, 2000 and 1999..... 9 Statements of Consolidated Cash Flows for the three months, nine months and twelve months ended September 30, 2000 and 1999.......... 10 Notes to Financial Statements........................................ 11-41 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 42-59 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 60
2 DEFINITIONS The following terms are used in this document with the following meanings:
Term Meaning ---------------------- ------------------------------------------------------- 1997 Act Illinois Electric Service Customer Choice and Rate Relief Law of 1997, as amended AFUDC Allowance for funds used during construction APB Accounting Principles Board APX Automated Power Exchange Inc., a California company CERCLA Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended City City of Chicago ComEd Commonwealth Edison Company, an Exelon subsidiary ComEd Funding ComEd Funding, LLC, a ComEd subsidiary ComEd Funding Trust ComEd Transitional Funding Trust, a ComEd Funding subsidiary Cotter Cotter Corporation, formerly a ComEd subsidiary CTC Non-bypassable "competitive transition charge" DOE U.S. Department of Energy Edison Development Edison Development Canada Inc., a ComEd subsidiary EME Edison Mission Energy, an Edison International subsidiary EPS Earnings/(Loss) per Common Share ESPP Employee Stock Purchase Plan FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission Fossil Plant ComEd's former six coal-fired generating plants, an oil and gas-fired plant, and nine peaking unit sites GAAP Generally Accepted Accounting Principles ICC Illinois Commerce Commission IDR Illinois Department of Revenue Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd subsidiary INPO Institute of Nuclear Power Operations ISO Independent System Operator MGP Manufactured gas plant NEIL Nuclear Electric Insurance Limited Northwind Chicago Northwind Chicago, LLC, a UT Holdings subsidiary Northwind Midway Northwind Midway, LLC, a UT Holdings subsidiary NRC Nuclear Regulatory Commission O&M Operation and maintenance PECO PECO Energy Company, a Pennsylvania company PPAs Purchase Power Agreements RES Retail Electric Supplier RTO Regional Transmission Organization 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 Power Holdings Unicom Power Holdings Inc., a Unicom Enterprises subsidiary Unicom Thermal Unicom Thermal Technologies Inc., a UT Holdings subsidiary U.S. EPA U.S. Environmental Protection Agency UT Holdings UT Holdings Inc., a Unicom Enterprises subsidiary
3 Part I. Financial Information REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Unicom Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of UNICOM CORPORATION (an Illinois corporation) and subsidiary companies as of September 30, 2000 and December 31, 1999, and the related statements of consolidated operations, retained earnings, comprehensive income and cash flows for the three-month, nine-month and twelve-month periods ended September 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Unicom Corporation and subsidiary companies as of September 30, 2000 and December 31, 1999, and the results of their operations and their cash flows for the three- month, nine-month and twelve-month periods ended September 30, 2000 and 1999, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois November 3, 2000 4 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months, nine months and twelve months ended September 30, 2000 and 1999 reflect the results of past operations and are not intended as any representation as to results of operations for any future period. Future operations will necessarily be affected by various and diverse factors and developments, including changes in electric prices, regulation, population, business activity, asset dispositions, competition, taxes, environmental control, energy use, fuel, cost of labor, purchased power and other matters, the nature and effect of which cannot now be determined.
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ---------------------- ---------------------- ---------------------- 2000 1999 2000 1999 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- (Thousands Except Per Share Data) Operating Revenues...... $2,220,289 $2,084,454 $5,685,671 $5,307,972 $7,225,646 $6,871,640 ---------- ---------- ---------- ---------- ---------- ---------- Operating Expenses and Taxes: Fuel.................. $ 97,207 $ 302,181 $ 294,046 $ 796,654 $ 494,654 $1,049,699 Purchased power....... 735,894 249,375 1,410,881 419,358 1,544,823 520,987 Operation and maintenance.......... 654,518 581,937 1,749,008 1,787,435 2,387,446 2,369,062 Depreciation and amortization......... 230,214 202,109 831,859 700,388 974,719 929,731 Taxes (except income).............. 138,610 144,791 406,357 407,286 507,525 535,247 Income taxes.......... 45,771 181,654 138,073 305,265 192,007 354,131 Investment tax credits deferred--net ....... (5,499) (7,021) (16,498) (21,063) (21,263) (27,856) ---------- ---------- ---------- ---------- ---------- ---------- $1,896,715 $1,655,026 $4,813,726 $4,395,323 $6,079,911 $5,731,001 ---------- ---------- ---------- ---------- ---------- ---------- Operating Income........ $ 323,574 $ 429,428 $ 871,945 $ 912,649 $1,145,735 $1,140,639 ---------- ---------- ---------- ---------- ---------- ---------- Other Income and (Deductions): Interest on long-term debt, net of interest capitalized.......... $ (133,837) $ (134,622) $ (398,058) $ (413,132) $ (529,888) $ (522,526) Interest on notes payable.............. (7,538) (5,282) (13,709) (13,003) (19,308) (17,377) Allowance for funds used during construction......... 5,599 6,581 16,610 15,982 22,440 20,121 Income taxes applicable to nonoperating activities........... (23,196) 2,080 (44,614) (1,169) (16,362) (17,418) Provisions for dividends and redemption premiums-- Preferred and preference stocks of ComEd............... (534) (1,830) (2,773) (20,170) (6,359) (33,991) ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities..... (7,428) (7,428) (22,283) (22,283) (29,710) (29,710) Miscellaneous--net.... 9,991 (9,175) 102,158 37,492 43,607 67,816 ---------- ---------- ---------- ---------- ---------- ---------- $ (156,943) $ (149,676) $ (362,669) $ (416,283) $ (535,580) $ (533,085) ---------- ---------- ---------- ---------- ---------- ---------- Net Income before Extraordinary Items ... $ 166,631 $ 279,752 $ 509,276 $ 496,366 $ 610,155 $ 607,554 Extraordinary Losses, less Applicable Income Taxes.................. (2,967) -- (7,134) (27,579) (7,134) (27,579) ---------- ---------- ---------- ---------- ---------- ---------- Net Income.............. $ 163,664 $ 279,752 $ 502,142 $ 468,787 $ 603,021 $ 579,975 ========== ========== ========== ========== ========== ========== Earnings per common share before extraordinary items Basic................. $ 0.96 $ 1.29 $ 2.82 $ 2.29 $ 3.21 $ 2.80 Diluted............... $ 0.95 $ 1.28 $ 2.80 $ 2.28 $ 3.20 $ 2.79 Extraordinary losses, less applicable income taxes (basic and diluted)............... $ (0.02) -- $ (0.04) $ (0.13) $ (0.04) $ (0.13) Earnings per common share-- Basic................. $ 0.94 $ 1.29 $ 2.78 $ 2.16 $ 3.17 $ 2.67 Diluted............... $ 0.93 $ 1.28 $ 2.76 $ 2.15 $ 3.16 $ 2.66 Cash Dividends Declared per Common Share....... $ 0.40 $ 0.40 $ 1.20 $ 1.20 $ 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
September 30, December 31, ASSETS 2000 1999 ------ ------------- ------------ (Thousands of Dollars) Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $801 million and $672 million, respectively)...................... $25,742,682 $25,007,637 Less--Accumulated provision for depreciation...... 14,151,813 13,729,223 ----------- ----------- $11,590,869 $11,278,414 Nuclear fuel, at amortized cost................... 845,401 843,724 ----------- ----------- $12,436,270 $12,122,138 ----------- ----------- Investments and Other Property: Nuclear decommissioning funds..................... $ 2,662,020 $ 2,546,540 Investment in leases.............................. 395,868 -- Nonutility property--less accumulated provision for depreciation of $24,894 and $17,345, respectively..................................... 251,329 304,976 Goodwill.......................................... 78,373 34,955 Subsidiary companies.............................. 17,583 50,417 Other, at cost.................................... 196,358 130,917 ----------- ----------- $ 3,601,531 $ 3,067,805 ----------- ----------- Current Assets: Cash and temporary cash investments............... $ 981,940 $ 1,696,336 Cash held for redemption of securities............ 71,622 285,056 Other cash investments............................ 1,231 62 Special deposits.................................. 515 1,845,730 Investment in leases.............................. 1,235,194 -- Receivables-- Customers....................................... 1,300,276 1,224,678 Forward share repurchase contract............... -- 813,046 Income Taxes.................................... 731,707 -- Other........................................... 192,266 181,532 Provisions for uncollectible accounts........... (48,004) (50,814) Coal and fuel oil, at average cost................ 18,271 15,613 Materials and supplies, at average cost........... 239,929 221,157 Deferred income taxes related to current assets and liabilities.................................. 71,276 60,056 Prepayments and other............................. 150,742 36,268 ----------- ----------- $ 4,946,965 $ 6,328,720 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Regulatory assets................................. $ 1,526,590 $ 1,792,907 Other............................................. 71,279 94,463 ----------- ----------- $ 1,597,869 $ 1,887,370 ----------- ----------- $22,582,635 $23,406,033 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 6 UNICOM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, CAPITALIZATION AND LIABILITIES 2000 1999 ------------------------------ ------------- ------------ (Thousands of Dollars) Capitalization (see accompanying statements): Common stock equity............................... $ 3,700,755 $ 5,332,611 Preferred and preference stocks of ComEd-- Without mandatory redemption requirements....... -- 1,790 ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities*............ 350,000 350,000 Long-term debt.................................... 7,133,995 7,129,906 ----------- ----------- $11,184,750 $12,814,307 ----------- ----------- Current Liabilities: Notes payable..................................... $ 1,477,990 $ 4,750 Current portion of long-term debt, redeemable preference stock and capitalized lease obliga- tions of subsidiary companies.................... 350,474 915,439 Accounts payable.................................. 928,584 582,920 Accrued interest.................................. 136,473 146,718 Accrued taxes..................................... 130,453 1,386,930 Dividends payable................................. 70,406 94,090 Customer deposits................................. 69,823 68,128 Other............................................. 221,779 316,542 ----------- ----------- $ 3,385,982 $ 3,515,517 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes............................. $ 3,451,783 $ 2,484,883 Nuclear decommissioning liability for retired plants........................................... 1,288,000 1,259,700 Accumulated deferred investment tax credits....... 461,762 484,717 Accrued spent nuclear fuel disposal fee and re- lated interest................................... 797,457 763,427 Obligations under capital leases of subsidiary companies........................................ -- 161,611 Regulatory liabilities............................ 580,991 596,157 Other............................................. 1,431,910 1,325,714 ----------- ----------- $ 8,011,903 $ 7,076,209 ----------- ----------- Commitments and Contingent Liabilities (Note 21) $22,582,635 $23,406,033 =========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. The accompanying Notes to Financial Statements are an integral part of the above statements. 7 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CAPITALIZATION
September 30, December 31, 2000 1999 ------------- ------------ (Thousands of Dollars) Common Stock Equity: Common stock, without par value-- Outstanding--219,075,493 shares and 217,817,610 shares, respectively............................. $ 5,002,631 $ 4,971,618 Preference stock expense of ComEd.................. -- (72) Retained earnings.................................. 657,421 364,345 Accumulated other comprehensive income............. 3,806 6,815 Treasury stock--49,708,406 shares and 264,406 shares, respectively.............................. (1,963,103) (10,095) ----------- ----------- $ 3,700,755 $ 5,332,611 ----------- ----------- Preferred and Preference Stocks of ComEd-- Without Mandatory Redemption Requirements: $1.425 convertible preferred stock, cumulative, without par value--Outstanding--no shares and 56,291 shares, respectively..................... $ -- $ 1,790 Prior preferred stock, cumulative, $100 par value per share-- No shares outstanding........................... -- -- ----------- ----------- $ -- $ 1,790 ----------- ----------- Subject to Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--No shares and 700,000 shares, respectively................................... $ -- $ 69,475 Current redemption requirements for preference stock included in current liabilities.......................... -- (69,475) ----------- ----------- $ -- $ -- ----------- ----------- ComEd-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities................ $ 350,000 $ 350,000 ----------- ----------- Long-Term Debt: First mortgage bonds: Maturing 2000 through 2004--5.30% to 9 3/8%...... $ 326,000 $ 698,245 Maturing 2005 through 2014--4.40% to 8 3/8%...... 1,299,400 1,299,400 Maturing 2015 through 2023--6.75% to 9 7/8%...... 1,486,950 1,589,443 ----------- ----------- $ 3,112,350 $ 3,587,088 Transitional trust notes, due 2001 through 2008-- 5.29% to 5.74%.................................... 2,804,541 3,070,000 Sinking fund debentures, due 2001 through 2011--2 7/8% to 4.75%..................................... 26,674 30,866 Pollution control obligations, due 2007 through 2014--4.65% to 5 7/8%............................. 137,700 139,200 Other long-term debt............................... 1,447,201 1,089,347 Current maturities of long-term debt included in current liabilities............................... (350,474) (737,615) Unamortized net debt discount and premium.......... (43,997) (48,980) ----------- ----------- $ 7,133,995 $ 7,129,906 ----------- ----------- $11,184,750 $12,814,307 ----------- -----------
The accompanying Notes to Financial Statements are an integral part of the above statements. 8 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
Three Months Ended September Nine Months Ended Twelve Months Ended 30 September 30 September 30 ------------------ ------------------ -------------------- 2000 1999 2000 1999 2000 1999 -------- -------- -------- -------- --------- --------- (Thousands of Dollars) Balance at Beginning of Period................. $561,502 $157,467 $364,345 $143,537 $348,126 $ 117,833 Add--Net income......... 163,664 279,752 502,142 468,787 603,021 579,975 -------- -------- -------- -------- --------- --------- $725,166 $437,219 $866,487 $612,324 $ 951,147 $ 697,808 -------- -------- -------- -------- --------- --------- Deduct-- Cash dividends declared on common stock....... $ 67,750 $ 86,979 $209,473 $260,760 $ 296,495 $ 347,566 Other capital stock transactions--net.. (5) 2,114 (407) 3,438 (2,769) 2,116 -------- -------- -------- -------- --------- --------- $ 67,745 $ 89,093 $209,066 $264,198 $ 293,726 $ 349,682 -------- -------- -------- -------- --------- --------- Balance at End of Period (Includes $1,009 million and $702 million of appropriated retained earnings for future dividend payments at September 30, 2000 and 1999, respectively)... $657,421 $348,126 $657,421 $348,126 $ 657,421 $ 348,126 ======== ======== ======== ======== ========= =========
UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------- -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- --------- --------- --------- (Thousands of Dollars) Net Income.............. $ 163,664 $ 279,752 $502,142 $468,787 $603,021 $579,975 Other Comprehensive Income Unrealized gains/(losses) on securities and foreign currency translations......... $ (3,221) $ -- $ (2,696) -- $ 9,051 $ -- Income taxes on other comprehensive income. 20 -- (313) -- (5,245) -- --------- --------- -------- --------- --------- --------- Other comprehensive $ $ $ income, net of tax... $ (3,201) -- $ (3,009) -- $ 3,806 -- --------- --------- -------- --------- --------- --------- Comprehensive Income.... $ 160,463 $ 279,752 $499,133 $468,787 $ 606,827 $ 579,975 ========= ========= ======== ========= ========= =========
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 Nine Months Ended Twelve Months Ended September 30 September 30 September 30 --------------------- ------------------------ ------------------------ 2000 1999 2000 1999 2000 1999 ---------- --------- ----------- ----------- ----------- ----------- (Thousands of Dollars) Cash Flow from Operating Activities: Net income............. $ 163,664 $ 279,752 $ 502,142 $ 468,787 $ 603,021 $ 579,975 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........ 273,688 210,648 941,010 742,432 1,104,070 976,815 Deferred income taxes and investment tax credits--net........ (87,381) (10,983) (171,786) (109,303) (1,511,488) (35,026) Contribution to environmental trust. -- -- -- -- (250,000) -- Recovery of coal reserve regulatory assets.............. -- 91,642 -- 111,578 178,038 108,078 Change in MGP remediation liability........... (2,600) -- (3,800) -- 64,278 -- Loss/(gain) on forward share arrangements........ -- 17,514 (113,071) (15,903) (55,370) (15,903) Provisions/(payments) for revenue refunds--net........ -- (2,439) -- (22,297) (371) 306 Equity component of allowance for funds used during construction........ (2,643) (2,243) (7,945) (5,999) (9,735) (7,600) Provisions/(payments) for liability for separation costs-- net................. 19,303 (1,746) 10,248 (11,544) (40,604) 1,029 Net effect on cash flows of changes in: Receivables........ (127,965) (2,306) (47,845) 63,988 (267,880) 29,834 Coal and fuel oil.. 1,000 14,753 (141) 4,143 (3,666) 21,052 Materials and supplies.......... (3,151) (2,829) (14,972) (10,096) (6,275) 8,150 Accounts payable excluding separation costs-- net............... 255,105 10,016 306,624 (92,907) 364,228 26,894 Accrued interest and taxes......... 15,095 3,198 (901,804) 107,785 236,394 (123,605) Other changes in certain current assets and liabilities....... (29,487) 37,883 19,597 89,881 (29,241) 152,030 Other--net........... 58,435 (85,162) 155,658 49,221 (16,168) 40,340 ---------- --------- ----------- ----------- ----------- ----------- $ 533,063 $ 557,698 $ 673,906 $ 1,369,766 $ 359,231 $ 1,762,369 ---------- --------- ----------- ----------- ----------- ----------- Cash Flow from Investing Activities: Construction expenditures.......... $ (319,698) $(271,921) $ (914,425) $ (752,614) $(1,285,302) $(1,042,735) Nuclear fuel expenditures.......... (123,007) (90,926) (224,486) (204,873) (273,096) (247,458) Sales of generating plants................ -- -- -- -- 4,885,720 -- Investment in leases... (17,279) -- (1,631,062) -- (1,631,062) -- Equity component of allowance for funds used during construction.......... 2,643 2,243 7,945 5,999 9,735 7,600 Contributions to nuclear decommissioning funds................. -- -- (39,400) (39,426) (89,919) (96,120) Other investments and special deposits...... (3,638) (26,644) 1,694,534 (39,345) (167,120) (47,603) Plant removal costs-- net................... 11,474 (17,291) (7,486) (49,303) (25,915) (89,464) ---------- --------- ----------- ----------- ----------- ----------- $ (449,505) $(404,539) $(1,114,380) $(1,079,562) $ 1,423,041 $(1,515,780) ---------- --------- ----------- ----------- ----------- ----------- Cash Flow from Financing Activities: Issuance of securities-- Transitional trust notes................ $ -- $ -- $ -- $ -- $ -- $ 3,382,629 Other long-term debt.. 450,062 98,025 478,153 161,155 518,748 161,357 Capital stock......... 18,465 3,763 31,013 8,175 43,859 13,912 Retirement, redemption and repurchase of securities-- Transitional trust notes................ (85,459) (97,045) (265,459) (237,045) (358,413) (237,045) Other long-term debt.. (231,601) (28,017) (606,372) (1,089,027) (948,893) (1,179,228) Common stock.......... (374,433) (2,390) (959,758) (32,446) (683,649) (39,246) Preferred stock....... (2,174) (72,644) (72,318) (606,852) (72,358) (610,423) Common stock forward repurchase arrangements.......... -- -- (67,133) (662,113) (262,038) (662,113) Cash dividends paid on common stock.......... (70,657) (86,915) (228,737) (260,585) (315,716) (347,428) Nuclear fuel lease principal payments.... (235,365) (55,610) (269,985) (157,546) (367,841) (208,820) Increase/(decrease) in short-term borrowings............ 797,624 36,900 1,473,240 155,787 1,029,240 40,104 ---------- --------- ----------- ----------- ----------- ----------- $ 266,462 $(203,933) $ (487,356) $(2,720,497) $(1,417,061) $ 313,699 ---------- --------- ----------- ----------- ----------- ----------- Change in Net Cash Balance................ $ 350,020 $ (50,774) $ (927,830) $(2,430,293) $ 365,211 $ 560,288 Cash, Temporary Cash Investments and Cash Held for Redemption of Securities: Balance at Beginning of Period........... 703,542 739,125 1,981,392 3,118,644 688,351 128,063 ---------- --------- ----------- ----------- ----------- ----------- Balance at End of Period.............. $1,053,562 $ 688,351 $ 1,053,562 $ 688,351 $ 1,053,562 $ 688,351 ========== ========= =========== =========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 10 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies. Corporate Structure and Basis of Presentation. Unicom is the parent holding company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility, is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated subsidiary of Unicom and is engaged, through its subsidiaries, in energy service activities. The consolidated financial statements include the accounts of Unicom, ComEd, Indiana Company, Edison Development, the Trusts, ComEd Funding, ComEd Funding Trust and Unicom's unregulated subsidiaries. All significant intercompany transactions have been eliminated. Although the accounts of ComEd Funding, ComEd Funding Trust and the subsidiaries of Unicom Investment, which are SPEs, are included in the consolidated financial statements, as required by GAAP, ComEd Funding, ComEd Funding Trust and the subsidiaries of Unicom Investment are legally separated from Unicom, ComEd and Unicom Investment. The assets of the SPEs are not available to creditors of Unicom, ComEd or Unicom Investment and the transitional property and investments held by the SPEs are not assets of Unicom, ComEd or Unicom Investment. See Note 2 for information on Unicom's merger with PECO. Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the transition to a new customer information and billing system, a larger portion of customer revenues and net receivables were based on estimates for the period July 1998 through November 1999 than in previous and subsequent periods. Regulation. ComEd is subject to regulation as to accounting and ratemaking policies and practices by the ICC and FERC. ComEd's accounting policies and the accompanying consolidated financial statements conform to GAAP applicable to rate-regulated enterprises for the non-generation portion of its business, including the effects of the ratemaking process in accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Such effects on the non-generation portion of its business concern mainly the time at which various items enter into the determination of operating results in order to follow the principle of matching costs with the applicable revenues collected from or returned to customers through future rates. ComEd's investment in generation-related net utility plant, not subject to cost-based rate regulation, including construction work in progress and nuclear fuel, and excluding the decommissioning costs included in the accumulated provision for depreciation was $7.7 billion and $7.8 billion as of September 30, 2000 and December 31, 1999, respectively. 11 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Regulatory Assets and Liabilities. Regulatory assets are incurred costs which have been deferred and are amortized for ratemaking and accounting purposes. Regulatory liabilities represent amounts to be settled with customers through future rates. Regulatory assets and liabilities reflected on the Consolidated Balance Sheets at September 30, 2000 and December 31, 1999 were as follows:
September 30, December 31, 2000 1999 ------------- ------------ (Thousands of Dollars) Regulatory assets: Impaired production plant(1)....................... $ 103,659 $ 366,221 Deferred income taxes (2).......................... 701,714 688,946 Nuclear decommissioning costs--Dresden Unit 1...... 189,506 202,308 Nuclear decommissioning costs--Zion Units 1 and 2.. 495,811 496,638 Unamortized loss on reacquired debt (3)............ 35,900 38,794 ---------- ---------- $1,526,590 $1,792,907 ========== ========== Regulatory liabilities: Deferred income taxes (2).......................... $ 580,991 $ 596,157 ========== ==========
-------- (1) Expected to be substantially recovered through regulated cash flow by the end of 2000. (2) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for non-generation related temporary differences. (3) Amortized over the remaining lives of the non-generation related long-term debt issued to finance the reacquisition. See "Loss on Reacquired Debt" below for additional information. The regulatory assets for Dresden Unit 1 and Zion Units 1 and 2 represent unrecovered nuclear decommissioning costs, which are expected to be recovered over the periods 2000-2011 and 2000-2013, respectively, through future rate recoveries and related trust fund earnings. See "Depreciation, Amortization of Regulatory Assets and Liabilities and Decommissioning" below for additional information. Depreciation, Amortization of Regulatory Assets and Liabilities, and Decommissioning. Depreciation, amortization of regulatory assets and liabilities, and decommissioning for the three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ----------------- ------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Depreciation expense.... $ 171,820 $ 180,598 $506,432 $538,623 $ 594,046 $ 714,518 Amortization of regulatory assets and liabilities--net....... 37,439 556 262,562 98,900 296,853 131,393 --------- --------- -------- -------- --------- --------- $ 209,259 $ 181,154 $768,994 $637,523 $ 890,899 $ 845,911 Decommissioning expense. 20,955 20,955 62,865 62,865 83,820 83,820 --------- --------- -------- -------- --------- --------- $ 230,214 $ 202,109 $831,859 $700,388 $ 974,719 $ 929,731 ========= ========= ======== ======== ========= =========
The regulatory asset amortization recorded in the recent three, nine and twelve month periods represent amounts calculated in accordance with the earnings cap provisions of the 1997 Act. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the December 1999 sale of Fossil Plant assets of $2.587 billion resulted in a regulatory liability, which was used to recover 12 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statements of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million in the fourth quarter of 1999. See Note 3 for additional information regarding amortization of regulatory assets with respect to limits on ComEd's earnings due to statutory sharing provisions. See Note 4 for additional information regarding the fossil plant sale. Provisions for depreciation, including nuclear plant, were at average annual rates of average depreciable utility plant and equipment for the three months, nine months and twelve months ended September 30, 2000 and 1999 as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------ ----------------- ------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- --------- --------- Average annual depreciation rates..... 2.70% 2.65% 2.70% 2.65% 2.69% 2.67%
Nuclear plant decommissioning costs generally are accrued over the current NRC license lives of the related nuclear generating units. The accrual is based on an annual levelized cost of the unrecovered portion of estimated decommissioning costs, which are escalated for expected inflation to the expected time of decommissioning and are net of expected earnings on the trust funds. Dismantling is expected to occur relatively soon after the end of the current NRC license life of each generating station currently operating. The accrual for decommissioning is based on the prompt removal method authorized by NRC guidelines. ComEd's ten operating units have remaining current NRC license lives ranging from 9 to 28 years. ComEd's Zion Station and Dresden Unit 1 are retired and are expected to be dismantled beginning in the years 2014 and 2011, respectively, which is consistent with the regulatory treatment for recovery of the related decommissioning costs. Based on ComEd's most recent study, decommissioning costs are estimated to be $5.6 billion in current-year (2000) dollars, including a contingency allowance. These expenditures are expected to occur primarily during the period from 2010 through 2034. All such costs are expected to be funded by the external decommissioning trusts, which ComEd established in compliance with Illinois law and into which ComEd has been making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of, or changes to NRC regulations, as well as changes in the assumptions used in making such estimates, including changes in technology, available alternatives for the disposal of nuclear waste and inflation. Since 1995, ComEd has collected decommissioning costs from its ratepayers in conjunction with a rider to its tariffs. The rider allows annual adjustments to decommissioning cost collections outside the context of a traditional rate proceeding and will continue under the 1997 Act. The ICC has approved ComEd's current funding plan, which provides for annual contributions of current accruals and ratable contributions of past accruals over the remaining current NRC license lives of the nuclear plants. ComEd is undertaking steps to transfer its nuclear generating assets, including the decommissioning trust funds, to a generation and power marketing subsidiary of Exelon ("Genco"), following the merger with PECO. On August 3, 2000 the NRC approved the request of ComEd and PECO to transfer licenses for both companies' nuclear plants from ComEd and PECO to Genco. 13 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued As part of the transfer of the nuclear generating stations, Genco is to assume responsibility for the decommissioning of those stations, including Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue to collect decommissioning-related charges from its customers. In May 2000, ComEd filed a petition with the ICC seeking approval to revise its existing decommissioning rider to its rates. Under the proposed revision, ComEd would collect approximately $121 million annually for a period of six years, after which the decommissioning rider and collection of decommissioning funds would end. On October 25, 2000, an ICC hearing examiner issued a proposed order denying ComEd's petition on the basis that existing law does not allow the ICC to authorize ComEd to continue to collect funds for decommissioning nuclear generating plants that it no longer owns. ComEd believes that the proposed order is wrong as a matter of law and that the ICC has the statutory authority to grant ComEd's petition. The ICC is not bound by the proposed order and may accept or reject it, in whole or in part, in preparing its final order in the proceedings. Responses from the parties to the proceedings regarding the proposed order are due in early November and a final order is expected before year-end. ComEd is evaluating the effect of the proposed order on the proposed structure of the Genco transaction. The transfer of the nuclear assets, including the decommissioning trust funds, are subject to satisfactory resolution of significant regulatory and tax issues. Although ComEd cannot currently determine whether an alternative funding structure will ultimately be approved and implemented, such a structure could increase the decommissioning cost recovery risk. See Note 2 for additional information on the merger of Unicom and PECO. For the ten operating nuclear units, decommissioning cost accruals are recorded as portions of depreciation expense and accumulated provision for depreciation on the Statements of Consolidated Operations and the Consolidated Balance Sheets, respectively, as such costs are recovered through rates. As of September 30, 2000, the total decommissioning costs included in the accumulated provision for depreciation were $2,197 million. For ComEd's retired nuclear units, the total estimated liability for nuclear decommissioning in current-year (2000) dollars is recorded as a noncurrent liability. The unrecovered portion of the liability is recorded as a regulatory asset. The nuclear decommissioning liability for retired plants as of September 30, 2000 was as follows:
Zion Dresden Units Unit 1 1 and 2 Total -------- -------- ---------- (Thousands of Dollars) Amounts recovered through rates and investment fund earnings.................................... $124,394 $478,289 $ 602,683 Unrecovered portion of the liability.............. 189,506 495,811 685,317 -------- -------- ---------- Nuclear decommissioning liability for retired plants.......................................... $313,900 $974,100 $1,288,000 ======== ======== ==========
Under Illinois law, decommissioning cost collections are required to be deposited into external trusts. Consequently, such collections do not add to the cash flows available for general corporate purposes. The fair value of funds accumulated in the external trusts at September 30, 2000 was $2,662 million, which includes pre-tax unrealized appreciation of $702 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 September 30, 2000 was as follows:
(Thousands of Dollars) Amounts recovered through rates and investment fund earnings for operating plants (included in the accumulated provision for depreciation)................ $2,196,811 Amounts recovered through rates and investment fund earnings for retired plants............................ 602,683 Less past accruals not yet contributed to the trusts.... 137,474 ---------- Fair value of external trust funds..................... $2,662,020 ==========
14 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued In February 2000, the FASB issued an exposure draft addressing the accounting for asset removal costs, including those relating to nuclear decommissioning. The exposure draft would require companies to recognize the entire decommissioning liability on the balance sheet when the liability is incurred very early in the operating life of the generating station, rather than ratably over the operating life of the station as is the current industry accounting practice. The cost basis of the related nuclear power plant would be increased by a corresponding amount at the time the liability is recorded and depreciated over the operating life. Although over the life of the stations total decommissioning provisions would approximate the total amount recognized over the life of the stations under current electric utility accounting practices, amounts for interim years could increase or decrease from currently expected decommissioning provisions. However, ComEd does not believe such changes will adversely impact results of operations due to the ability to recover decommissioning costs through rates. The exposure draft is proposed to be effective for financial statements issued for fiscal years beginning after June 15, 2001. A final statement is expected to be issued during the first quarter of 2001. 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 September 30, 2000. It includes the City, an area of about 225 square miles with an estimated population of approximately three million from which ComEd derived approximately 30 percent of its ultimate consumer revenues in 1999. ComEd had approximately 3.5 million electric customers at September 30, 2000. Revenues are recognized as electric and delivery services are provided to customers. As a result of the implementation of a new customer billing and information system in July 1998, billing and collection delays temporarily increased accounts receivable from customers. In December 1998 and June 1999, ComEd recorded increased provisions for uncollectible accounts to recognize the estimated portion of the receivables that are not expected to be recoverable. Such provisions increased O&M expenses by $35 million in the twelve months ended September 30, 1999, compared to normally expected levels. Receivables from customers include $53 million and $103 million as of September 30, 2000 and December 31, 1999, respectively, in estimated unbilled revenue for service that has been provided to customers, but for which bill issuance was delayed beyond the normal date of issuance. Receivables from customers as of September 30, 2000 and December 31, 1999 also include $321 million and $295 million, respectively, for estimated unbilled revenues for electric service that has been provided to customers subsequent to the normal billing date and prior to the end of the reporting period. See "Use of Estimates" above for additional information regarding ComEd's revenues and net receivables. See Note 3 for additional information. Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on the quantity of heat produced using the unit of production method. As authorized by the ICC, provisions for spent nuclear fuel disposal costs have been recorded at a level required to recover the fee payable on the current nuclear-generated and sold electricity and the current interest accrual on the one-time fee payable to the DOE for nuclear generation prior to April 7, 1983. The one-time fee and interest thereon have been recovered and the current fee and interest on the one-time fee are presently being recovered through base rates. See Note 13 for additional information concerning the disposal of spent nuclear fuel, one-time fee and interest accrual on the one-time fee. Nuclear fuel expenses, including leased fuel costs 15 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued and provisions for spent nuclear fuel disposal costs, were $97 million and $107 million for the three months ended September 30, 2000 and 1999, respectively, $294 million and $288 million for the nine months ended September 30, 2000 and 1999, respectively, and $386 million and $372 million for the twelve months ended September 30, 2000 and 1999, respectively. Income Taxes. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book/tax temporary differences reverse. Prior years' deferred investment tax credits are amortized through credits to income generally over the lives of the related property. Income tax credits resulting from interest charges applicable to nonoperating activities, principally construction, are classified as other income. AFUDC and Interest Capitalized. In accordance with the uniform systems of accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC, compounded semiannually, which represents the estimated cost of funds used to finance its construction program for the non-generation portion of its business. The equity component of AFUDC is recorded on an after-tax basis and the borrowed funds component of AFUDC is recorded on a pre-tax basis. The average annual capitalization rates for AFUDC were 8.29% and 7.87% for the three months ended September 30, 2000 and 1999, respectively, 8.29% and 7.85% for the nine months ended September 30, 2000 and 1999, respectively, and 8.14% and 7.92% for the twelve months ended September 30, 2000 and 1999, respectively. In accordance with SFAS No. 34, Capitalization of Interest Cost, ComEd capitalized $2 million and $4 million for the three months ended September 30, 2000 and 1999, respectively, $4 million and $16 million for the nine months ended September 30, 2000 and 1999, respectively, and $10 million and $31 million for the twelve months ended September 30, 2000 and 1999, respectively, in interest costs on its generation-related construction work in progress and nuclear fuel in process. AFUDC and interest capitalized do not contribute to the current cash flow of Unicom or ComEd. Interest. Total interest costs incurred on debt, leases and other obligations were $160 million and $160 million for the three months ended September 30, 2000 and 1999, respectively, $473 million and $484 million to the nine months ended September 30, 2000 and 1999, respectively, and $631 million and $611 million for the twelve months ended September 30, 2000 and 1999, respectively. Debt Discount, Premium and Expense. Discount, premium and expense on long- term debt of ComEd are being amortized over the lives of the respective issues. Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss from ComEd's reacquisition, in connection with the refinancing of first mortgage bonds, sinking fund debentures and pollution control obligations prior to their scheduled maturity dates, is deferred and amortized over the lives of the long-term debt issued to finance the reacquisition for non- generation related financings. See "Regulatory Assets and Liabilities" above and Note 3 for additional information. Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure purposes only. Unicom accounts for its stock option awards and ESPP under APB Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 for additional information. 16 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Average Common Shares Outstanding. The number of average outstanding common shares used to compute basic and diluted EPS for the three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ----------------- ------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- --------- --------- (Thousands of Shares) Average Number of Common Shares Outstanding: Average Number of Common Shares--Basic.. 174,003 217,375 180,739 217,231 189,935 217,208 Potentially Dilutive Common Shares-- Treasury Method: Stock Options........ 1,595 801 1,025 777 899 777 Other Convertible Securities.......... 86 89 86 89 86 89 --------- --------- -------- -------- --------- --------- Average Number of Common Shares--Diluted........ 175,684 218,265 181,850 218,097 190,920 218,074 ========= ========= ======== ======== ========= =========
Energy Risk Management Contracts. In the normal course of business, ComEd utilizes contracts for the forward sale and purchase of energy to manage effectively the utilization of its available generating capability. ComEd also utilizes put and call option contracts and energy swap arrangements to limit the market price risk associated with the forward commodity contracts. As ComEd does not currently utilize financial or commodity instruments for trading or speculative purposes, any gains or losses on forward commodity contracts are recognized when the underlying transactions affect earnings. Revenues and expenses associated with market price risk management contracts are amortized over the terms of such contracts. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. In June 2000, FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, as an amendment of SFAS No. 133. SFAS No. 133, as amended, requires that changes in the derivative's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. The 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 companies to formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The effective date of SFAS No. 133, as amended, has been delayed for one year, to fiscal years beginning after June 15, 2000. SFAS No. 133. SFAS No. 133, as amended, must be applied to (i) derivative instruments and (ii) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after January 1, 1998 or January 1, 1999 at the Company's election. Unicom and ComEd will adopt SFAS No. 133 on January 1, 2001, and are in the final process of reviewing their various contracts to determine which contracts need to be reflected as derivatives under the standard and accounted for at fair value. Among the contracts that are expected to be subject to the 17 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued fair value requirements are contracts related to electricity and gas purchases and sales. Unicom and ComEd have not fully quantified the effects on their financial statements of adopting SFAS No. 133 on January 1, 2001. The ultimate impact will depend upon market prices, at the time of adoption, for electricity and gas. Adoption of SFAS No. 133 in 2001 will result in increased volatility in earnings. 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. As of September 30, 2000, the cash held for redemption of securities reported on the Consolidated Balance Sheets includes $72 million of escrowed cash and pending instrument funding charges collected from ComEd customers to be applied to the principal and interest payment on the transitional trust notes. See Note 3 for additional information. Investment in Leases. In June 2000, Unicom Investment entered into a like- kind exchange transaction utilizing proceeds from the December 1999 sale of fossil generating stations. Under the transaction, Unicom Investment invested approximately $1.6 billion, previously classified as special deposits, in passive generating station leases with two separate entities. The generating stations were leased back to such entities as part of the transaction. For financial accounting purposes, the investments are accounted for as direct financing lease investments. Under the terms of the lease agreements, Unicom Investment will receive prepayments of its scheduled lease payments of about $1.24 billion in the fourth quarter of 2000 which will reduce the outstanding lease investment at that time. The components of the net investment in the direct financing leases as of September 30, 2000 are as follows:
(Thousands of Dollars) ---------- Total minimum lease payments.................................. $2,727,233 Less: Unearned income......................................... 1,096,172 ---------- $1,631,062 ==========
Goodwill. Goodwill represents the excess of the purchase consideration over the fair value of the net assets of the companies or natural gas service contracts acquired by subsidiaries of Unicom Enterprises. Goodwill arising from such acquisitions is generally being amortized on a straight-line basis over 40 years for goodwill arising from the acquisition of established mechanical services companies and over 10 to 15 years for the goodwill arising from the acquisition of performance contracting companies and natural gas service contracts. Statements of Consolidated Cash Flows. For purposes of the Statements of Consolidated Cash Flows, temporary cash investments, generally investments maturing within three months at the time of purchase, and cash held for redemption of securities are considered to be cash equivalents. Supplemental cash flow information for the three months, nine months and twelve months ended September 30, 2000 and 1999 was as follows: 18 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ------------------- ------------------- 2000 1999 2000 1999 2000 1999 --------- --------- ---------- -------- ---------- -------- (Thousands of Dollars) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized). $143,101 $158,363 $ 411,261 $485,881 $ 532,195 $572,934 Income taxes (net of refunds)............ $ 28,080 $140,915 $1,114,302 $225,022 $1,344,460 $484,873 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obligations incurred by subsidiary companies............. $ -- $ 189 $ 34 $ 1,625 $ 154 $ 3,062
(2) Merger Agreement. On October 19, 2000, Unicom and PECO received approval from the Securities and Exchange Commission under the Public Utilities Holding Company Act of 1935, the last regulatory approval, to complete their merger to form Exelon Corporation. The companies completed the merger on October 20, 2000 and began trading as Exelon Corporation (NYSE: EXC) on October 23, 2000. Upon completion of the merger, PECO and ComEd became the principal utility subsidiaries of Exelon. This result was achieved by a mandatory exchange of the outstanding common stock of PECO for common stock of Exelon, and a subsequent merger of Unicom with and into Exelon wherein holders of Unicom common stock received 0.875 shares of Exelon common stock plus $3.00 in cash for each of their shares of Unicom common stock. The merger transaction will be accounted for as a purchase of Unicom by PECO. Consistent with Unicom's $1 billion share repurchase commitment in the merger agreement with PECO, Unicom has completed the repurchase of 24 million shares of its common stock. The shares were repurchased from the open market over the recent ten months pursuant to agreements with financial institutions. Approximately $153 million of these share repurchases were funded with proceeds from the 1998 issuance of transitional trust notes. The remaining share repurchases were funded from available funds, including funds ultimately resulting from the fossil plant sale. These share repurchases are in addition to 26.3 million shares of Unicom common stock that Unicom repurchased in January 2000 upon settlement of certain forward purchase contracts. See Notes 6 and 23 for additional information. ComEd and PECO are undertaking steps to transfer their generating assets and wholesale power marketing operations to subsidiaries following the consummation of the merger. Subsequent to those transfers, these subsidiaries will be transferred to Exelon and ultimately will be combined into a power generation and marketing company, which will be a direct subsidiary of Exelon ("Genco"). In ComEd's case, the transfer will include its Braidwood, Byron, Dresden, LaSalle and Quad Cities nuclear generating stations representing an aggregate generating capability of 9,566 megawatts, its Zion station, its rights and obligations under various power purchase agreements, the assets constituting its nuclear decommissioning trusts and its wholesale power marketing business. Genco will enter into a power purchase agreement with ComEd in which Genco will undertake to supply ComEd's full requirements for electric energy through 2004 and all of ComEd's requirements up to the available capacity of the nuclear generating stations in 2005 and 2006. On August 3, the NRC approved the request of ComEd and PECO to transfer licenses for both companies' nuclear plants from ComEd and PECO to Genco. 19 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued As part of the transfer of the nuclear generating stations, Genco is to assume responsibility for the decommissioning of those stations, including Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue to collect decommissioning-related charges from its customers. In May 2000, ComEd filed a petition with the ICC seeking approval to revise its existing decommissioning rider to its rates. Under the proposed revision, ComEd would collect approximately $121 million annually for a period of six years, after which the decommissioning rider and collection of decommissioning funds would end. On October 25, 2000, an ICC hearing examiner issued a proposed order denying ComEd's petition on the basis that existing law does not allow the ICC to authorize ComEd to continue to collect funds for decommissioning nuclear generating plants that it no longer owns. ComEd believes that the proposed order is wrong as a matter of law and that the ICC has the statutory authority to grant ComEd's petition. The ICC is not bound by the proposed order and may accept or reject it, in whole or in part, in preparing its final order in the proceedings. Responses from the parties to the proceedings regarding the proposed order are due in early November and a final order is expected before year-end. ComEd is evaluating the effect of the proposed order on the proposed structure of the Genco transaction. The transfer of the nuclear assets, including the decommissioning trust funds, are subject to satisfactory resolution of significant regulatory and tax issues. (3) Accounting Effects Related to the 1997 Act. In December 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act was amended in June 1999. As a result of the 1997 Act and FERC rules, prices for the supply of electric energy are expected to transition from cost-based, regulated rates to rates determined by competitive market forces. Accordingly, the 1997 Act provides for, among other things, gradual customer access to other electric suppliers or a power purchase option which allows the purchase of electric energy from ComEd at market based prices, and the collection of a CTC from customers who choose to purchase electric energy from a RES or elect the power purchase option during a transition period that extends through 2006. Effective October 1, 1999, the CTC was established in accordance with a formula defined in the 1997 Act. The CTC, which is applied on a cents per kilowatthour basis, considers the revenue which would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. The CTC allows ComEd to recover some of its costs which might otherwise be unrecoverable under market-based rates. Nonetheless, ComEd will need to take steps to address the portion of such costs which are not recoverable through the CTC. Such steps may include cost control efforts, developing new sources of revenue and asset dispositions. See Note 4 for additional information. As of June 1, 2000, more than 62,000 non-residential customers are eligible to choose a new electric supplier or elect the purchase power option. As of September 30, 2000, over 7,800 non-residential customers, representing approximately 18 percent of ComEd's retail kilowatthour sales for the twelve months prior to the introduction of open access, elected to receive their electric energy from a RES or chose the purchase power option. The impact of customer choice on results of operations will depend on various factors, including the extent to which customers elect to receive energy from a RES or the purchased power option, the development of a competitive market, the market price for energy, the extent to which ComEd develops new sources of revenue and the results of cost control efforts. Because of the inherent uncertainty in these factors ComEd is unable to predict the long term impact of customer choice on results of operations. However, ComEd does not expect customer choice to have a material effect in the near term as a result of the collection of CTCs as provided by the 1997 Act. 20 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select a RES can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based, regulated rates. The ICC issued orders in August and September 1999 approving, with modifications, ComEd's delivery service tariffs. The 1997 Act also provides for a 15% residential base rate reduction which became effective August 1, 1998 and an additional 5% residential base rate reduction in October 2001. ComEd's operating revenues were reduced by approximately $170 million in 1998 due to the 15% residential base rate reduction. The 15% rate reduction further reduced ComEd's operating revenues by approximately $226 million in 1999, compared to 1998 rate levels. Notwithstanding the rate reductions and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. During this period, utilities may reorganize, sell or assign assets, retire or remove plants from service, and accelerate depreciation or amortization of assets with limited ICC regulatory review. A utility may request a rate increase during the rate freeze period only when necessary to ensure the utility's financial viability. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity is based on the 30- Year Treasury Bond rate, plus 5.5% in the years 1998 and 1999, and plus 8.5% in the years 2000 through 2004. The utility's earned return on common equity and the threshold return on common equity for ComEd are each calculated on a two-year average basis. The earnings sharing provision is applicable only to ComEd's earnings. Consistent with the provisions of the 1997 Act, increased amortization of regulatory assets may be recorded, thereby reducing the earned return on common equity, if earnings otherwise would have exceeded the maximum allowable rate of return. The potential for earnings sharing or increased amortization of regulatory assets could limit earnings in future periods. ComEd's returns on average common equity for the years 1999 and 1998 were 11.56% and 10.86%, respectively. The average return of 11.21% for the two year period ended December 31, 1999 equaled the threshold return for that period under the earnings provisions of the 1997 Act. ComEd does not currently expect to trigger the earnings sharing provisions of the 1997 Act in the years 2000 through 2004. The 1997 Act also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a SPE. The proceeds, net of transaction costs, from such security issuances must be used to refinance outstanding debt or equity or for certain other limited purposes. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. The proceeds from the transitional trust notes, net of transaction costs, were used to redeem long-term debt and preference stock and reduce ComEd's outstanding short-term debt, as required. Unicom has also repurchased its common stock using proceeds it received from ComEd's repurchase of its common stock held by Unicom. The balance of the proceeds were used for the payment of fees and other debt issuance costs and a collateral requirement related to the transitional trust notes. (4) Fossil Plant Sale. In December 1999, ComEd completed the sale of its fossil generating assets to EME for a cash purchase price of $4.8 billion. The fossil generating assets represent an aggregate generating capacity of approximately 9,772 megawatts. Just prior to the consummation of the fossil plant sale, ComEd transferred these assets to an affiliate, Unicom Investment. In consideration for the transferred assets, Unicom Investment paid ComEd consideration totalling approximately $4.8 billion in the form of a demand note in the amount 21 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued of approximately $2.4 billion and an interest-bearing note with a maturity of twelve years. Unicom Investment immediately sold the fossil plant assets to EME, in consideration of which Unicom Investment received approximately $4.8 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment paid the $2.4 billion aggregate principal due to ComEd under the demand note. Unicom Investment will use the remainder of the cash received from EME to fund other business opportunities, including the share repurchases. Of the cash received by ComEd, $1.5 billion has been used to pay the costs and taxes associated with the fossil plant sale, including ComEd's contribution of $250 million of the proceeds to an environmental trust as required by the 1997 Act. The remainder of the demand note proceeds will be available to ComEd to fund, among other things, transmission and distribution projects, nuclear generation station projects, and environmental and other initiatives. See Note 1, under "Investment in Leases," for additional information. The sale produced an after-tax gain of approximately $1.6 billion, after recognizing commitments associated with certain coal contracts ($350 million), recognizing employee-related costs ($112 million) and contributing to the environmental trust. The coal contract costs include the amortization of the remaining balance of ComEd's regulatory asset for unrecovered coal reserves of $178 million and the recognition of $172 million of settlement payments related to the above-market portion of coal purchase commitments ComEd assigned to EME at market value upon completion of the fossil plant sale. The severance costs included pension and post-retirement welfare benefit curtailment and special termination benefit costs of $51 million and transition, separation and retention payments of $61 million. A total of 1,730 fossil station employee positions were eliminated upon completion of the fossil plant sale on December 15, 1999. The employees whose positions were eliminated have been terminated. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the sale of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statement of Consolidated Operations. See Note 1, under "Regulatory Assets and Liabilities," for additional information. (5) Authorized Shares, Voting Rights and Stock Rights of Capital Stock. At September 30, 2000, Unicom's authorized shares consisted of 400,000,000 shares of common stock. The authorized shares of ComEd preferred and preference stocks at September 30, 2000 were: preference stock--6,810,451 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. Pursuant to a plan adopted by the Unicom Board of Directors on February 2, 1998, each share of Unicom's common stock carries the right (referred to herein as a "Right") to purchase one-thousandth of one share of Unicom's common stock at a purchase price of $100 per whole share of common stock, subject to adjustment. The plan was amended on September 22, 1999 to render the Rights inapplicable to the transactions contemplated by the Merger Agreement. The Rights are tradable only with Unicom's common stock until they become exercisable. The Rights become exercisable upon the earlier of ten days following a public announcement that a person (an "Acquiring Person") has acquired 15% or more of Unicom's outstanding common stock or ten business days (or such later date as may be determined by action of the Board of Directors) following the commencement of a tender or exchange offer which, if consummated, would result in a person or group becoming an Acquiring Person. The Rights are subject to redemption by Unicom at a price of $0.01 per Right, subject to certain limitations, and will expire on February 2, 2008. If a person or group becomes an Acquiring 22 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued stock at a 50% discount from the then current market price. If Unicom is acquired in a merger or other business combination transaction in which Unicom is not the survivor, or 50% or more of Unicom's assets or earning power is sold or transferred, each holder of a Right shall then have the right to receive, upon exercise, common stock of the acquiring company at a 50% discount from the then current market price of such common stock. Rights held by an Acquiring Person become void upon the occurrence of such events. (6) Common Equity. In January 2000, Unicom physically settled the forward share repurchase arrangements it had with financial institutions for the repurchase of 26.3 million Unicom common shares. Prior to settlement, the repurchase arrangements were recorded as a receivable on Unicom's Consolidated Balance Sheets based on the aggregate market value of the shares under the arrangements. In 1999, net unrealized losses of $44 million (after-tax), or $0.20 per common share were recorded related to the arrangements. The settlement of the arrangements in January 2000 resulted in a gain of $113 million (after-tax), which was recorded in the first quarter of 2000. The settlement of the arrangements resulted in a reduction in Unicom's outstanding common shares and common stock equity effective January 2000. Consistent with Unicom's $1 billion share repurchase commitment in the merger agreement with PECO, Unicom has completed the repurchase of 24 million shares of its common stock. The shares were repurchased from the open market over the recent ten months pursuant to agreements with financial institutions. Approximately $153 million of the share repurchases were funded with proceeds from the 1998 issuance of transitional trust notes. At September 30, 2000, shares of Unicom common stock were reserved for the following purposes: Long-Term Incentive Plan........................................ 1,041,015 Employee Stock Purchase Plan.................................... 284,940 Shareholder Rights Plan......................................... 400,000 Exchange for ComEd common stock not held by Unicom.............. 86,040 1996 Directors' Fee Plan........................................ 135,791 --------- 1,947,786 =========
Common stock issued/(reacquired) for the three months, nine months and twelve months ended September 30, 2000 and 1999 was as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 --------------------- --------------------- --------------------- 2000 1999 2000 1999 2000 1999 ----------- -------- ------------ ------- ------------ ------- Shares of Common Stock Issued/(Reacquired): Long-Term Incentive Plan.................. 520,842 154,971 1,190,748 388,186 1,254,063 510,850 Employee Stock Purchase Plan.................. -- -- 38,857 45,126 83,231 86,884 Exchange for ComEd com- mon stock not held by Unicom................ 590 -- 1,610 (3,330) 2,486 1,727 1996 Directors' Fee Plan.................. 1,085 739 26,668 4,087 28,102 7,088 Treasury Stock......... (7,798,100) -- (49,444,000) -- (49,444,000) -- ----------- -------- ------------ ------- ------------ ------- (7,275,583) 155,710 (48,186,117) 434,069 (48,076,118) 606,549 =========== ======== ============ ======= ============ =======
23 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ----------------------------------------- --------------------- 2000 1999 2000 1999 2000 1999 ---------- ------------------- -------- ----------- -------- (Thousands of Dollars) Changes in Common Stock Accounts: Total shares issued.... $ 18,492 $ 3,756 $ 30,935 $ 8,533 $ 43,691 $ 14,463 Net cash settlement of forward share repur- chase contract........ -- -- -- (16,454) -- (16,454) Share repurchases...... (374,434) -- (1,953,008) -- (1,953,008) -- Shares held by trustee for Unicom Stock Bonus Deferral Plan......... -- -- -- -- -- 7,428 Other.................. (27) 7 78 144 87 (51) ---------- ------- ----------- -------- ----------- -------- $ (355,969) $ 3,763 $(1,921,995) $ (7,777) $(1,909,230) $ 5,386 ========== ======= =========== ======== =========== ========
At September 30, 2000 and December 31, 1999, 75,082 and 75,692, respectively, 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. (7) Stock Option Awards/Employee Stock Purchase Plan. Unicom has a nonqualified stock option awards program under its Long-Term Incentive Plan. The stock option awards program was adopted by Unicom in July 1996 to reward valued employees responsible for, or contributing to, the management, growth and profitability of Unicom and its subsidiaries. The stock options granted expire ten years from their grant date. One-third of the shares subject to the options vest on each of the first three anniversaries of the option grant date. In addition, the stock options will become fully vested immediately if the holder dies, retires, is terminated by the Company, other than for cause, or qualifies for long-term disability. Options granted before July 22, 1998 also vest in full upon a change in control, while options granted on or after July 22, 1998 vest in full if the option holder is terminated within 24 months after a change of control. Stock option transactions through September 30, 2000 are summarized as follows:
Number of Weighted Average Options Exercise Price --------- ---------------- Outstanding as of December 31, 1997................ 2,291,378 $23.810 Granted during the year............................ 1,379,525 35.234 Exercised during the year.......................... (404,082) 24.244 Expired/cancelled during the year.................. (123,928) 25.715 --------- Outstanding as of December 31, 1998................ 3,142,893 28.694 Granted during the year............................ 1,853,050 35.750 Exercised during the year.......................... (313,231) 24.102 Expired/cancelled during year...................... (179,076) 33.551 --------- Outstanding as of December 31, 1999................ 4,503,636 31.723 Granted during the nine months ended September 30, 2000.............................................. 2,213,100 37.063 Exercised during the nine months ended September 30, 2000.......................................... (874,785) 27.834 Expired/cancelled during the nine months ended Sep- tember 30, 2000................................... (140,598) 35.710 --------- Outstanding as of September 30, 2000............... 5,701,353 34.294 =========
Of the stock options outstanding at September 30, 2000, 2,075,749 had vested with a weighted average exercise price of $30.77. 24 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Stock Option Grant Date ----------------------- 2000 1999 1998 ------- ------- ------- Expected option life.................................... 7 years 7 years 7 years Dividend yield.......................................... 4.30% 4.50% 4.54% Expected volatility..................................... 21.97% 23.02% 21.95% Risk-free interest rate................................. 6.76% 4.83% 5.58%
The estimated weighted average fair value for each stock option granted in the first three quarters of 2000 and in 1999 and 1998 was $8.19, $6.48 and $6.62, respectively. The ESPP was terminated on June 28, 2000 by Unicom's Board of Directors in anticipation of the merger with PECO. The ESPP allowed employees to purchase Unicom common stock at a ten percent discount from market value. Substantially all of the employees of Unicom, ComEd and their subsidiaries were eligible to participate in the ESPP. Unicom issued 83,231 and 86,884 shares of common stock for the twelve months ended September 30, 2000 and 1999, respectively, under the ESPP at a weighted average annual purchase price of $35.02 and $34.34, respectively. Unicom has adopted the disclosure-only provisions of SFAS No. 123. For financial reporting purposes, Unicom has adopted APB No. 25 and has taken into consideration FASB Interpretation No. 44 of APB No. 25, and thus no compensation cost has been recognized for the stock option awards program or ESPP. If Unicom had recorded compensation expense for the stock options granted and the shares of common stock issued under the ESPP in accordance with SFAS No. 123 using the fair value based method of accounting, the additional charge to operations would have been $4 million (after-tax), or $0.02 per common share (diluted), and $4 million (after-tax), or $0.02 per common share (diluted), for the twelve months ended September 30, 2000 and 1999, respectively. (8) ComEd Preferred and Preference Stocks Without Mandatory Redemption Requirements. During the twelve months ended September 30, 2000 and 1999, no shares and 13,499,549 shares of preferred or preference stock without mandatory redemption requirements were redeemed, respectively, and no shares were issued. All of the outstanding shares of Series $1.425 preferred stock were redeemed on August 1, 2000. The redemption price was $42 per share, plus accrued and unpaid dividends. (9) ComEd Preference Stock Subject to Mandatory Redemption Requirements. During the twelve months ended September 30, 2000 and 1999, no shares of ComEd preference stock subject to mandatory redemption requirements were issued. During the twelve months ended September 30, 2000 and 1999, 700,000 shares and 1,056,060 shares, respectively, of ComEd preference stock subject to mandatory redemption requirements were reacquired to meet sinking fund requirements or were part of the early redemption in 1999. There were 700,000 shares of Series $6.875 preference stock outstanding at December 31, 1999, at an aggregate stated value of $69 million. This series was non- callable and was redeemed on May 1, 2000. (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 25 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Financing II is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. There is a full and unconditional guarantee by ComEd of the Trusts' obligations under the securities issued by the Trusts. However, ComEd's obligations are subordinate and junior in right of payment to certain other indebtedness of ComEd. ComEd has the right to defer payments of interest on the subordinated deferrable interest notes by extending the interest payment period, at any time, for up to 20 consecutive quarters. Similarly, ComEd has the right to defer payments of interest on the subordinated deferrable interest debentures by extending the interest payment period, at any time, for up to ten consecutive semi- annual periods. If interest payments on the subordinated deferrable interest notes or debentures are so deferred, distributions on the preferred securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, ComEd may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock. The subordinated deferrable interest notes are redeemable by ComEd, in whole or in part, from time to time, on or after September 30, 2000, and with respect to the subordinated deferrable interest debentures, on or after January 15, 2007, or at any time in the event of certain income tax circumstances. If the subordinated deferrable interest notes or debentures are redeemed, the Trusts must redeem preferred securities having an aggregate liquidation amount equal to the aggregate principal amount of the subordinated deferrable interest notes or debentures so redeemed. In the event of the dissolution, winding up or termination of the Trusts, the holders of the preferred securities will be entitled to receive, for each preferred security, a liquidation amount of $25 for the securities of ComEd Financing I and $1,000 for the securities of ComEd Financing II, plus accrued and unpaid distributions thereon, including interest thereon, to the date of payment, unless in connection with the dissolution, the subordinated deferrable interest notes or debentures are distributed to the holders of the preferred securities. (11) Long-Term Debt. ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust, in the fourth quarter of 1998. The current amount outstanding is as follows:
Series Principal Amount ------------------------ ---------------------- (Thousands of Dollars) 5.29% due June 25, 2001............................ $ 254,541 5.34% due March 25, 2002........................... 258,861 5.39% due June 25, 2003............................ 421,139 5.44% due March 25, 2005........................... 598,511 5.63% due June 25, 2007............................ 761,489 5.74% due December 25, 2008........................ 510,000 ---------- $2,804,541 ==========
For accounting purposes, the liabilities of ComEd Funding Trust for the transitional trust notes are reflected as long-term debt on the Consolidated Balance Sheets of Unicom and ComEd. The proceeds, net of transaction costs, from the transitional trust notes were used, as required, to redeem debt and equity. During 1999, ComEd redeemed or reacquired $1,101 million of long-term debt. Sinking fund requirements and scheduled maturities remaining through 2004 for ComEd's first mortgage bonds, transitional trust notes, sinking fund debentures and other long-term debt outstanding at September 30, 2000, after deducting deposits made for the retirement of sinking fund debentures, are summarized as follows: 2000--$86 million; 2001--$346 million; 2002--$845 million; 2003--$695 million; and 2004--$577 million. 26 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued At September 30, 2000, ComEd's outstanding first mortgage bonds maturing through 2004 were as follows:
Series Principal Amount -------------------------------- ---------------------- (Thousands of Dollars) 7 3/8% due September 15, 2002...................... $200,000 6 5/8% due July 15, 2003........................... 100,000 5 3/10% due January 15, 2004....................... 26,000 -------- $326,000 ========
Other long-term debt outstanding at September 30, 2000 is summarized as follows:
Principal Debt Security Amount Interest Rate ---------------------------------------- ---------- ------------------------------------------ (Thousands of Dollars) Unicom-- Loans Payable: Loan due January 1, 2003 $ 4,212 Interest rate of 8.31% Loan due January 1, 2004 5,021 Interest rate of 8.44% Loan due January 15, 2009 5,228 Interest rate of 8.30% Loan due January 15, 2009 6,568 Interest rate of 8.55% Loan due January 15, 2010 3,632 Interest rate of 8.65% Loan due January 15, 2010 6,880 Interest rate of 8.88% Loan due July 15, 2010 8,703 Interest rate of 7.98% ---------- $ 40,244 ---------- ComEd-- Notes: Senior note due September 30, 2002 $ 200,000 Interest rate of 7.158% Senior note due September 30, 2003 250,000 Interest rate of 7.284% Medium Term Notes, Series 3N due vari- ous dates through October 15, 2004 156,000 Interest rates ranging from 9.17% to 9.20% Notes due January 15, 2004 150,000 Interest rate of 7.375% Notes due October 15, 2005 235,000 Interest rate of 6.40% Notes due January 15, 2007 150,000 Interest rate of 7.625% Notes due July 15, 2018 225,000 Interest rate of 6.95% ---------- $1,366,000 ---------- Purchase Contract Obligation due April 30, 2005 $ 254 Interest rate of 3.00% ---------- Total ComEd $1,366,254 ---------- Unicom Enterprises-- Notes: Unicom Thermal Guaranteed Senior Note due January 31, 2020 $ 28,000 Interest rate of 9.09% Northwind Midway Guaranteed Senior Note due June 30, 2023 11,423 Interest rate of 7.68% Unicom Thermal Obligation due April 1, 2015 1,124 Interest rate of 8.00% Unicom Mechanical Services Notes due various dates through July 15, 2003 156 Interest rate ranging from 8.50% to 9.25% ---------- Total Unicom Enterprises $ 40,703 ---------- Total Unicom $1,447,201 ==========
27 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Long-term debt maturing within one year has been included in current liabilities. ComEd's outstanding first mortgage bonds are secured by a lien on substantially all property and franchises, other than expressly excepted property, owned by ComEd. Unicom Thermal redeemed the $115.8 million outstanding balance of the 7.38% unsecured guaranteed senior Note on July 12, 2000. Unicom Thermal recorded an extraordinary loss related to early redemption premiums paid and the write-off of unamortized debt expenses, which reduced Unicom's net income on common stock by approximately $3.5 million (after-tax) in the third quarter of 2000. In May 2000, Northwind Chicago issued $28 million of 9.09% guaranteed senior Notes due January 31, 2020, the proceeds of which will be used primarily to finance certain project construction costs. The Notes were guaranteed by Unicom and included certain covenants with respect to Unicom and Northwind Chicago's operations. Pursuant to Unicom's merger with PECO, Exelon assumed Unicom's guarantee obligation with respect to the Notes as a matter of law. In June 1999, Northwind Midway issued $11.4 million of 7.68% guaranteed senior Notes due June 2023, the proceeds of which will be used primarily to finance certain project construction costs. The Notes were guaranteed by Unicom and include certain covenants with respect to Unicom and Northwind Midway's operations. Such covenants include, among other things, a requirement that Unicom and its consolidated subsidiaries own no less than 65% of the voting membership interest of Northwind Midway. Pursuant to Unicom's merger with PECO, Exelon assumed Unicom's guarantee obligation with respect to the Notes as a matter of law. (12) Lines of Credit. ComEd had total unused bank lines of credit of $800 million at September 30, 2000. Of that amount, $500 million expires on December 15, 2000 and $300 million expires on December 17, 2002. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread which is dependent upon the credit rating of ComEd's outstanding first mortgage bonds or on a prime interest rate. ComEd is obligated to pay commitment and facility fees with respect to the line of credit. (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 entered into a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste from ComEd's nuclear generating stations. The contract with the DOE requires ComEd to pay the DOE a one-time fee applicable to nuclear generation through April 6, 1983 of $277 million, with interest to date of payment, and a fee payable quarterly equal to one mill per kilowatthour of nuclear-generated and sold electricity after April 6, 1983. Pursuant to the contract, ComEd has elected to pay the one-time fee, with interest, just prior to the first delivery of spent nuclear fuel to the DOE. The liability for the one-time fee and the related interest is reflected on the Consolidated Balance Sheets. The contract also provided for acceptance by the DOE of such materials to begin in January 1998; however, that date was not met by the DOE and is expected to be delayed significantly. The DOE's current estimate for opening a facility to accept such waste is 2010. This extended delay in spent nuclear fuel acceptance by the DOE has led to ComEd's consideration of additional dry storage alternatives. On July 30, 1998, ComEd filed a complaint against the United States in the United States Court of Federal Claims seeking to recover damages caused by the DOE's failure to honor its contractual obligation to 28 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued begin disposing of spent nuclear fuel in January 1998. On September 14, 2000, the Judge hearing ComEd's case lifted a stay originally imposed on November 5, 1999. The court further ordered the government to file a response to ComEd's motion for summary judgment on the issue of the DOE's liability for breaching its contract with ComEd. (14) Fair Value of Financial Instruments. The following methods and assumptions were used to estimate the fair value of financial instruments either held, or issued and outstanding. The disclosure of such information does not purport to be a market valuation of Unicom and subsidiary companies as a whole. The impact of any realized or unrealized gains or losses related to such financial instruments on the financial position or results of operations of Unicom and subsidiary companies is primarily dependent on the treatment authorized under future ComEd ratemaking proceedings. Investments. Securities included in the nuclear decommissioning funds have been classified and accounted for as "available for sale" securities. The estimated fair value of the nuclear decommissioning funds, as determined by the trustee and based on published market data, as of September 30, 2000 and December 31, 1999 was as follows:
September 30, 2000 December 31, 1999 -------------------------------- -------------------------------- Unrealized Unrealized Gains/ Gains/ CostBasis (Losses) Fair Value Cost Basis (Losses) Fair Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Short-term investments.. $ 33,583 $ -- $ 33,583 $ 41,362 $ 95 $ 41,457 U.S. Government and Agency issues.......... 244,797 8,761 253,558 245,399 (1,993) 243,406 Municipal bonds......... 394,946 6,027 400,973 383,816 (940) 382,876 Corporate bonds......... 212,357 (2,416) 209,941 196,942 (5,699) 191,243 Common stock............ 911,799 677,324 1,589,123 832,802 732,893 1,565,695 Other................... 162,879 11,963 174,842 125,072 (3,209) 121,863 ---------- -------- ---------- ---------- -------- ---------- $1,960,361 $701,659 $2,662,020 $1,825,393 $721,147 $2,546,540 ========== ======== ========== ========== ======== ==========
At September 30, 2000, the debt securities held by the nuclear decommissioning funds had the following maturities:
Cost Basis Fair Value ---------- ---------- (Thousands of Dollars) Within 1 year....................................... $ 31,303 $ 31,627 1 through 5 years................................... 325,139 326,986 5 through 10 years.................................. 222,319 226,044 Over 10 years....................................... 425,776 429,513
29 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The net earnings of the nuclear decommissioning funds, which are recorded in the accumulated provision for depreciation, for the three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------ ---------------------- --------------------- 2000 1999 2000 1999 2000 1999 -------- --------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Gross proceeds from sales of securities............. $359,346 $ 399,024 $1,263,586 $1,241,887 $1,786,700 $1,637,011 Less cost based on spe- cific identification......... 332,394 386,970 1,198,132 1,205,155 1,711,128 1,598,484 -------- --------- ---------- ---------- ---------- ---------- Realized gains/(losses) on sales of securities............. $ 26,952 $ 12,054 $ 65,454 $ 36,732 $ 75,571 $ 38,527 Other realized fund earnings, net of expenses............... 12,126 12,186 30,113 43,002 50,038 59,983 -------- --------- ---------- ---------- ---------- ---------- Total realized net earn- ings of the funds...... $ 39,078 $ 24,240 $ 95,567 $ 79,734 $ 125,609 $ 98,510 Unrealized gains/(losses)......... 6,056 (135,210) (19,488) (46,472) 128,494 142,147 -------- --------- ---------- ---------- ---------- ---------- Total net earnings of the funds............. $ 45,134 $(110,970) $ 76,079 $ 33,262 $ 254,103 $ 240,657 ======== ========= ========== ========== ========== ==========
Securities held by certain trusts, which were established to provide for supplemental retirement benefits and executive medical claims, have been classified and accounted for as "available for sale." The estimated fair value of these securities, as determined by the trustee and based on published market data, as of September 30, 2000 was as follows:
Cost Unrealized Fair Basis Gain Value ------- ---------- ------- (Thousands of Dollars) Short-term investments.............................. $ 279 $ -- $ 279 Registered investment companies..................... 21,955 13,258 35,213 ------- ------- ------- $22,234 $13,258 $35,492 ======= ======= =======
Current Assets. Cash, temporary cash investments, cash held for redemption of securities and other cash investments, which include U.S. Government obligations and other short-term marketable securities, and special deposits, are stated at cost, which approximates their fair value because of the short maturity of these instruments. The securities included in these categories have been classified as "available for sale" securities. Capitalization. The estimated fair values of ComEd preferred and preference stocks, ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities, transitional trust notes and long-term debt were obtained from an independent consultant. The estimated fair values, which include the current portions of redeemable preference stock and long-term debt but exclude accrued interest and dividends, as of September 30, 2000 and December 31, 1999 were as follows:
September 30, 2000 December 31, 1999 -------------------------------- --------------------------------- Unrealized Unrealized Carrying Gains/ Carrying Gains/ Fair Value (Losses) Fair Value Value (Losses) Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) ComEd preferred and preference stocks...... $ -- $ -- $ -- $ 71,265 $ 58 $ 71,323 ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities............. $ 350,000 $(21,467) $ 328,533 $ 350,000 $ (10,595) $ 339,405 Transitional trust notes.................. $2,794,121 $(98,119) $2,696,002 $3,057,112 $(163,600) $2,893,512 Long-term debt.......... $4,690,093 $ 6,925 $4,697,018 $4,810,108 $ (23,136) $4,786,972
30 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Current Liabilities. The carrying value of notes payable, which consists of commercial paper and bank loans maturing within one year, approximates the fair value because of the short maturity of these instruments. See "Capitalization" above for a discussion of the fair value of the current portion of long-term debt and redeemable preference stock. Other Noncurrent Liabilities. The carrying value of accrued spent nuclear fuel disposal fee and related interest represents the settlement value as of September 30, 2000 and December 31, 1999; therefore, the carrying value is equal to the fair value. (15) Pension and Postretirement Benefits. As of September 30, 2000, ComEd had a qualified non-contributory defined benefit pension plan which covers all regular employees of ComEd and certain of Unicom's subsidiaries. Benefits under this plan reflect each employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. The September 30, 2000 and December 31, 1999 pension liabilities and related data were determined using the January 1, 1999 actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental retirement plan which covers any excess pension benefits that would be payable to management employees under the qualified plan but which are limited by the Internal Revenue Code. In 1998, Indiana Company's qualified defined benefit pension plan was merged into ComEd's pension plan as a result of the sale of Indiana Company's State Line Station and the transfer of its remaining employees to ComEd. ComEd and certain of Unicom's subsidiaries provide certain postretirement medical, dental and vision care, and life insurance for retirees and their dependents and for the surviving dependents of eligible employees and retirees. Generally, the employees become eligible for postretirement benefits if they retire no earlier than age 55 with ten years of service. The liability for postretirement benefits is funded through trust funds based upon actuarially determined contributions that take into account the amount deductible for income tax purposes. The health care plans are contributory, funded jointly by the companies and the participating retirees. The September 30, 2000 and December 31, 1999 postretirement benefit liabilities and related data were determined using the January 1, 1999 actuarial valuations. 31 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Reconciliations of the beginning and ending balances of the projected pension benefit obligation and the accumulated postretirement benefit obligation, and the funded status of these plans for the nine months ended September 30, 2000 and twelve months ended December 31, 1999 were as follows:
Nine Months Ended Twelve Months Ended September 30, 2000 December 31, 1999 -------------------------- -------------------------- Other Other Pension Postretirement Pension Postretirement Benefits Benefits Benefits Benefits ---------- -------------- ---------- -------------- (Thousands of Dollars) Change in benefit obligation ----------------- Benefit obligation at beginning of period.... $4,124,000 $1,169,000 $4,326,000 $1,236,000 Service cost............ 53,000 25,000 120,000 41,000 Interest cost........... 232,000 66,000 285,000 82,000 Plan participants' con- tributions............. -- 3,000 -- 4,000 Actuarial loss/(gain)... 6,000 (1,000) (428,000) (170,000) Benefits paid........... (195,000) (43,000) (241,000) (51,000) Special termination ben- efits.................. -- 6,000 62,000 27,000 ---------- ---------- ---------- ---------- Benefit obligation at end of period......... $4,220,000 $1,225,000 $4,124,000 $1,169,000 ---------- ---------- ---------- ---------- Change in plan assets --------------------- Fair value of plan as- sets at beginning of period................. $4,270,000 $ 948,000 $4,015,000 $ 865,000 Actual return on plan assets................. 78,000 20,000 493,000 106,000 Employer contribution... 4,000 -- 3,000 24,000 Plan participants' con- tributions............. -- 3,000 -- 4,000 Benefits paid........... (195,000) (43,000) (241,000) (51,000) ---------- ---------- ---------- ---------- Fair value of plan as- sets at end of period. $4,157,000 $ 928,000 $4,270,000 $ 948,000 ---------- ---------- ---------- ---------- Plan assets greater/(less) than benefit obligation..... $ (63,000) $ (297,000) $ 146,000 $ (221,000) Unrecognized net actuar- ial gain............... (305,000) (479,000) (534,000) (538,000) Unrecognized prior serv- ice cost/(asset)....... (10,000) 38,000 (11,000) 41,000 Unrecognized transition obligation/(asset)..... (71,000) 261,000 (79,000) 276,000 ---------- ---------- ---------- ---------- Accrued liability for benefits.............. $ (449,000) $ (477,000) $ (478,000) $ (442,000) ========== ========== ========== ==========
The assumed discount rate used to determine the benefit obligation as of September 30, 2000 and December 31, 1999 was 7.75%. The fair value of plan assets excludes $26 million and $25 million held in grantor trust as of September 30, 2000 and December 31, 1999, respectively, for the payment of benefits under the supplemental plan and $9 million and $9 million held in a grantor trust as of September 30, 2000 and December 31, 1999, respectively, for the payment of postretirement medical benefits. 32 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The components of pension and other postretirement benefit costs, portions of which were recorded as components of construction costs, for the three months, nine months and twelve months ended September 30, 2000 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- -------------------- -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- --------- --------- --------- --------- (Thousands of Dollars) Pension Benefit Costs --------------------- Service cost............ $ 12,000 $ 31,000 $ 53,000 $ 94,000 $ 79,000 $ 116,000 Interest cost on pro- jected benefit obliga- tion................... 78,000 71,000 232,000 213,000 304,000 278,000 Expected return on plan assets................. (98,000) (90,000) (295,000) (271,000) (386,000) (356,000) Amortization of transi- tion asset............. (3,000) (3,000) (8,000) (9,000) (12,000) (12,000) Amortization of prior service asset.......... 1,000 (1,000) (1,000) (3,000) (2,000) (4,000) Recognized loss/(gain).. (3,000) 1,000 (5,000) 3,000 (5,000) 4,000 Curtailment loss........ -- -- -- -- 16,000 -- --------- --------- --------- --------- --------- --------- Net periodic benefit cost.................. $ (13,000) $ 9,000 $ (24,000) $ 27,000 $ (6,000) $ 26,000 ========= ========= ========= ========= ========= ========= Other Postretirement Benefit Costs -------------------- Service cost............ $ 9,000 $ 10,000 $ 25,000 $ 31,000 $ 35,000 $ 42,000 Interest cost on accumu- lated benefit obligation............. 22,000 21,000 66,000 62,000 86,000 84,000 Expected return on plan assets................. (21,000) (19,000) (64,000) (56,000) (84,000) (73,000) Amortization of transi- tion obligation........ 5,000 6,000 15,000 17,000 20,000 22,000 Amortization of prior service cost........... 1,000 1,000 3,000 3,000 4,000 4,000 Recognized gain......... (5,000) (3,000) (16,000) (9,000) (21,000) (9,000) Severance plan cost..... 6,000 -- 6,000 1,000 6,000 5,000 Curtailment loss........ -- -- -- -- 35,000 -- --------- --------- --------- --------- --------- --------- Net periodic benefit cost.................. $ 17,000 $ 16,000 $ 35,000 $ 49,000 $ 81,000 $ 75,000 ========= ========= ========= ========= ========= =========
In accounting for the pension costs and other postretirement benefit costs under the plans, the following weighted average actuarial assumptions were used for the periods during 2000, 1999 and 1998:
Other Postretirement Pension Benefits Benefits ----------------- ----------------- 2000 1999 1998 2000 1999 1998 ----- ----- ----- ----- ----- ----- Annual discount rate....................... 7.75% 6.75% 7.00% 7.75% 6.75% 7.00% Annual long-term rate of return on plan as- sets...................................... 9.50% 9.25% 9.50% 9.23% 8.97% 9.20% Annual rate of increase in future compensa- tion levels............................... 4.00% 4.00% 4.00% -- -- --
The pension and other postretirement benefit curtailment losses for the twelve months ended September 30, 2000 represent the recognition of prior service costs and transition obligations, and an increase in the benefit obligations resulting from special termination benefits, related to the reduction in the number of employees due to ComEd's December 1999 sale of the fossil stations. The health care cost trend rates used to measure the expected cost of the postretirement medical benefits are assumed to be 7.5% for pre-Medicare recipients and 5.5% for Medicare recipients for 2000. Those rates are assumed to decrease in 0.5% annual increments to 5% for the years 2005 and 2001, respectively, and to remain level thereafter. The health care cost trend rates, used to measure the expected cost of postretirement dental and vision benefits, are a level 3.5% and 2.0% per year, respectively. Assumed health care cost trend rates have a significant effect on the amounts reported 33 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued for the health care plans. A one percentage point change in the assumed health care cost trend rates would have the following effects:
1 Percentage 1 Percentage Point Increase Point Decrease -------------- -------------- (Thousands of Dollars) Effect on total annual service and interest cost components...................................... $ 23,000 $ (18,000) Effect on postretirement benefit obligation as of September 30, 2000.............................. 195,000 (155,000)
In addition, an employee savings and investment plan is available to eligible employees of ComEd and certain of its and Unicom's subsidiaries. Under the plan, each participating employee may contribute up to 20% of such employee's base pay and the participating companies match the first 6% of such contribution equal to 100% of the first 2% of contributed base salary, 70% of the next 3% of contributed base salary and 25% of the next 1% of contributed base salary. The participating companies' contributions were $7 million and $9 million for the three months ended September 30, 2000 and 1999, respectively, $23 million and $24 million for nine months ended September 30, 2000 and 1999, respectively, and $31 million and $32 million for the twelve months ended September 30, 2000 and 1999, respectively. (16) Separation Plan Costs. O&M expenses included $33 million and $2 million for the three months ended September 30, 2000 and 1999, respectively, $47 million and $7 million for the nine months ended September 30, 2000 and 1999, respectively, and $50 million and $23 million for the twelve months ended September 30, 2000 and 1999, respectively, for costs related to voluntary separation offers to certain employees of ComEd, other than costs related to the fossil plant sale, as well as certain other employee-related costs. Such costs resulted in charges of $20 million (after-tax), or $0.11 per common share (diluted) and $1 million (after-tax), or less than $0.01 per common share (dilutive) for the three months ended September 30, 2000 and 1999, respectively, $28 million (after-tax), or $0.15 per common share (diluted), and $4 million (after-tax), or $0.02 per common share (diluted), for the nine months ended September 30, 2000 and 1999, respectively, and $30 million (after-tax), or $0.16 per common share (diluted), and $14 million (after-tax), or $0.06 per common share (diluted), for the twelve months ended September 30, 2000 and 1999, respectively. See Note 4 regarding employee separation costs related to the fossil plant sale. (17) Income Taxes. The components of the net deferred income tax liability at September 30, 2000 and December 31, 1999 were as follows:
September 30, December 31, 2000 1999 ------------- ------------ (Thousands of Dollars) Deferred income tax liabilities: Accelerated cost recovery and liberalized deprecia- tion, net of removal costs........................ $2,632,492 $2,815,972 Overheads capitalized.............................. 152,271 159,836 Deferred gain on sale of fossil stations........... 458,472 -- Involuntary conversion............................. 613,449 -- Repair allowance................................... 213,020 221,502 Regulatory assets recoverable through future rates. 701,714 688,946 Deferred income tax assets: Postretirement benefits............................ (378,449) (376,538) Unamortized investment tax credits................. (154,588) (161,756) Regulatory liabilities to be settled through future rates............................................. (580,991) (596,157) Nuclear plant closure.............................. (5,455) (5,456) Other--net......................................... (271,428) (321,522) ---------- ---------- Net deferred income tax liability................... $3,380,507 $2,424,827 ========== ==========
34 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The components of net income tax expense charged to continuing operations for the three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- ---------- -------- (Thousands of Dollars) Operating income: Current income taxes... $ 128,058 $ 193,103 $308,230 $405,482 $1,665,029 $380,183 Deferred income taxes.. (82,288) (11,449) (170,157) (100,217) (1,473,022) (26,052) Investment tax credits deferred--net......... (5,499) (7,021) (16,498) (21,063) (21,263) (27,856) Other (income) and deductions: Current income taxes... 24,497 (5,809) 37,378 (4,057) 41,139 5,160 Deferred income taxes.. 852 6,159 13,694 12,238 27,287 23,787 Investment tax credits. (2,153) (2,153) (6,458) (6,133) (52,064) (10,768) --------- --------- -------- -------- ---------- -------- Net income taxes charged to continuing opera- tions.................. $ 63,467 $ 172,830 $166,189 $286,250 $ 187,106 $344,454 ========= ========= ======== ======== ========== ========
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, nine months and twelve months ended September 30, 2000 and 1999:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Net income before extraordinary items.... $ 166,631 $ 279,752 $509,276 $496,366 $ 610,155 $607,554 Net income taxes charged to continuing operations............. 63,467 172,830 166,189 286,250 187,106 344,454 Provision for dividends on ComEd preferred and preference stocks...... 534 1,830 2,773 20,170 6,359 33,991 --------- --------- -------- -------- --------- --------- Pre-tax income before extraordinary items and provision for dividends.............. $ 230,632 $ 454,412 $678,238 $802,786 $ 803,620 $ 985,999 ========= ========= ======== ======== ========= ========= Effective income tax rate................... 27.5% 38.0% 24.5% 35.7% 23.3% 34.9% ========= ========= ======== ======== ========= =========
35 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The principal differences between net income taxes charged to continuing operations and the amounts computed at the federal statutory rate of 35% for the three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ------------------ -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Federal income taxes computed at statutory rate................... $ 80,721 $ 159,045 $237,384 $280,975 $ 281,267 $ 345,100 Amortization of investment tax credits, net of deferred income taxes.................. (5,234) (5,907) (15,702) (17,525) (46,391) (24,782) State income taxes, net of federal income taxes.................. 8,961 21,958 22,612 37,394 31,137 44,566 Net gain on forward share repurchase contract............... -- 6,130 (39,575) (5,566) (18,619) (5,566) Earnings on non-tax qualified decommissioning fund... (1,505) (951) (2,637) (3,719) (7,833) (3,719) Differences between book and tax accounting, primarily property- related deductions..... (19,476) (7,445) (35,893) (5,309) (52,455) (11,145) -------- --------- -------- -------- --------- --------- Net income taxes charged to continuing operations............. $ 63,467 $ 172,830 $166,189 $286,250 $ 187,106 $ 344,454 ======== ========= ======== ======== ========= =========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes, for the three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ------------------ -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Illinois public utility revenue................ $ -- $ (601) $ (3,685) $ 1,296 $ (4,000) $ 8,365 Illinois electricity distribution tax....... 31,267 32,942 77,985 87,615 104,611 116,061 Municipal utility gross receipts............... 24,752 29,832 74,002 80,418 93,285 98,811 Real estate............. 18,325 33,801 94,853 97,034 113,028 122,916 Municipal compensation.. 23,781 23,714 64,702 60,515 77,536 78,821 Energy assistance and renewable energy charge................. 8,629 8,117 26,079 25,562 34,940 33,753 Other--net.............. 31,856 16,986 72,421 54,846 88,125 76,520 --------- --------- -------- -------- --------- --------- $ 138,610 $ 144,791 $406,357 $407,286 $ 507,525 $ 535,247 ========= ========= ======== ======== ========= =========
See Note 21 for additional information regarding Illinois invested capital taxes. (19) Lease Obligations of Subsidiary Companies. Future minimum rental payments at September 30, 2000 for operating leases of equipment and real property are estimated to aggregate to $280 million, including $7 million in 2000, $29 million in 2001, $27 million in 2002, $26 million in 2003, $25 million in 2004 and $166 million in 2005-2043. (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 $39 million at September 30, 2000. 36 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (21) Commitments and Contingent Liabilities. Purchase commitments, principally related to construction, nuclear fuel, and coal in support of certain power purchase agreements approximated $839 million at September 30, 2000, comprised of $769 million for ComEd, $11 million for UT Holdings, $50 million for Unicom Energy Services, $1 million for Unicom Distributed Energy and $8 million for Unicom Power Holdings. In addition, ComEd has substantial commitments for expected capacity payments and fixed charges related to power purchase agreements. Upon completion of the fossil plant sale with EME, ComEd entered into arrangements to assign or settle a substantial portion of its coal purchase commitments and entered into purchase power agreements with EME. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction Program," for additional information regarding ComEd's purchase commitments. ComEd is a member of NEIL which provides insurance coverage against property damage and associated replacement power costs occurring at members' nuclear generating facilities. All companies insured with NEIL are subject to retrospective premium adjustments if losses exceed accumulated reserve funds. Capital has been accumulated in the reserve funds such that ComEd would not be liable for any single incident. However, ComEd could be subject to assessments in any policy year for each of three types of coverage provided. The maximum assessments are approximately $32 million for primary property damage, $20 million for excess property damage and $7 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 $969 million in the event of an incident, limited to a maximum of $110 million in any calendar year. In addition, ComEd participates in the American Nuclear Insurers Master Worker Program, which provides coverage for worker tort claims filed for bodily injury caused by the nuclear energy hazard. This program was modified, effective January 1, 1998, to provide coverage to all workers whose "nuclear- related employment" began on or after the commencement date of reactor operations. ComEd will not be liable for a retrospective assessment under this new policy. However, ComEd is still subject to a maximum retroactive assessment of up to $36 million in the event losses incurred under the small number of policies in the old program exceed accumulated reserves. Three of ComEd's wholesale municipal customers filed a complaint and request for refund with the FERC alleging that ComEd failed to properly adjust their rates, as provided for under the terms of their electric service contracts, to track certain refunds made to ComEd's retail customers in the years 1992 through 1994. In the third quarter of 1998, the FERC granted the complaint and directed that refunds be made, with interest. ComEd filed and was granted a request for rehearing for purposes of reconsideration with the FERC. If the order is upheld, ComEd must make refunds within 15 days of the resolution for rehearing. ComEd's management believes an adequate reserve has been established in connection with this case. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects. With 37 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts against Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions have been settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge vs. 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 plaintiffs, after an amended judgement was issued March 11, 1999, totaled approximately $6 million, including compensatory and punitive damages, interest and medical monitoring. Cotter appealed. On February 11, 2000, the Tenth Circuit Court of Appeals agreed with Cotter, found that the trial judge had erred in critical rulings and reversed the jury verdict, remanding the case for new trial. A trial involving the next group of twelve plaintiffs is currently underway in federal district court in Denver. Although this trial and the other 1991 cases will necessarily involve the resolution of numerous contested issues of law and fact, it is ComEd's assessment that these actions will not have a material impact on its financial position or operations. In August of 1999, three class action lawsuits were filed against the Company related to a series of service interruptions. The two primary events occurred on July 30 through August 2, 1999. Another significant outage occurred on August 12, 1999. The outages of July 30, 1999, described as the Northwest Substation events, began during a period of intense heat and humidity. On August 12, 1999, in what is described as the Jefferson Substation event, ComEd interrupted service to customers on the near north and near west side of the Loop. While major commercial customers were affected, all service was restored in this event on the same date. The combined effect of these events resulted in over 168,000 customers losing service for more than 4 hours. The class action complaints have been consolidated and seek to recover damages for personal injuries and property damage, as well as economic loss for these events. Further, ComEd initiated expedited claim settlements for those with primarily food spoilage claims and has paid over $4 million to date. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. For purposes of such discussions, the outage described above, as well as lesser events through August 31, 1999, will be considered. If talks are not productive, either side can withdraw unilaterally. The Company has repeatedly declared that it will pay no economic damages and will vigorously defend against such claims. The lawsuits are pending in the Circuit Court of Cook County. ComEd filed a motion challenging the legal sufficiency of the consolidated complaints. On July 21, 2000, the judge dismissed two of the counts with prejudice, and four others with leave to replead. The plaintiffs filed an amended complaint on August 29, 2000. ComEd has again filed a motion seeking dismissal of the pleadings. The plaintiffs have not yet responded. The next status before the Court is set for November 10, 2000. Argument on the motion to dismiss will likely occur in December 2000. A portion of any settlement or verdict may be covered by insurance and discussions with the carrier are ongoing. ComEd's management believes adequate reserves have been established in connection with these cases. Following the summer 1999 service interruptions, the ICC opened a three- phase investigation of the design and reliability of ComEd's transmission and distribution system. At the conclusion of each phase of the investigation, the ICC will issue reports that will include specific recommendations for ComEd and a timetable for executing the recommendations. Although the recommendations are not legally binding on ComEd, the ICC may enforce the recommendations through litigation. The report on Phase I of the investigation was released the week of January 3, 2000, which focused on the outages of July and August 1999. The first and second of five reports on Phase II and Phase III, focusing on the transmission and distribution system, were released during the weeks of June 5 and June 17, respectively. The third report is anticipated later this year. The investigation is expected to conclude by early 2001. Since summer 1999, the Company has devoted significant resources to 38 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued improving the reliability of its transmission and distribution system. The Company believes that the likelihood of a successful material claim resulting from this investigation is remote. The investigation is expected to conclude by early 2001. In 1996, several developers of non-utility generating facilities filed litigation against various Illinois officials claiming that the enforcement against those facilities of an amendment to Illinois law removing the entitlement of those facilities to state-subsidized payments for electricity sold to ComEd after March 15, 1996 violated their rights under the federal and state constitutions, and against ComEd for a declaratory order that their rights under their contracts with ComEd were not affected by the amendment. On August 4, 1999, the Illinois Appellate Court held that the developers' claims against the State were premature, and the Illinois Supreme Court denied leave to appeal that ruling by Order dated December 1, 1999. On April 14, 2000, the developer of one such facility requested leave to amend its complaint to allege claims for damages against ComEd based on breach be ComEd of an alleged contractual obligation to pay for electricity purchased from that developer at the state-subsidized rate. ComEd has objected to the developer's request for leave to amend, and intends vigorously to contest any assertion by such developer that it is entitled to any payment in excess of ComEd's avoided costs. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. ComEd generally did not operate MGPs as a corporate entity but did, however, acquire MGP sites as part of the absorption of smaller utilities. Approximately half of these sites were transferred to then Northern Illinois Gas Company (Nicor Gas) as part of a general conveyance in 1954. ComEd also acquired former MGP sites as vacant real estate on which ComEd facilities have been constructed. To date, ComEd has identified 44 former MGP sites for which it may be liable for remediation. In the fourth quarter of 1999, ComEd re- evaluated its environmental remediation strategies. As a result of this re- evaluation, ComEd's estimate of its cost of former MGP site investigation and remediation was increased by $68 million in the fourth quarter of 1999. ComEd's current best estimate of its costs of former MGP site investigation and remediation is $89 million (2000) dollars (reflecting an estimated inflation rate of 3.0% and a discount rate of 6.5%). Such estimate, reflecting an estimated inflation rate of 3% and before the effects of discounting, is $176 million and is included in other liabilities on the Consolidated Balance Sheets as of September 30, 2000. It is expected that the costs associated with investigation and remediation of former MGP sites will be substantially incurred through 2012, however monitoring and certain other costs are expected to be incurred through 2042. The increase in ComEd's estimated costs of former MGP sites of $68 million in the fourth quarter of 1999 was included in O & M expenses on Unicom and ComEd's Statements of Consolidated Operations. In addition, as of September 30, 2000 and December 31, 1999, a reserve of $7 million and $8 million, respectively, has been included in other noncurrent liabilities on the Consolidated Balance Sheets, representing ComEd's estimate of the liability associated with cleanup costs of sites other than former MGP sites. These cost estimates are based on currently available information regarding the responsible parties likely to share in the costs of responding to site contamination, the extent of contamination at sites for which the investigation has not yet been completed and the cleanup levels to which sites are expected 39 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued to have to be remediated. While ComEd may have rights of reimbursement under insurance policies, amounts that may be recoverable from other entities are not considered in establishing the estimated liability for the environmental remediation costs. The IDR has issued Notices of Tax Liability to ComEd alleging deficiencies in Illinois invested capital tax payments for the years 1988 through 1997. The alleged deficiencies, including interest and penalties, totaled approximately $54 million as of September 30, 2000. ComEd has protested the notices, and the matter is currently pending before the IDR's Office of Administrative Hearings. Interest will continue to accumulate on the alleged tax deficiencies. (22) Segment Reporting. Unicom's reportable operating segments as determined under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information include its regulated electric utility and its unregulated business operations. Unicom's reportable segments are managed separately because of their different regulatory and operating environments. Unicom evaluates their performance based on net income. ComEd is an electric utility which is engaged in the generation, purchase, transmission, distribution and sale of electric energy in Northern Illinois. ComEd's rates and services are subject to federal and state regulations. Unicom's unregulated business operations, including energy services and development of new business ventures, are not subject to utility regulation by federal or state agencies. As a result of the December 1999 fossil plant sale, as described in Note 4, the assets of unregulated businesses exceeded 10% of Unicom's total assets and, as such, constitute a reportable segment. The assets of the unregulated businesses include approximately $1.6 billion of investments in leases at September 30, 2000 as discussed in Note 1. 40 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Concluded The accounting policies of the segments are the same as those described in Note 1. Unicom's financial data for business segments are as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ---------------------- ---------------------- ---------------------- 2000 1999 2000 1999 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Operating Revenue: Electric Utility....... $2,039,961 $2,060,217 $5,274,100 $5,266,647 $6,764,910 $6,824,708 Unregulated Businesses. 180,328 24,237 411,571 41,325 460,736 46,932 Intersegment Revenue... 46,873 8,998 82,012 14,675 88,864 21,509 Elimination............ (46,873) (8,998) (82,012) (14,675) (88,864) (21,509) ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $2,220,289 $2,084,454 $5,685,671 $5,307,972 $7,255,646 $6,871,640 ========== ========== ========== ========== ========== ========== Depreciation, Amortization and Decommissioning: Electric Utility....... $ 225,951 $ 200,284 $ 821,662 $ 695,387 $ 962,420 $ 923,216 Unregulated Businesses. 4,263 1,825 10,197 5,001 12,299 6,515 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $ 230,214 $ 202,109 $ 831,859 $ 700,388 $ 974,719 $ 929,731 ========== ========== ========== ========== ========== ========== Interest and Dividend Income: Electric Utility....... $ 54,632 $ 10,241 $ 176,859 $ 41,110 $ 195,980 $ 48,924 Unregulated Businesses. 35,055 1,000 114,325 2,827 121,019 3,716 Elimination............ (74,298) (1,298) (189,052) (1,891) (197,966) (2,179) ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $ 15,389 $ 9,943 $ 102,132 $ 42,046 $ 119,033 $ 50,461 ========== ========== ========== ========== ========== ========== Interest Expense--Net: Electric Utility....... $ 124,661 $ 135,945 $ 381,156 $ 413,824 $ 512,684 $ 524,109 Unregulated Businesses. 91,012 5,257 219,663 14,202 234,478 17,973 Elimination............ (74,298) (1,298) (189,052) (1,891) (197,966) (2,179) ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $ 141,375 $ 139,904 $ 411,767 $ 426,135 $ 549,196 $ 539,903 ========== ========== ========== ========== ========== ========== Income Tax Expense/(Benefit): Electric Utility....... $ 91,726 $ 184,992 $ 237,658 $ 322,868 $ 267,012 $ 400,325 Unregulated Businesses. (22,759) (5,418) 213,313 85,587 256,875 152,340 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $ 68,967 $ 179,574 $ 450,971 $ 408,455 $ 523,887 $ 552,665 ========== ========== ========== ========== ========== ========== Net Income/(Loss): Electric Utility....... $ 196,246 $ 287,049 $ 579,965 $ 511,435 $ 691,259 $ 643,283 Unregulated Businesses. (32,582) (7,297) (77,823) (42,648) (88,238) (63,308) ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $ 163,664 $ 279,752 $ 502,142 $ 468,787 $ 603,021 $ 579,975 ========== ========== ========== ========== ========== ========== Capital Expenditures: Electric Utility....... $ 324,746 $ 262,946 $ 899,072 $ 736,654 $1,245,816 $1,021,602 Unregulated Businesses. (5,048) 8,975 15,353 15,960 39,486 21,133 ---------- ---------- ---------- ---------- ---------- ---------- Consolidated Unicom..... $ 319,698 $ 271,921 $ 914,425 $ 752,614 $1,285,302 $1,042,735 ========== ========== ========== ========== ========== ==========
September 30, December 31, 2000 1999 ------------- ------------ Total Assets: Electric Utility................................... $21,877,441 $23,160,265 Unregulated Businesses............................. 8,310,774 3,720,376 Elimination........................................ (7,605,580) (3,474,608) ----------- ----------- Consolidated Unicom................................. $22,582,635 $23,406,033 =========== ===========
41 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in the Electric Utility Industry Unicom and its predominant business, electric energy generation, transmission and distribution, are in a period of fundamental change. These changes are attributable to changes in technology and regulation. Federal law and regulations have been amended to provide for open transmission system access, and various states, including Illinois, are considering, or have adopted, new regulatory structures to allow access by some or all customers to energy suppliers, in addition to the local utility. Electric Utility Industry. The electric utility industry historically has consisted of vertically integrated companies which combine generation, transmission and distribution assets; serve customers within relatively defined service territories; and operate under extensive regulation with respect to rates, operations and other matters. Utilities have operated under a regulatory compact with the state, with a statutory obligation to serve all of the electricity needs within their service territory in a nondiscriminatory manner. Historically, investment and operating decisions have been made based upon the utilities' respective assessment of the current and projected needs of their customers. In view of this obligation, regulation has focused on investment and operating costs, and rates have been based on recovery of some or all of such prudently incurred costs plus a return on invested capital. Such rate regulation, and the ability of utilities to recover investment and other costs through rates, have provided the basis for recording certain costs as regulatory assets. These assets represent costs which are allocated over future periods reflecting related regulatory treatment, rather than expensed in the current period. Federal Regulation. The Federal Energy Policy Act of 1992, among other things, empowered the FERC to introduce a greater level of competition into the wholesale marketplace for electric energy. Under FERC Order No. 888, utilities are required to file open access tariffs with regard to their transmission systems. These tariffs set forth the terms, including prices, under which other parties and the utility's wholesale marketing function may use the utility's transmission system. ComEd has an approved open access tariff with the FERC. A companion FERC rule, Order No. 889, requires the separation of the transmission operations and wholesale marketing functions so as to ensure that unaffiliated third parties have access to the same information as to system availability and other requirements. The FERC Order further requires utilities to operate an electronic bulletin board to make transmission price and access data available to all potential users. A key feature of FERC Order No. 888 is that it contemplates full recovery of a utility's costs "stranded" by competition. These costs are "stranded" or "strandable" to the extent market-based rates would be insufficient to allow for their full recovery. To recover stranded costs, the utility must show that it had a reasonable expectation that it would continue to serve the customer in question under its regulatory compact. In addition, some governmental entities, such as cities, may elect to "municipalize" a utility's distribution facilities through condemnation proceedings. Such municipalities would then be able to purchase electric power on a wholesale basis and resell it to customers over the newly acquired facilities. The FERC Order provides for the recovery of a utility's investment stranded by municipalization. The 1997 Act. In December 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act was amended in June 1999. As a result of the 1997 Act and FERC rules, prices for the supply of electric energy are expected to change from cost-based, regulated rates to rates determined by competitive market forces. Accordingly, the 1997 Act provides for, among other things, gradual customer access to other electric suppliers or a power purchase option which allows the purchase of electric energy from ComEd at 42 market based prices, and the collection of a CTC from customers who choose to purchase electric energy from a RES or elect the power purchase option during a transition period that extends through 2006. Effective October 1, 1999, the CTC was established in accordance with a formula defined in the 1997 Act. The CTC, which is applied on a cents per kilowatthour basis, considers the revenue which would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. The CTC allows ComEd to recover some of its costs which might otherwise be unrecoverable under market-based rates. Nonetheless, ComEd will need to take steps to address the portion of such costs which are not recoverable through the CTC. Such steps may include cost control efforts, developing new sources of revenue and asset dispositions. See "Response to Regulatory Changes" and "Fossil Plant Sale" below for additional information. As of June 1, 2000, more than 62,000 non-residential customers are eligible to choose a new electric supplier or elect the purchase power option. As of September 30, 2000, over 7,800 non-residential customers, representing approximately 18 percent of ComEd's retail kilowatthour sales for the twelve months prior to the introduction of open access, elected to receive their electric energy from a RES or chose the purchase power option. The impact of customer choice on results of operations will depend on various factors, including the extent to which customers elect to receive energy from a RES or the purchased power option, the development of a competitive market, the market price for energy, the extent to which ComEd develops new sources of revenue and the results of cost control efforts. Because of the inherent uncertainty in these factors, ComEd is unable to predict the long term impact of customer choice on results of operations. However, ComEd does not expect customer choice to have a material effect in the near term as a result of the collection of CTCs as provided by the 1997 Act. Utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select a RES can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based, regulated rates. The ICC issued orders in August and September 1999 approving, with modifications, ComEd's delivery service tariffs. The 1997 Act also provides for a 15% residential base rate reduction which became effective August 1, 1998 and an additional 5% residential base rate reduction in October 2001. ComEd's operating revenues were reduced by approximately $170 million in 1998 due to the 15% residential base rate reduction. The 15% rate reduction further reduced ComEd's operating revenues by approximately $226 million in 1999, compared to 1998 rate levels. Notwithstanding the rate reductions and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. During this period, utilities may reorganize, sell or assign assets, retire or remove plants from service, and accelerate depreciation or amortization of assets with limited ICC regulatory review. A utility may request a rate increase during the rate freeze period only when necessary to ensure the utility's financial viability. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity is based on the 30- Year Treasury Bond rate, plus 5.5% in the years 1998 and 1999, and plus 8.5% in the years 2000 through 2004. The utility's earned return on common equity and the threshold return on common equity are each calculated on a two-year average basis. The earnings sharing provision is applicable only to ComEd's earnings. In accordance with the provisions of the 1997 Act, increased amortization of regulatory assets may be recorded, thereby reducing the earned return on common equity, if earnings otherwise would have exceeded the maximum allowable rate of return. The potential for earnings sharing or increased amortization of regulatory assets could limit earnings in future periods. ComEd's returns on average common equity 43 for the years 1999 and 1998 were 11.56% and 10.86%, respectively. The average return of 11.21% for the two year period ended December 31, 1999 equaled the threshold return for that period under the earnings provisions of the 1997 Act. ComEd does not currently expect to trigger the earnings sharing provisions of the 1997 Act in the years 2000 through 2004. The 1997 Act also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a SPE. The proceeds, net of transaction costs, from such security issuances must be used to refinance outstanding debt or equity or for certain other limited purposes. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS-- Capital Resources" below, and Notes 3 and 6 of Notes to Financial Statements, for additional information regarding the redemptions and repurchases of debt and equity. The 1997 Act also requires utilities to establish or join an ISO that will independently manage and control utility transmission systems. Additionally, the 1997 Act includes the leveling of certain regulatory requirements to permit operational flexibility, the leveling of certain regulatory and tax provisions as applied to various electric suppliers and a new, more stringent, reliability requirement applicable to ComEd in the event of a major outage. See "Response to Regulatory Changes" below for additional information. See Notes 1, under "Regulatory Assets and Liabilities," and 3 of Notes to Financial Statements for the accounting effects related to the 1997 Act. Response to Regulatory Changes. Unicom has announced several business and operational objectives designed to focus efforts in responding to the energy market changes that are expected to develop from the 1997 Act. Among other things, these strategic objectives call for a focus on operations to: (1) provide a reliable supply of electricity as the competitive marketplace evolves, (2) become a top quartile operator of competitive nuclear plants, (3) deliver competitive earnings while restructuring the balance sheet to reflect the realities of the marketplace, (4) expand the offering of energy-related products and services, and (5) transform the corporate culture of Unicom. Under the 1997 Act, the role of electric utilities in the supply and delivery of energy is expected to change. Utilities, such as ComEd, traditionally have been responsible for providing both adequate supply and reliable delivery of electricity to customers within their service areas. In the future, ComEd will continue to be obligated to provide a reliable delivery system. However, ComEd will be obligated to supply electricity only to those customers that it continues to serve under tariffs for electricity, but not for those customers who choose to rely on the marketplace. Nonetheless, during the transition period to a competitive supply marketplace, ComEd must provide both an adequate supply and reliable delivery of electricity. Given the tight capacity situation in ComEd's market, ComEd will be working to maintain its available capacity, as well as working to assist in the development of a competitive supply marketplace in Illinois. ComEd has a significant commitment to, and investment in, nuclear generating capacity. ComEd has installed a management team responsible for improving nuclear operations. Such improvements 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. 44 In December 1999, FERC issued an order known as "Order 2000" requiring jurisdictional utilities to file a proposal to form an RTO meeting certain governance, operational, and scope and scale requirements articulated in the order or, alternatively, to describe efforts to participate in or work toward participating in an RTO or explain why they were not participating in an RTO. Order 2000 is generally designed to separate the governance and operation of the transmission system from generation companies and other market participants. RTOs may be organized in a variety of ways, including so-called independent system operators or "ISOs" (such as the Midwest Independent System Operator or "MISO"), which are generally not-for-profit entities and which would operate but not own transmission facilities, as well as independent for- profit transmission companies, and other structures. ComEd has been a member of the MISO and has participated with other utilities in evaluating the formation of an independent transmission company operating within the oversight of the MISO. As a result of that evaluation, and in consideration of the recently completed transaction in which Exelon Corporation was formed as the holding company for ComEd and PECO, ComEd believes that continued participation in the MISO is not in its best interests given circumstances as they now stand. Consequently, on October 31, 2000, ComEd notified the MISO of its intention to withdraw and to join the Alliance Regional Transmission Organization, an RTO being established by American Electric Power, Consumers Energy, Detroit Edison, Virginia Electric & Power and FirstEnergy. ComEd's withdrawal from the MISO is subject to regulatory approval. As a result of the Exelon transaction, ComEd believes that Exelon has the right to withdraw ComEd's facilities from participation in the MISO as of October 31, 2001, subject to FERC approval, and that its responsibility for start-up costs associated with the Midwest MISO under the transmission owners' agreement will not be material. The MISO is expected to oppose this view and has argued, among other things, that the provision allowing earlier withdrawal in the case of a merger is not applicable to the Exelon transaction and that the earliest applicable date for ComEd's withdrawal is the end of the year following the fifth anniversary of ComEd's execution of the transmission owners' agreement, which would be December 31, 2002, unless the Federal Energy Regulatory Commission permits earlier withdrawal. MISO may also dispute ComEd's view of its responsibility for costs MISO has and will continue to incur. If ComEd's view of its right to withdraw and responsibility for costs is challenged and does not prevail, then the costs associated with ComEd's withdrawal may be material. Merger Agreement. On October 19, 2000, Unicom and PECO received approval from the Securities and Exchange Commission under the Public Utilities Holding Company Act of 1935, the last regulatory approval, to complete their merger to form Exelon Corporation. The companies completed the merger on October 20, 2000 and began trading as Exelon Corporation (NYSE: EXC) on October 23, 2000. Upon completion of the merger, PECO and ComEd became the principal utility subsidiaries of Exelon. This result was achieved by a mandatory exchange of the outstanding common stock of PECO for common stock of Exelon, and a subsequent merger of Unicom with and into Exelon wherein holders of Unicom common stock received 0.875 shares of Exelon common stock plus $3.00 in cash for each of their shares of Unicom common stock. The merger transaction will be accounted for as a purchase of Unicom by PECO. 45 Consistent with Unicom's $1 billion share repurchase commitment in the merger agreement with PECO, Unicom has completed the repurchase of 24 million shares of its common stock. The shares were repurchased from the open market over the recent ten months pursuant to agreements with financial institutions. Approximately $153 million of these share repurchases were funded with proceeds from the 1998 issuance of transitional trust notes. The remaining share repurchases will be funded from available funds, including funds ultimately resulting from the fossil plant sale. These share repurchases are in addition to 26.3 million shares of Unicom common stock that Unicom repurchased in January 2000 upon settlement of certain forward purchase contracts. See Notes 6 and 23 of Notes to Financial Statements for additional information. ComEd and PECO are undertaking steps to transfer their generating assets and wholesale power marketing operations to subsidiaries following the consummation of the merger. Subsequent to those transfers, these subsidiaries will be transferred to Exelon and ultimately will be combined into a single power generation and marketing company, which will be a direct subsidiary of Exelon ("Genco"). In ComEd's case, the transfer will include its Braidwood, Byron, Dresden, LaSalle and Quad Cities nuclear generating stations representing an aggregate generating capability of 9,566 megawatts, its Zion station, its rights and obligations under various power purchase agreements, the assets constituting its nuclear decommissioning trusts and its wholesale power marketing business. Genco will enter into a power purchase agreement with ComEd in which Genco will undertake to supply ComEd's full requirements for electric energy through 2004 and all of ComEd's requirements up to the available capacity of the nuclear generating stations in 2005 and 2006. On August 3, the NRC approved the request of ComEd and PECO to transfer licenses for both companies' nuclear plants from ComEd and PECO to Exelon Generating Company to be formed in connection with the proposed merger. As part of the transfer of the nuclear generating stations, Genco is to assume responsibility for the decommissioning of those stations, including Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue to collect decommissioning-related charges from its customers. In May 2000, ComEd filed a petition with the ICC seeking approval to revise its existing decommissioning rider to its rates. Under the proposed revision, ComEd would collect approximately $121 million annually for a period of six years, after which the decommissioning rider and collection of decommissioning funds would end. On October 25, 2000, an ICC hearing examiner issued a proposed order denying ComEd's petition on the basis that existing law does not allow the ICC to authorize ComEd to continue to collect funds for decommissioning nuclear generating plants that it no longer owns. ComEd believes that the proposed order is wrong as a matter of law and that the ICC has the statutory authority to grant ComEd's petition. The ICC is not bound by the proposed order and may accept or reject it, in whole or in part, in preparing its final order in the proceedings. Responses from the parties to the proceedings regarding the proposed order are due in early November and a final order is expected before year-end. ComEd is evaluating the effect of the proposed order on the proposed structure of the Genco transaction. The transfer of the nuclear assets, including the decommissioning trust funds, are subject to satisfactory resolution of significant regulatory and tax issues. The Amended and Restated Agreement and Plan of Exchange and Merger, dated as of January 7, 2000, was filed on January 13, 2000 by Unicom with the SEC as an exhibit to a Form 8-K, and reference to that filing is made for more detailed information. Fossil Plant Sale. In December 1999, ComEd completed the sale of its fossil generating assets to EME for a cash purchase price of $4.8 billion. The fossil plant assets represent an aggregate generating capacity of approximately 9,772 megawatts. Just prior to the consummation of the fossil plant sale, ComEd transferred these assets to an affiliate, Unicom Investment. In consideration for the transferred assets, Unicom Investment paid ComEd consideration totalling approximately $4.8 billion in the form of a demand note in the amount 46 of approximately $2.4 billion and an interest-bearing Note with a maturity of twelve years. Unicom Investment immediately sold the fossil plant assets to EME, in consideration of which Unicom Investment received approximately $4.8 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment paid the $2.4 billion aggregate principal due to ComEd under the demand note. Unicom Investment will use the remainder of the cash received from EME to fund other business opportunities. Of the cash received by ComEd, $1.5 billion has been used to pay the costs and taxes associated with the fossil plant sale including ComEd's contribution of $250 million to an environmental trust as required by the 1997 Act. The remainder of the demand note proceeds will be available to ComEd to fund, among other things, transmission and distribution projects, nuclear generation station projects, and environmental and other initiatives. See Note 1 of Notes to Financial Statements, under "Investment in Leases," for additional information. The sale produced an after-tax gain of approximately $1.6 billion, after recognizing commitments associated with certain coal contracts ($350 million), recognizing employee-related costs ($112 million) and contributing to the environmental trust. The coal contract costs include the amortization of the remaining balance of ComEd's regulatory asset for unrecovered coal reserves of $178 million and the recognition of $172 million of settlement payments related to the above-market portion of coal purchase commitments ComEd assigned to EME at market value upon completion of the fossil plant sale. The severance costs included pension and post-retirement welfare benefit curtailment and special termination benefit costs of $51 million and transition, separation and retention payments of $61 million. A total of 1,730 fossil station employee positions were eliminated upon completion of the fossil plant sale on December 15, 1999. The employees whose positions were eliminated have been terminated. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the sale of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion are reflected in depreciation and amortization expense on Unicom's Statement of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million. As part of the sale transaction, ComEd entered into transitional, limited term power purchase agreements with the buyer. Such purchase power agreements will increase ComEd's purchased power costs. Liquidity and Capital Resources UTILITY OPERATIONS Construction Program. ComEd's construction program for the year 2000 principally covers improvements to its nuclear production, transmission and distribution facilities. The amount shown below for transmission and distribution expenditures reflects a current reevaluation of the level of expenditures required this year to support ComEd's ongoing intensive efforts to improve the reliability of its transmission and distribution systems. A significant portion of the transmission and distribution expenditures reflects management decisions to adopt new design criteria that will improve reliability and reduce the number and duration of power outages, and to accelerate the pace of certain projects that had been scheduled for completion after 2000. Current estimates of construction expenditures (excluding nuclear fuel expenditures of approximately $260 million) are as follows:
2000 ------ (Millions of Dollars) Nuclear................................................. $ 210 Transmission and Distribution........................... 764 General................................................. 159 ------ $1,133 ======
47 The construction expenditures in the above table reflect an increase of approximately $26 million from previously reported levels. The increased transmission and distribution expenditures will be used to fund infrastructure improvement projects, including the expansion of substation and line capacity in Chicago and suburban locations, upgrading transmission lines and the installation of monitoring equipment that is designed to identify distribution problems faster and restore power to customers more quickly. ComEd has experienced improved reliability of its distribution system during the past twelve months as measured by a reduction in the number and duration of power outages. ComEd is currently evaluating its construction expenditures for the years 2001 and 2002 and expects expenditures for transmission and distribution construction to remain above historic expenditure levels in order to attain additional improvements in overall system reliability. Purchase commitments for ComEd, principally related to construction, nuclear fuel and coal in support of certain power purchase agreements approximated $769 million at September 30, 2000. In addition, ComEd's estimated commitments for expected capacity payments and fixed charges related to power purchase agreements were as follows:
Commitments(1) Period ($Millions) ------ -------------- 2000 (Oct. through Dec.)........... $ 87 2001............................... 700 2002............................... 585 2003-2004.......................... 927 2005-2012.......................... 917 ------ $3,216 ======
-------- (1) Capacity payments may be adjusted based on certain conditions. No estimate of future cost escalation has been made. See "Changes in the Electric Utility Industry," subcaptions "The 1997 Act" and "Fossil Plant Sale" above, for additional information. Capital Resources. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. The proceeds from the transitional trust notes, net of transaction costs, were, as required, used to redeem $1,101 million of long- term debt and $607 million of preference stock in 1999 and reduce by $500 million ComEd's outstanding short-term debt. During the year 1999, ComEd recorded an extraordinary loss related to the early redemptions of such long- term debt, which reduced net income on common stock by approximately $28 million (after-tax), or $0.13 per common share (diluted). ComEd also recorded $12 million (after-tax), or $0.05 per common share (diluted), for premiums paid in connection with the redemption of such preference stock. The preference stock premiums were included in the provision for dividends for preference stocks of ComEd on the Statements of Consolidated Operations. Unicom has also repurchased shares of its common stock using $1,104 million of proceeds it received from ComEd's repurchase of its common stock held by Unicom. The balance of proceeds were used for the payment of fees and other debt issuance costs totaling $23 million and a $17 million collateral requirement related to the transitional trust notes. In January 2000, Unicom physically settled the forward share repurchase arrangements it had with financial institutions for the repurchase of 26.3 million Unicom common shares. Prior to settlement, the repurchase arrangements were recorded as a receivable on Unicom's Consolidated Balance Sheets based on the aggregate market value of the shares under the arrangements. In 1999, net unrealized losses of $44 million (after-tax), or $0.20 per common share were recorded related to the arrangements. The settlement of the arrangements in January 2000 resulted in a gain of $113 million (after-tax), which was recorded in the first quarter of 2000. The settlement of the arrangements resulted in a reduction in Unicom's outstanding common shares and common stock equity, effective January 2000. 48 Consistent with Unicom's $1 billion share repurchase commitment in the merger agreement with PECO, Unicom has completed the repurchase of 24 million shares of its common stock. The shares were repurchased from the open market over the recent ten months pursuant to agreements with financial institutions. Approximately $153 million of these share repurchases were funded with proceeds from the 1998 issuance of transitional trust notes. During the third quarter of 2000, Unicom borrowed $1.2 billion under a credit agreement with several banks. Unicom expects to use $1.2 billion of lease prepayments, scheduled to be received in the fourth quarter of 2000, to repay the amounts borrowed pursuant to the credit agreement. See Note 1 of Notes to Financial Statements, under "Investment in Leases", for additional information Proceeds from the credit agreement were used to fund the August 7, 2000 termination payment for Unicom Enterprises' $400 million credit facility of which $341 million was used as of August 7, 2000. The remaining proceeds from the credit agreement were used to fund share repurchases and other general corporate purposes. ComEd forecasts that internal sources will provide approximately three- fourths of the funds required for ComEd's 2000 construction program and other capital requirements, including nuclear fuel expenditures, contributions to nuclear decommissioning funds, sinking fund obligations and scheduled debt maturities. See Notes 9 and 11 of Notes to Financial Statements for the summaries of the annual sinking fund requirements and scheduled maturities for ComEd preference stock and long-term debt, respectively. See "Changes in the Electric Utility Industry," subcaption "Fossil Plant Sale" above, for a description of ComEd's planned uses of the fossil plant sale proceeds. The type and amount of external financing will depend on financial market conditions and the needs and capital structure of ComEd at the time of such financing. ComEd had total unused bank lines of credit of $800 million at September 30, 2000, which may be borrowed at various interest rates. Of that amount, $500 million expires on December 15, 2000 and $300 million expires on December 17, 2002. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread, which is dependent upon the credit ratings of ComEd's outstanding first mortgage bonds or on a prime interest rate. See Note 12 of Notes to Financial Statements for additional information concerning lines of credit. See the Statements of Consolidated Cash Flows for the construction expenditures and cash flow from operating activities for the three months, nine months and twelve months ended September 30, 2000 and 1999. As of September 30, 2000, ComEd has an effective "shelf" registration statement with the SEC for the future sale of up to an additional $280 million of debt securities and cumulative preference stock for general corporate purposes of ComEd, including the discharge or refund of other outstanding securities. On October 20, 2000, following the announcement of the SEC's approval of the merger of Unicom and PECO, Moody's and Fitch affirmed their ratings of ComEd's securities. On October 18, 2000, S&P raised their ratings of ComEd's securities. The current ratings are as follows:
Standard Moody's & Poor's Fitch ------- -------- ----- First mortgage and secured pollution control bonds...... Baa1 A- A- Publicly-held debentures and unsecured pollution control obligations............................................ Baa2 BBB+ BBB+ Convertible preferred stock............................. baa3 BBB BBB Preference stock........................................ Baa2 BBB BBB Trust Securities........................................ baa3 BBB BBB Commercial paper........................................ P-2 A-2 F-2
49 ComEd Funding Trust's securities are currently rated by three principal securities rating agencies as follows:
Standard Moody's & Poor's Fitch ------- -------- ----- Transitional trust notes........................... Aaa AAA AAA
Capital Structure. ComEd's ratio of long-term debt to total capitalization has increased to 59.2% at September 30, 2000 from 55.2% at December 31, 1999, primarily due to the repurchase of common stock in the first nine months of 2000. As of September 30, 2000 and December 31, 1999, $1,210 million and $852 million, respectively, of retained earnings had been appropriated for ComEd's future dividend payments. New Customer Information and Billing system. In July 1998, ComEd began a transition to a new customer information and billing system. The new system was implemented to achieve a number of strategic objectives as the electric industry enters into a more competitive environment. Following the July 1998 initial implementation, ComEd experienced delays in issuing bills on a timely basis to a portion of its commercial and industrial customers. ComEd also temporarily suspended credit activities from late in the third quarter of 1998 until the end of the first quarter of 1999 as a result of system implementation issues. The system stabilized gradually throughout 1999 such that by the fourth quarter of 1999 substantially all customers were being billed on a current basis. Operating results for twelve months ended September 30, 1999 were adversely affected by increased labor and overtime costs incurred to address the billing issues, and by increased charges for uncollectible accounts of approximately $35 million resulting from the billing and collection delays and the temporary suspension of credit activities. Cash flows from operations were adversely affected in the twelve months ended September 30, 1999 and positively affected in the twelve months ended September 30, 2000 as a result of the billing delays experienced due to implementation. Receivables from customers as of September 30, 2000 and December 31, 1999 include $53 million and $103 million, respectively, for estimated unbilled revenues for service that has been provided to customers but for which bill issuance was delayed beyond the normal date of issuance. See "Results of Operations," subcaption "Operation and Maintenance Expenses" below, and Note 1 of Notes to Financial Statements, under "Customer Receivables and Revenues" and "Use of Estimates," for additional information. Market Risks. ComEd is exposed to market risk due to changes in interest rates and the market price for electricity. Exposure for interest rate changes relates to its long-term debt and preferred equity obligations. Exposure to electricity market price risk relates to forward activities taken to manage effectively the supply of, and demand for, the electric generation capability of ComEd's generating plants. ComEd has implemented an integrated risk management framework to manage such risks. A corporate Risk Management Committee defines the Company's risk tolerance and establishes appropriate position limits, and corporate policies and procedures have been implemented to minimize the exposure to market risk. ComEd does not currently utilize derivative commodity or financial instruments for trading or speculative purposes. See "Energy Risk Management Contracts" in Note 1 of Notes to Financial Statements regarding the accounting for energy risk management contracts. Market Price Exposure. ComEd's energy purchases from other suppliers have increased as a result of reductions in owned generating capability and system load growth. The market price of energy is subject to price volatility associated with changes in supply and demand in the electric supply markets. In the normal course of business, ComEd utilizes contracts for the forward sale and purchase of energy to assure system reliability and manage effectively the utilization of its available generating capability. ComEd also utilizes put and call option contracts and energy swap 50 arrangements to limit the market price risk associated with the forward commodity contracts. The estimated September 30, 2000 fair value of the forward contracts, including options, for the purchase and sale of energy for the years 2000 through 2007, was approximately $10 million. The estimated fair value is based on the estimated net settlement value of the contracts derived from forward price curves and market quotes, discounted at a 10% rate. A 10% increase in the forward price of electricity would decrease the September 30, 2000 fair value of the forward energy contracts for the years 2000-2007 by approximately $100 million, of which approximately $50 million is for contracts for the period 2000-2002. Likewise, a 10% decrease would increase the fair value of the energy contracts by approximately $100 million. Notwithstanding these price risk management activities, an unexpected loss of generating capability or reduction in demand could increase ComEd's exposure to market price risks and could have a material adverse effect on operating results. Unicom Energy Inc., has entered into gas sales contracts which are hedged with gas supply contracts at lower prices. Unicom Energy Inc.'s margin per therm of gas delivered is not significantly affected by the market price of gas. Unicom Energy Inc. has also entered into electricity contracts for which the mark-to-market at September 30, 2000 is not material. UNREGULATED OPERATIONS Unicom Enterprises is engaged, through subsidiaries, in energy service activities which are not subject to utility regulation by federal or state agencies. One of these subsidiaries, UT Holdings, provides district cooling and related services to offices and other buildings in the central business district of the City and in other cities in North America, generally working with local utilities. District cooling involves, in essence, the production of chilled water at one or more central locations and its circulation to customers' buildings through a closed circuit of supply and return piping. Such water is circulated through customers' premises primarily for air conditioning. This process is used by customers in lieu of self-generated cooling. Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged in providing energy services, including gas services, performance contracting, distributed energy and energy management systems. Through an alliance with AlliedSignal Power Systems, Inc., a subsidiary of Honeywell, Unicom Energy Services is an exclusive distributor for the Parallon 75(TM) TurboGenerator system, which was developed by AlliedSignal to provide customers with on-site electricity production. Unicom Energy Services' exclusive territory for distributing the Parallon 75(TM) system encompasses 12 Midwest states, Ontario, Canada and Puerto Rico. Unicom Energy Inc., a subsidiary of Unicom Energy Services, is currently engaged in providing retail gas services to commercial and industrial customers in the Midwest region. Unicom Energy Inc. also provides retail electric services as a RES. Unicom Mechanical Services Inc., a subsidiary of Unicom Enterprises, designs, installs and services through various subsidiaries heating, ventilating and air conditioning facilities and building control systems for commercial and industrial customers located in the Midwest. Construction Program and Purchase Commitments. Unicom Enterprises estimate of construction expenditures for its unregulated operations is $150 million for the year 2000, excluding expenditures for acquisitions contemplated by subsidiaries of Unicom Enterprises. Unicom Enterprises' construction expenditures include $48 million for the expansion of UT Holdings' Chicago district cooling facilities and the related distribution piping and plants in other cities. 51 Unicom Power Holdings purchased approximately 440 MW of combustion turbine generators and auxiliary equipment for approximately $165 million. It was determined that the equipment was no longer needed and is being marketed for sale. Unicom Enterprises purchase commitments, principally related to equipment purchases and the expansion of UT Holdings' district cooling facilities and the related distribution piping in Chicago and other cities, approximated $60 million at September 30, 2000. Capital Resources. Unicom's primary source of funds for investment in its unregulated subsidiaries have been the fossil plant sale proceeds, dividends received on its ComEd common stock and from borrowings. The availability of ComEd's dividends to Unicom is dependent on ComEd's financial performance and cash position, as well as legal restrictions on the payment of dividends by public utilities. These legal restrictions come from the Federal Power Act and the Illinois Public Utilities Act, which generally prohibit payment of dividends in the absence of earnings and earned surplus in the absence of regulatory authorization. The "Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to the Provisions of the Federal Power Act" provides a mechanism whereby utilities with insufficient retained earnings balances may nontheless pay dividends out of current earnings as long as current earnings have been appropriated. Other forms of financing by ComEd or the unregulated subsidiaries of Unicom, such as additional loans or additional equity investments, which are not expected, would be subject to prior approval by the ICC. The fossil plant sale proceeds received by Unicom Investment, after the payment of the demand note to ComEd, were used to fund share repurchases and to invest in new business opportunities. See "Changes in the Electric Utility Industry" subcaption "Fossil Plant Sale" above, and Notes 1 and 23 of Notes to Financial Statements for additional information. Unicom Thermal redeemed the $115.8 million outstanding balance of the 7.38% unsecured guaranteed senior Note on July 12, 2000. Unicom Thermal recorded an extraordinary loss related to the early redemption premiums paid and the write-off of unamortized debt expenses, which reduced Unicom's net income on common stock by approximately $3.5 million (after-tax) in the third quarter of 2000. In May 2000, Northwind Chicago issued $28 million of 9.09% guaranteed senior Notes due January 31, 2020, the proceeds of which will be used primarily to finance certain project construction costs. The Notes were guaranteed by Unicom and included certain covenants with respect to Unicom and Northwind Chicago's operations. In June 1999, Northwind Midway issued $12 million of 7.68% guaranteed senior Notes due June 2023, the proceeds of which will be used primarily to finance certain project construction costs. Capital Structure. Unicom's ratio of long-term debt to total capitalization has increased to 63.8% at September 30, 2000 from 55.6% at December 31, 1999, primarily due to the repurchase of common stock in the first nine months of 2000. As of September 30, 2000 and December 31, 1999, $1,009 million and $716 million, respectively, of retained earnings had been appropriated for Unicom's future dividend payments. Regulation ComEd and Indiana Company are subject to federal and state regulation in the conduct of their respective businesses. Such regulation includes rates, securities issuance, nuclear operations, environmental and other matters. Particularly in the cases of nuclear operations and environmental matters, such regulation can and does affect operational and capital expenditures. 52 Rate Matters. See "Changes in the Electric Utility Industry," subcaption "The 1997 Act" above, for information regarding the effect of the 1997 Act on rate matters. Nuclear Matters. Nuclear operations have been, and remain, an important focus of ComEd. ComEd operates five nuclear plants--Braidwood, Byron, Dresden, LaSalle and Quad Cities Stations, and is committed to safe, reliable and efficient operation. On May 6, 1999, ComEd's LaSalle Station was officially removed from the NRC's listing of plants that require increased regulatory scrutiny. LaSalle Station had been on this list since January 1997. Concurrent with the LaSalle Station action, the NRC announced the formal removal of the Quad Cities Station from its list of plants with declining performance trends. Quad Cities Station had been on the declining trend list since January 1998. With these actions, all of ComEd's nuclear plants are now placed in the NRC's "routine oversight" category. The NRC and representatives of ComEd's management have met, and will continue to meet periodically as part of the NRC's normal oversight process, to discuss the overall performance of the ComEd nuclear program. Based on ComEd's most recent study, decommissioning costs are estimated to be $5.6 billion in current-year (2000) dollars, including a contingency allowance. These expenditures are expected to occur primarily during the period from 2007 through 2034. All such costs are expected to be funded by the external decommissioning trusts, which ComEd established in compliance with Illinois law and into which ComEd has been making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of, or changes to NRC regulations, as well as changes in the assumptions used in making such estimates, including changes in technology, available alternatives for the disposal of nuclear waste and inflation. Since 1995, ComEd has collected decommissioning costs from its ratepayers in conjunction with a rider to its tariffs. The rider allows annual adjustments to decommissioning cost collections outside the context of a traditional rate proceeding and will continue under the 1997 Act. See Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Liabilities, and Decommissioning," for additional information regarding decommissioning costs. Environmental Matters. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. See Note 21 of Notes to Financial Statements for additional information. Results of Operations Unicom's basic and diluted earnings per common share for three months, nine months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ----------------- --------------------- 2000 1999 2000 1999 2000 1999 --------- --------- -------- -------- ---------- ---------- Basic Earnings per Com- mon Share.............. $ 0.94 $ 1.29 $ 2.78 $ 2.16 $ 3.17 $ 2.67 ========= ========= ======== ======== ========== ========== Diluted Earnings per Common Share........... $ 0.93 $ 1.28 $ 2.76 $ 2.15 $ 3.16 $ 2.66 ========= ========= ======== ======== ========== ==========
Substantially all of the results of operations for Unicom are the results of operations for ComEd. As such, the following section generally discusses, in more detail, the effect of ComEd's operations on Unicom's financial results. EPS computations for the recent three, nine and twelve month periods were positively affected by reductions in Unicom's outstanding shares as a result of share repurchases. All EPS computations shown below reflect the impact on Unicom's diluted EPS. 53 Net Income for the Three Months Ended September 30, 2000. The decrease in Unicom's net income in the recent three-month period reflects, among other factors, ComEd's increased energy costs, higher O&M expenses and increased regulatory asset amortization, partially offset by improved nuclear operating performance. Net Income for the Nine Months Ended September 30, 2000. The increase in ComEd's net income in the recent nine-month period reflects, among other factors, the continued improvement of ComEd's nuclear fleet, increased kilowatthour sales, lower O&M expenses, lower financing costs and a reduction in Unicom's outstanding shares partially offset by higher energy costs. Net Income for the Twelve Months Ended September 30, 2000. The increase in earnings for the twelve-month period was primarily due to increased off-system kilowatthour sales, the sale of ComEd's fleet of fossil stations, lower financing costs, a reduction in Unicom's outstanding common shares, partially offset by increased regulatory asset amortization, higher energy costs and higher O&M expenses. Operating Revenues. ComEd's electric operating revenues reflect revenues from sales to ultimate consumers (including residential, commercial and industrial customers within its service territory) and revenues from sales for resale (i.e., sales to wholesale customers, principally other electric utilities). Operating revenues are affected by kilowatthour sales and rate levels. Kilowatthour sales, in turn, are affected by weather, the level of economic activity within ComEd's service area, and off-system or wholesale sales to other utilities. Off-system sales are affected by a number of factors, including nuclear generating station availability and performance. See Note 1 of Notes to Financial Statements, under "Use of Estimates" and "Customer Receivables and Revenues", for additional information. ComEd's operating revenues increased $17 million for the three months ended September 30, 2000, compared to the three months ended September 30, 2000, primarily due to a $120 million increase in off-system sales and other revenues offset by a $103 million reduction in sales to retail customers. ComEd's operating revenues increased $71 million for the nine months ended September 30, 2000, compared to the nine months ended September 30, 2000, primarily due to a $354 million increase in off-system sales and other revenues partially offset by a $284 million reduction in sales to retail customers. ComEd's operating revenues increased $7 million for the twelve months ended September 30, 2000, compared to the twelve months ended September 30, 2000 due to a $378 million increase in off-system sales and other revenues partially offset by a $353 million reduction in sales to retail customers. Unicom's unregulated businesses' operating revenues increased $19 million, $307 million and $347 million in the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the three months, nine months and twelve months ended September 30, 2000. The increase is primarily due to the acquisition of new businesses during the recent 12-month period and increased revenues related to performance contracting and district cooling services. 54 Energy Costs. Energy costs are currently affected primarily by system load, the cost of nuclear fuel consumed, the availability and net generation of ComEd's nuclear generating units, the PPAs ComEd entered into upon the sale of its fossil stations, the availability and cost of power from other utilities and the costs of gas supply contracts entered into by Unicom's unregulated gas services subsidiaries. Prior to the sale of ComEd's fossil stations, energy costs were also affected by changes in the cost of fossil fuels consumed and changes in the mix of fuel sources of electric energy generated. Energy costs, electricity available for sale and fuel sources of kilowatthour generation were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------------------ ---------------------------------- ---------------------------------- 2000 1999 2000 1999 2000 1999 -------------- -------------- ---------------- ---------------- ---------------- ---------------- Cost Cost Cost Cost Cost Cost Energy per Energy per Energy per Energy per Energy per Energy per Costs Kwh Costs Kwh Costs Kwh Costs Kwh Costs Kwh Costs Kwh -------- ---- -------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ---- (000's) (000's) (000's) (000's) (000's) (000's) Cost of energy: Electric (ComEd) Fuel Nuclear........... $ 97,207 0.48c $107,455 0.53c $ 294,046 0.49c $ 287,778 0.52c $ 386,758 0.49c $ 371,987 0.52c Coal.............. -- -- 160,893 2.19 -- -- 431,719 2.30 94,177 2.08 589,151 2.37 Oil............... -- -- 4,475 5.69 -- -- 6,659 5.07 1,195 9.09 8,276 5.81 Natural gas....... -- -- 29,358 2.80 -- -- 70,498 2.98 12,524 5.91 80,285 3.11 Purchased power.... 689,629 5.82 249,375 7.74 1,287,018 4.34 419,358 5.81 1,419,235 4.17 520,987 5.52 -------- -------- ---------- ---------- ---------- ---------- Total electric energy cost...... $786,836 2.45c $551,556 1.73c $1,581,064 1.76c $1,216,012 1.46c $1,913,889 1.63c $1,570,686 1.45c ======== ======== ========== ========== ========== ========== Gas (Unregulated operations) Supply contracts... $ 46,265 $ -- $ 123,863 $ -- $ 125,588 $ -- -------- -------- ---------- ---------- ---------- ---------- Total energy cost.. $833,101 $551,556 $1,704,927 $1,216,012 $2,039,477 $1,570,686 ======== ======== ========== ========== ========== ========== Electricity available for sale (millions of kilowatthours) Generation--net... 20,223 28,627 60,293 76,319 83,659 99,021 Purchased power... 11,851 3,222 29,684 7,215 34,030 9,445 -------- -------- ---------- ---------- ---------- ---------- Total available for sale......... 32,074 31,849 89,977 83,534 117,689 108,466 ======== ======== ========== ========== ========== ========== Sources of kilowatthour generation available for sale: Fuel Nuclear........... 63% 64% 67% 66% 67% 66% Coal.............. -- 23 -- 22 4 23 Oil............... -- -- -- -- -- -- Natural gas....... -- 3 -- 3 -- 2 Purchased power... 37 10 33 9 29 9 -------- -------- ---------- ---------- ---------- ---------- 100% 100% 100% 100% 100% 100% ======== ======== ========== ========== ========== ==========
Higher energy costs for the three months, nine months and twelve months ended September 30, 2000 resulted primarily from the effects of the PPAs ComEd entered into upon the sale of its fleet of fossil stations which increase purchased power costs but are offset by lower depreciation and O&M expenses. Costs associated with Unicom Energy's gas supply contracts also contributed to higher 55 energy costs for the recent three, nine and twelve months ended September 30, 2000. See "Regulation," subcaption "Nuclear Matters" above, for information regarding ComEd's nuclear generating stations. For additional information concerning ComEd's purchase power commitments see "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Construction Program," above and Note 21 of Notes to Financial Statements. The market price for electricity is subject to price volatility associated with changes in supply and demand in the electric supply markets. ComEd utilizes energy put and call option contracts and energy swap arrangements to limit market price risk associated with forward commodity contracts. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Market Risks" above, for additional information. Operation and Maintenance Expenses. O&M expenses include the expenses associated with operating and maintaining ComEd's generation, transmission and distribution assets, as well as administrative overhead and support, and the expenses associated with Unicom's unregulated businesses. Given the variety of expense categories covered, there are a number of factors which affect the level of such expenses within any given period. A major component of such expenses, however, is the cost associated with operating and maintaining ComEd's nuclear 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, nine months and twelve months ended September 30, 2000, the aggregate level of O&M expenses increased 12%, decreased 2% and increased 1%, respectively, compared to the same periods ended September 30, 1999. O&M expenses associated with nuclear generating stations increased $21 million, and decreased $62 million and $100 million during the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the same periods ended September 30, 1999. The increase in the recent three-month period is due to refueling outages which began in mid-September. There were no refueling outages in the third quarter of 1999. The decreases in the recent nine-month and twelve-month periods were due to shorter refueling outages and fewer forced outages. O&M expenses associated with ComEd's fossil generating stations sold in December 1999 were $51 million for the three months and $183 million for the nine months ended September 30, 1999 and $37 million and $248 million for the twelve months ended September 30, 2000 and September 30, 1999, respectively. O&M expenses associated with ComEd's transmission and distribution system increased $13 million, $85 million and $104 million for the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the same periods ended September 30, 1999. The increases for the recent three- month, nine-month and twelve-month periods were primarily due to ComEd's intensive efforts to improve the reliability of its transmission and distribution systems. O&M expenses associated with customer related activities decreased $16 million, $15 million and $2 million for the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the same periods ended September 30, 1999. The decrease in the recent three- month, nine-month and twelve-month periods were primarily due to increased credit and collection activity and lower overtime and labor costs incurred during the three-month, nine-month and twelve-month periods ended September 30, 1999 to address billing problems encountered following the implementation of a new customer information and billing system in July 1998. O&M expenses for the twelve months ended September 30, 2000 reflect an increase of $68 million in ComEd's estimated environmental liability for the remediation of former manufactured gas plant sites compared to the same period ended September 30, 1999. O&M expenses for the nine and twelve 56 months ended September 30, 1999 also reflect increased charges of $25 million and $35 million, respectively, for uncollectible accounts resulting from billing and collection delays experienced following the ongoing implementation of a new customer information system and the temporary suspension of credit activities in the last half of 1998 and early 1999. O&M expenses also include employee benefits expenses. Since 1995, ComEd has reduced the size of its workforce by offering incentives for employees to leave the company voluntarily. Such incentives included both current payments and earlier eligibility for postretirement health care benefits, in addition to certain other employee-related costs, resulting in charges of $33 million and $2 million for the three months ended September 30, 2000 and 1999, respectively, $47 million and $7 million for the nine months ended September 30, 2000 and 1999, respectively, and $50 million and $23 million for the twelve months ended September 30, 2000 and 1999, respectively, other than costs related to the fossil plant sale. Other ComEd employee benefits expenses, excluding the effects of employee separation plans and certain other employee-related costs increased $18 million and decreased $20 million and $29 million for the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the same periods ended September 30, 1999. The increase for the recent three-month period was primarily due to higher accruals for incentive compensation. The decreases for the recent nine-month and twelve-month periods were primarily due to a reduction in pension costs and medical costs for active and retired employees. O&M expenses also include increases of $9 million, $26 million and $26 million for the recent three, nine and twelve months ended September 30, 2000, respectively, for expenses, other than severance, incurred in connection with the merger with PECO. O&M expenses included a $25 million charge for the nine months and twelve months ended September 30, 1999 as a result of a franchise related settlement agreement between ComEd and the City. O&M expenses also include increases of $28 million, $52 million and $52 million for the recent three, nine and twelve months ended September 30, 2000, respectively, for the rental of gas and diesel peaking units. O&M expenses decreased $47 million, $76 million and $51 million for the three, nine and twelve months ended September 30, 2000, compared to the same periods ended September 30, 1999, due to lower administrative and general costs. O&M expenses associated with Unicom's unregulated businesses increased $67 million, $165 million and $195 million for the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the same periods ended September 30, 1999. The increase is primarily related to (more to come). Depreciation, Amortization and Decommissioning. Depreciation, amortization and decommissioning expense increased $28 million, $131 million and $45 million for the three months, nine months and twelve months ended September 30, 2000, respectively, compared to the same periods ended September 30, 1999 primarily due to increased regulatory asset amortization. The regulatory asset amortization recorded for the three months, nine months and twelve months ended September 30, 2000 represent amounts calculated in accordance with the earnings cap provisions of the 1997 Act. Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the fossil plant sale of $2.587 billion resulted in a regulatory liability, which was used to recover regulatory assets. Therefore, the gain on the sale, excluding $43 million of amortization of investment tax credits, was recorded as a regulatory liability in the amount of $2.544 billion and amortized in the fourth quarter of 1999. The amortization of the regulatory liability and additional regulatory asset amortization of $2.456 billion 57 are reflected in depreciation and amortization expense on Unicom's Statements of Consolidated Operations and resulted in a net reduction to depreciation and amortization expense of $88 million for the twelve months ended September 30, 2000. See Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Liabilities, and Decommissioning," for additional information. Interest on Debt. Changes in interest on long-term debt and notes payable for the three months, nine months and twelve months ended September 30, 2000, compared to the same periods ended September 30, 1999, were due to changes in average interest rates and in the amounts of long-term debt and notes payable outstanding. Changes in interest on ComEd's long-term debt also reflected new issues of debt, the retirement and early redemption of debt, and the retirement and redemption of issues which were refinanced at generally lower rates of interest. See Notes 3 and 6 of Notes to Financial Statements for information regarding the redemptions and repurchases of debt and equity. The average amounts of ComEd's long-term debt and notes payable outstanding and average interest rates thereon were as follows:
Nine Months Three Months Ended Ended Twelve Months Ended September 30 September 30 September 30 -------------------- -------------- -------------------- 2000 1999 2000 1999 2000 1999 --------- --------- ------ ------ --------- --------- Long-term debt outstand- ing: Average amount (millions)............ $ 7,163 $ 7,998 $7,360 $8,227 $ 7,469 $ 7,671 Average interest rate.. 7.12% 6.77% 6.96% 6.76% 6.90% 7.01% Notes payable outstand- ing: Average amount (millions)............ $ 437 $ 381 $ 271 $ 298 $ 300 $ 311 Average interest rate.. 6.87% 5.50% 6.75% 5.84% 6.44% 5.59%
Other Items. The amounts of AFUDC reflect changes in the average levels of investment subject to AFUDC and changes in the average annual capitalization rates as discussed in Note 1 of Notes to Financial Statements, under "AFUDC and Interest Capitalized." In accordance with SFAS No. 34, Capitalization of Interest Cost, ComEd capitalized $2 million and $4 million for the three months ended September 30, 2000 and 1999, respectively, $4 million and $16 million for the nine months ended September 30, 2000 and 1999, respectively, and $10 million and $31 million for the twelve months ended September 30, 2000 and 1999, respectively, of interest costs on its generation-related construction work in progress and nuclear fuel in process. AFUDC and interest capitalized do not contribute to the current cash flow of Unicom or ComEd. ComEd's ratios of earnings to fixed charges for the twelve months ended September 30, 2000 and December 31, 1999 were 2.48 and 2.45, respectively. ComEd's ratios of earnings to fixed charges and preferred and preference stock dividend requirements for the twelve months ended September 30, 2000 and December 31, 1999 were 2.44 and 2.32, respectively. Business corporations, in general, have been adversely affected by inflation because amounts retained after the payment of all costs have been inadequate to replace, at increased costs, the productive assets consumed. Electric utilities, in particular, have been especially affected as a result of their capital intensive nature and regulation which limits capital recovery and prescribes installation or modification of facilities to comply with increasingly stringent safety and environmental requirements. Because the regulatory process limits the amount of depreciation expense included in ComEd's revenue allowance to the original cost of utility plant investment, the resulting cash flows are inadequate to provide for replacement of that investment in future years or preserve the purchasing power of common equity capital previously invested. Foward-Looking Information. Except for historical data, the information contained herein constitutes forward-looking statements. Forward-looking statements are inherently uncertain and 58 subject to risks. Such statements should be viewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. Forward-looking statements in this report include, but are not limited to: (1) statements regarding expectations of revenue reductions and collections of future CTC revenues as a result of the 1997 Act in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Changes in the Electric Utility Industry--The 1997 Act," and in Notes 1 and 3 of Notes to Financial Statements, (2) statements regarding estimated capital expenditures in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaptions "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction Program" and "Liquidity and Capital Resources-- UNREGULATED OPERATIONS--Construction Program," and "Changes in the Electric Utility Industry--Response to Regulatory Changes," (3) statements regarding the costs of decommissioning nuclear generating stations in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation--Nuclear Matters," and in Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Liabilities and Decommissioning," (4) statements regarding cleanup costs associated with MGPs and other remediation sites in Note 21 of Notes to Financial Statements, (5) statements regarding the estimated fair value of forward energy contracts in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources-- UTILITY OPERATIONS--Market Risks," (6) statements regarding the use of fossil plant sale proceeds in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaptions "Changes in the Electric Utility Industry--Fossil Plant Sale," "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction Program," and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--Capital Resources," and in Note 4 of Notes to Financial Statements, (7) statements regarding estimates of claims resulting from the summer of 1999 outages set forth in Note 21 of Notes to Financial Statements, (8) statements regarding ComEd's transfer of nuclear assets, including the decommissioning trust funds, in Notes 1 and 2 of Notes to Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" subcaption "Changes in the Electric Utility Industry--Merger Agreement" and (9) statements regarding the withdrawal of ComEd's facilities from the MISO and ComEd's responsibility for start-up costs associated with the MISO under the transmission owners' agreement. Management cannot predict the course of future events or anticipate the interaction of multiple factors beyond management's control and their effect on revenues, project timing and costs. The statements regarding revenue reductions and collections of future CTC revenues are subject to unforeseen developments in the market for electricity in Illinois resulting from regulatory changes. The statements regarding estimated capital expenditures, decommissioning costs and cleanup costs are subject to changes in the scope of work and manner in which the work is performed and consequent changes in the timing and level of the projected expenditure, and are also subject to changes in laws and regulations or their interpretation or enforcement. The statements regarding the fair value of forward energy contracts are subject to changes in generating capability and reduction in the demand for electricity. The statement regarding the use of proceeds from the fossil plant sale is subject to the possibility that regulatory action might affect the amount and use of such proceeds and the possibility that, due to changing market conditions, Unicom and ComEd may determine that other uses of the proceeds may be in their best interest. The statements regarding estimates of claims resulting from the summer of 1999 outages are subject to the risk that the actual amount of losses suffered by customers and restoration costs may exceed the estimated amounts. The statements regarding ComEd's transfer of nuclear assets, including the decommissioning trust funds, are subject to the risk of unsatisfactory resolution of significant regulatory and tax issues. The statements regarding the timing of withdrawal of ComEd's facilities from the MISO and ComEd's responsibility for start-up costs associated with the MISO are subject to resolution of legal issues raised, and expected to be raised, by the MISO. 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 PART II. OTHER INFORMATION Item 1. Legal Proceedings. On June 12, 2000, the NRC issued to ComEd an Order imposing a civil penalty of $110,000 for a violation of NRC employee protection regulations at Zion Station in 1997. On August 11, 2000, ComEd notified the NRC that it would not request a hearing, although it did not agree that a violation had occurred, and paid the civil penalty. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects. With respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions have been settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v. Cotter (United States District Court for the District of Colorado, Civil Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991 cases. The verdict against Cotter and in favor of the plaintiffs, after an amended judgement was issued March 11, 1999, totaled approximately $6 million, including compensatory and punitive damages, interest and medical monitoring. Cotter appealed. On February 11, 2000, the Tenth Circuit Court of Appeals agreed with Cotter, found that the trial judge had erred in critical rulings and reversed the jury verdict, remanding the case for new trial. A trial involving the next group of twelve plaintiffs is currently underway in federal district court in Denver. Although this trial and the other 1991 cases will necessarily involve the resolution of numerous contested issues of law and fact, it is the Company's assessment that these actions will not have a material impact on its financial position or operations. In August of 1999, three class action lawsuits were filed against the Company related to a series of service interruptions. The two primary events occurred on July 30 through August 2, 1999. Another significant outage occurred on August 12, 1999. The outages of July 30, 1999, described as the Northwest Substation events, began during a period of intense heat and humidity. On August 12, 1999, in what is described as the Jefferson Substation event, ComEd interrupted service to customers on the near north and near west side of the Loop. While major commercial customers were affected, all service was restored in this event on the same date. The combined effect of these events resulted in over 168,000 customers losing service for more than 4 hours. The class action complaints have been consolidated and seek to recover damages for personal injuries and property damage, as well as economic loss for these events. Further, ComEd initiated expedited claim settlements for those with primarily food spoilage claims and has paid over $4 million to date. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. For purposes of such discussions, the outages described above, as well as lesser events through August 31, 1999, will be considered. If talks are not productive, either side can withdraw unilaterally. The Company has repeatedly declared that it will pay no economic damages and will vigorously defend against such claims. The lawsuits are pending in the Circuit Court of Cook County. ComEd filed a motion challenging the legal sufficiency of the consolidated complaints. On July 21, 2000, the judge dismissed two of the counts with prejudice, and four others with leave to replead. The plaintiffs filed an amended complaint on August 29, 2000. ComEd has again filed a motion seeking dismissal of the pleadings. The plaintiffs have not yet responded. The next status before the Court is set for November 10, 2000. Argument on the motion to dismiss will likely occur in December 2000. A portion of any settlement or verdict may be covered by insurance and discussions with the carrier are ongoing. ComEd's management believes adequate reserves have been established in connection with these cases. Following the summer 1999 service interruptions, the ICC opened a three- phase investigation of the design and reliability of ComEd's transmission and distribution system. At the conclusion of each 60 phase of the investigation, the ICC will issue reports that will include specific recommendations for ComEd and a timetable for executing the recommendations. Although the recommendations are not legally binding on ComEd, the ICC may enforce the recommendations through litigation. The report on Phase I of the investigation was released the week of January 3, 2000, which focused on the outages of July and August 1999. The first and second of five reports on Phase II and Phase III, focusing on the transmission and distribution system, were released during the weeks of June 5 and June 17, respectively. The third report is anticipated later this year. The investigation is expected to conclude by early 2001. Since summer 1999, the Company has devoted significant resources to improving the reliability of its transmission and distribution system. The Company believes that the likelihood of a successful material claim resulting from this investigation is remote. The investigation is expected to conclude by early 2001. In 1996, several developers of non-utility generating facilities filed litigation against various Illinois officials claiming that the enforcement against those facilities of an amendment to Illinois law removing the entitlement of those facilities to state-subsidized payments for electricity sold to ComEd after March 15, 1996 violated their rights under the federal and state constitutions, and against ComEd for a declaratory order that their rights under their contracts with ComEd were not affected by the amendment. On August 4, 1999, the Illinois Appellate Court held that the developers' claims against the State were premature, and the Illinois Supreme Court denied leave to appeal that ruling by Order dated December 1, 1999. On April 14, 2000, the developer of one such facility requested leave to amend its complaint to allege claims for damages against ComEd based on breach by ComEd of an alleged contractual obligation to pay for electricity purchased from that developer at the state-subsidized rate. ComEd has objected to the developer's request for leave to amend, and intends vigorously to contest any assertion by such developer that it is entitled to any payment in excess of ComEd's avoided costs. CERCLA provides for immediate response and removal actions coordinated by the U.S. EPA to releases of hazardous substances into the environment and authorizes the U.S. Government either to clean up sites at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Under CERCLA, generators and transporters of hazardous substances, as well as past and present owners and operators of hazardous waste sites, are made strictly, jointly and severally liable for the cleanup costs of waste at sites, most of which are listed by the U.S. EPA on the NPL. These responsible parties can be ordered to perform a cleanup, can be sued for costs associated with a U.S. EPA directed cleanup, may voluntarily settle with the U.S. Government concerning their liability for cleanup costs, or may voluntarily begin a site investigation and site remediation prior to listing on the NPL under state oversight. Various states, including Illinois, have enacted statutes which contain provisions substantially similar to CERCLA. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. See Note 21 of Notes to Financial Statements for information regarding costs associated with investigating and remediating former MGP sites. From time to time, Unicom and its subsidiaries are, or are claimed to be, in violation of or in default under orders, statutes, rules or regulations relating to environmental controls and other matters, compliance plans imposed upon or agreed to by them or permits issued by various state and federal agencies for the construction or operation of their facilities. Unicom and ComEd does not believe, so far as they now foresee, that such violations or defaults will have a material adverse effect on their future business and operating results, except for events otherwise described in Unicom and ComEd's Annual Reports on Form 10-K for the year ended December 31, 1999 or in this Quarterly Reports on Form 10-Q for the quarterly period ended September 30, 2000, which could have such an effect. 61