-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WxmM6CjHW8dwB0BZX3NsI+MUq0BtoztRdrGe05HM38H7OzelHnVHO43Aw7m3A64D 5/jayEHB6ajUeo89zWra5A== 0000950131-98-004823.txt : 19980817 0000950131-98-004823.hdr.sgml : 19980817 ACCESSION NUMBER: 0000950131-98-004823 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: CSX SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNICOM CORP CENTRAL INDEX KEY: 0000918040 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 363961038 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-11375 FILM NUMBER: 98686965 BUSINESS ADDRESS: STREET 1: 10 SOUTH DEARBORN ST 37TH FLOOR STREET 2: P O BOX A-3005 CITY: CHICAGO STATE: IL ZIP: 60690-3005 BUSINESS PHONE: 3123947399 MAIL ADDRESS: STREET 1: P O BOX 767 CITY: CHICAGO STATE: IL ZIP: 60690 FORMER COMPANY: FORMER CONFORMED NAME: CECO HOLDING CO DATE OF NAME CHANGE: 19940125 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH EDISON CO CENTRAL INDEX KEY: 0000022606 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 360938600 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-01839 FILM NUMBER: 98686966 BUSINESS ADDRESS: STREET 1: ONE FIRST NATIONAL PLZ 37TH FL STREET 2: P O BOX 767 CITY: CHICAGO STATE: IL ZIP: 60690 BUSINESS PHONE: 3123944321 MAIL ADDRESS: STREET 1: 10 SOUTH DEARBORN STREET STREET 2: 37TH FLOOR CITY: CHICAGO STATE: IL ZIP: 606900767 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
COMMISSION FILE REGISTRANT; STATE OF INCORPORATION; IRS EMPLOYER NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. ---------- ----------------------------------- ------------------ 1-11375 UNICOM CORPORATION 36-3961038 (an Illinois corporation) 37th Floor, 10 South Dearborn Street Post Office Box A-3005 Chicago, Illinois 60690-3005 312/394-7399 1-1839 COMMONWEALTH EDISON COMPANY 36-0938600 (an Illinois corporation) 37th Floor, 10 South Dearborn Street Post Office Box 767 Chicago, Illinois 60690-0767 312/394-4321
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) have been subject to such filing requirements for the past 90 days. Yes X No Common Stock outstanding at July 31, 1998: Unicom Corporation 217,012,760 shares Commonwealth Edison Company 214,236,071 shares - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNICOM CORPORATION AND COMMONWEALTH EDISON COMPANY QUARTERLY REPORTS ON FORM 10-Q TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998 This document contains the Quarterly Reports on Form 10-Q for the quarterly period ended June 30, 1998 for each of Unicom Corporation and Commonwealth Edison Company. Information contained herein relating to an individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Commonwealth Edison Company makes no representation as to information relating to Unicom Corporation or to any other companies affiliated with Unicom Corporation. In addition, several portions of these Quarterly Reports contain forward-looking statements; and reference is made to page 53 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, six months and twelve months ended June 30, 1998 and 1997............... 5 Consolidated Balance Sheets--June 30, 1998 and December 31, 1997..... 6-7 Statements of Consolidated Capitalization--June 30, 1998 and December 31, 1997............................................................ 8 Statements of Consolidated Retained Earnings (Deficit) for the three months, six months and twelve months ended June 30, 1998 and 1997... 9 Statements of Consolidated Cash Flows for the three months, six months and twelve months ended June 30, 1998 and 1997............... 10 Notes to Financial Statements........................................ 11-36 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 37-53 Commonwealth Edison Company and Subsidiary Companies: Financial Statements-- Report of Independent Public Accountants............................. 54 Statements of Consolidated Operations for the three months, six months and twelve months ended June 30, 1998 and 1997............... 55 Consolidated Balance Sheets--June 30, 1998 and December 31, 1997..... 56-57 Statements of Consolidated Capitalization--June 30, 1998 and December 31, 1997............................................................ 58 Statements of Consolidated Retained Earnings (Deficit) for the three months, six months and twelve months ended June 30, 1998 and 1997... 59 Statements of Consolidated Cash Flows for the three months, six months and twelve months ended June 30, 1998 and 1997............... 60 Notes to Financial Statements........................................ 61-65 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 66 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 67 Item 4. Submission of Matters to a Vote of Security Holders............ 68-69 Item 6. Exhibits and Reports on Form 8-K............................... 69 SIGNATURES............................................................... 70
2 DEFINITIONS The following terms are used in this document with the following meanings:
TERM MEANING ---------------------- ------------------------------------------------------- 1997 Act Illinois Electric Service Customer Choice and Rate Relief Law of 1997 AFUDC Allowance for funds used during construction APB Accounting Principles Board CERCLA Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended CFC Chlorofluorocarbon Clean Air Amendments Clean Air Act Amendments of 1990 ComEd Commonwealth Edison Company Cotter Cotter Corporation, a ComEd subsidiary CTC Non-bypassable "competitive transition charge" DOE U.S. Department of Energy EEI Edison Electric Institute EPRI Electric Power Research Institute EPS Earnings per Share ESPP Employee Stock Purchase Plan FAC Fuel adjustment clause FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission FERC Order FERC Open Access Order No. 888 issued in April 1996 GAAP Generally Accepted Accounting Principles ICC Illinois Commerce Commission Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd subsidiary INPO Institute of Nuclear Power Operations ISO Independent System Operator MGP Manufactured gas plant NEIL Nuclear Electric Insurance Limited NERC North American Electric Reliability Council NML Nuclear Mutual Limited NPL National Priorities List NRC Nuclear Regulatory Commission O&M Operation and maintenance Rate Order ICC rate order issued in January 1995, as subsequently modified SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards S&P Standard & Poor's Trusts ComEd Financing I and ComEd Financing II, ComEd subsidiaries Trust Securities ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities Unicom Unicom Corporation Unicom Energy Services Unicom Energy Services Inc., a Unicom Enterprises subsidiary Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary U.S. EPA U.S. Environmental Protection Agency UT Holdings UT Holdings Inc., a Unicom Enterprises subsidiary
3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Unicom Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Unicom Corporation (an Illinois corporation) and subsidiary companies as of June 30, 1998 and December 31, 1997, and the related statements of consolidated operations, retained earnings (deficit) and cash flows for the three-month, six-month and twelve-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Unicom Corporation and subsidiary companies as of June 30, 1998 and December 31, 1997, and the results of their operations and their cash flows for the three-month, six- month and twelve-month periods ended June 30, 1998 and 1997, in conformity with generally accepted accounting principles. As discussed in Note 3, effective January 1, 1997, the Company changed its method of accounting for revenue recognition. Arthur Andersen LLP Chicago, Illinois August 10, 1998 4 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months, six months and twelve months ended June 30, 1998 and 1997 reflect the results of past operations and are not intended as any representation as to results of operations for any future period. Future operations will necessarily be affected by various and diverse factors and developments, including changes in electric prices, regulation, population, business activity, competition, taxes, environmental control, energy use, fuel, cost of labor, purchased power and other matters, the nature and effect of which cannot now be determined.
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ---------------------- ---------------------- ----------------------- 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ----------- ---------- (THOUSANDS EXCEPT PER SHARE DATA) Operating Revenues...... $1,779,146 $1,686,527 $3,491,381 $3,357,339 $ 7,218,074 $7,062,813 ---------- ---------- ---------- ---------- ----------- ---------- Operating Expenses and Taxes: Fuel................... $ 250,923 $ 308,722 $ 482,299 $ 617,790 $ 1,103,947 $1,237,114 Purchased power........ 279,359 119,333 500,089 183,640 716,503 264,440 Operation and maintenance........... 556,572 642,360 1,125,568 1,212,606 2,352,601 2,324,266 Depreciation........... 232,581 246,771 481,483 496,631 974,320 989,231 Recovery of regulatory assets................ -- 3,818 -- 7,636 7,636 15,272 Taxes (except income).. 185,062 188,982 392,488 390,180 803,258 796,072 Income taxes........... 60,935 31,247 112,486 96,500 332,991 390,480 Investment tax credits deferred--net ........ (6,888) (7,897) (14,048) (15,794) (29,270) (34,840) ---------- ---------- ---------- ---------- ----------- ---------- $1,558,544 $1,533,336 $3,080,365 $2,989,189 $ 6,261,986 $5,982,035 ---------- ---------- ---------- ---------- ----------- ---------- Operating Income........ $ 220,602 $ 153,191 $ 411,016 $ 368,150 $ 956,088 $1,080,778 ---------- ---------- ---------- ---------- ----------- ---------- Other Income and (Deductions): Interest on long-term debt.................. $ (110,640) $ (120,952) $ (223,394) $ (247,920) $ (462,863) $ (502,035) Interest on notes payable............... (3,207) (3,298) (9,016) (5,249) (12,900) (9,869) Allowance for funds used during construction-- Borrowed funds....... 2,738 4,952 4,314 9,004 13,865 17,164 Equity funds......... 1,960 5,706 3,544 10,786 16,529 20,797 Income taxes applicable to nonoperating activities............ 3,314 2,052 6,198 2,418 15,009 5,165 Provision for dividends-- Preferred and preference stocks of ComEd................ (14,462) (15,485) (29,009) (31,012) (58,483) (62,450) ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities...... (7,428) (7,428) (14,855) (14,076) (29,639) (22,556) Loss on nuclear plant closure............... -- -- -- -- (885,611) -- Income tax effects of nuclear plant closure............... -- -- -- -- 362,952 -- Miscellaneous--net..... (12,419) (13,240) (14,625) (20,886) (91,204) (26,923) ---------- ---------- ---------- ---------- ----------- ---------- $ (140,144) $ (147,693) $ (276,843) $ (296,935) $(1,132,345) $ (580,707) ---------- ---------- ---------- ---------- ----------- ---------- Net Income (Loss) Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle.............. $ 80,458 $ 5,498 $ 134,173 $ 71,215 $ (176,257) $ 500,071 Extraordinary Loss, Less Applicable Income Taxes.................. -- -- -- -- (810,335) -- Cumulative Effect of Change in Accounting Principle.............. -- -- -- 196,700 -- 196,700 ---------- ---------- ---------- ---------- ----------- ---------- Net Income (Loss)....... $ 80,458 $ 5,498 $ 134,173 $ 267,915 $ (986,592) $ 696,771 ========== ========== ========== ========== =========== ========== Average Number of Common Shares Outstanding..... 216,897 216,368 216,802 216,211 216,625 215,934 Basic and Diluted Earnings (Loss) per Common Share: Earnings (Loss) per Common Share Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle. $ 0.37 $ 0.03 $ 0.62 $ 0.33 $ (0.80) $ 2.32 Extraordinary Loss, Less Applicable Income Taxes......... -- -- -- -- (3.75) -- Cumulative Effect of Change in Accounting Principle............ -- -- -- 0.91 -- 0.91 ---------- ---------- ---------- ---------- ----------- ---------- Earnings (Loss) per Common Share......... $ 0.37 $ 0.03 $ 0.62 $ 1.24 $ (4.55) $ 3.23 ========== ========== ========== ========== =========== ========== Cash Dividends Declared per Common Share....... $ 0.40 $ 0.40 $ 0.80 $ 0.80 $ 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
JUNE 30, DECEMBER 31, ASSETS 1998 1997 ------ ----------- ------------ (THOUSANDS OF DOLLARS) Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $1,006 million and $1,131 million, respectively)................. $27,461,861 $27,519,365 Less--Accumulated provision for depreciation....... 14,924,147 11,645,985 ----------- ----------- $12,537,714 $15,873,380 Nuclear fuel, at amortized cost.................... 920,081 906,043 ----------- ----------- $13,457,795 $16,779,423 ----------- ----------- Investments and Other Property: Nuclear decommissioning funds...................... $ 2,118,263 $ 1,855,697 Subsidiary companies............................... 41,438 41,830 Other, at cost..................................... 240,821 216,243 ----------- ----------- $ 2,400,522 $ 2,113,770 ----------- ----------- Current Assets: Cash............................................... $ 27,470 $ 18,519 Temporary cash investments......................... 30,772 102,702 Special deposits................................... 1,043 271 Receivables-- Customers........................................ 1,087,380 873,418 Other............................................ 61,571 132,449 Provisions for uncollectible accounts............ (17,374) (17,544) Coal and fuel oil, at average cost................. 205,172 120,664 Materials and supplies, at average cost............ 263,944 255,338 Deferred income taxes related to current assets and liabilities....................................... 49,429 179,553 Prepayments and other.............................. 134,104 126,088 ----------- ----------- $ 1,843,511 $ 1,791,458 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Regulatory assets.................................. $ 4,471,689 $ 1,685,235 Coal reserves...................................... 140,533 194,769 Other.............................................. 96,879 135,095 ----------- ----------- $ 4,709,101 $ 2,015,099 ----------- ----------- $22,410,929 $22,699,750 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 6 UNICOM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, CAPITALIZATION AND LIABILITIES 1998 1997 ------------------------------ ----------- ------------ (THOUSANDS OF DOLLARS) Capitalization (see accompanying statements): Common stock equity................................. $ 4,883,875 $ 4,918,687 Preferred and preference stocks of ComEd-- Without mandatory redemption requirements......... 506,829 507,053 Subject to mandatory redemption requirements...... 168,368 174,328 ComEd-obligated mandatorily redeemable preferred se- curities of subsidiary trusts holding solely ComEd's subordinated debt securities*.............. 350,000 350,000 Long-term debt...................................... 5,766,672 5,737,348 ----------- ----------- $11,675,744 $11,687,416 ----------- ----------- Current Liabilities: Notes payable....................................... $ 489,846 $ 158,150 Current portion of long-term debt, redeemable pref- erence stock and capitalized lease obligations of subsidiary companies.......................................... 330,023 775,296 Accounts payable.................................... 611,422 505,444 Accrued interest.................................... 165,693 169,559 Accrued taxes....................................... 262,651 175,758 Dividends payable................................... 107,037 107,001 Customer deposits................................... 54,383 55,214 Accrued plant closing costs......................... 110,376 135,000 Other............................................... 125,565 165,177 ----------- ----------- $ 2,256,996 $ 2,246,599 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes............................... $ 3,745,332 $ 3,850,308 Nuclear decommissioning liability for retired plants............................................. 1,214,700 1,301,000 Accumulated deferred investment tax credits......... 580,601 602,122 Accrued spent nuclear fuel disposal fee and related interest........................................... 710,810 692,673 Obligations under capital leases of subsidiary com- panies............................................. 417,910 437,950 Regulatory liabilities.............................. 610,113 698,750 Other............................................... 1,198,723 1,182,932 ----------- ----------- $ 8,478,189 $ 8,765,735 ----------- ----------- Commitments and Contingent Liabilities (Note 22) $22,410,929 $22,699,750 =========== ===========
*As described in Note 11 of Notes to Financial Statements, the sole asset of ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. The accompanying Notes to Financial Statements are an integral part of the above statements. 7 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CAPITALIZATION
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (THOUSANDS OF DOLLARS) Common Stock Equity: Common stock, without par value-- Outstanding--216,929,000 shares and 216,659,480 shares, respectively (excludes $9 million and $7 million as of June 30, 1998 and December 31, 1997, respectively, held by trustee for Unicom Stock Bonus Deferral Plan)....................... $ 4,948,032 $ 4,943,211 Preference stock expense of ComEd.................. (3,325) (3,340) Retained earnings (deficit)........................ (60,832) (21,184) ----------- ----------- $ 4,883,875 $ 4,918,687 ----------- ----------- Preferred and Preference Stocks of ComEd: Without Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--13,499,549 shares.................. $ 504,957 $ 504,957 $1.425 convertible preferred stock, cumulative, without par value-- Outstanding--58,851 shares and 65,912 shares, respectively................................... 1,872 2,096 Prior preferred stock, cumulative, $100 par value per share-- No shares outstanding........................... -- -- ----------- ----------- $ 506,829 $ 507,053 ----------- ----------- Subject to Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--1,998,560 shares and 2,058,560 shares, respectively .......................... $ 199,056 $ 205,016 Current redemption requirements for preference stock included in current liabilities.......................... (30,688) (30,688) ----------- ----------- $ 168,368 $ 174,328 ----------- ----------- ComEd-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities................ $ 350,000 $ 350,000 ----------- ----------- Long-Term Debt: First mortgage bonds: Maturing 1998 through 2002--6.00% to 9 3/8%...... $ 880,000 $ 1,060,000 Maturing 2003 through 2012--3.70% to 8 3/8%...... 1,440,400 1,440,400 Maturing 2013 through 2022--5.85% to 9 7/8%...... 1,791,000 1,791,000 Maturing 2023--7 3/4% to 8 3/8%.................. 560,000 560,000 ----------- ----------- $ 4,671,400 $ 4,851,400 Sinking fund debentures, due 1999 through 2011--2 3/4% to 7 5/8%.................................... 95,167 100,298 Pollution control obligations, due 2007 through 2014--3.45% to 5 7/8%............................. 140,700 142,200 Other long-term debt............................... 1,040,810 1,193,818 Deposit for retirement of long-term debt........... (995) -- Current maturities of long-term debt included in current liabilities............................... (135,896) (503,909) Unamortized net debt discount and premium.......... (44,514) (46,459) ----------- ----------- $ 5,766,672 $ 5,737,348 ----------- ----------- $11,675,744 $11,687,416 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 8 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- -------------------- ---------------------- 1998 1997 1998 1997 1998 1997 -------- ---------- -------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Balance at Beginning of Period................. $(54,207) $1,353,931 $(21,184) $1,177,997 $1,272,858 $ 921,822 Add--Net income (loss).. 80,458 5,498 134,173 267,915 (986,592) 696,771 -------- ---------- -------- ---------- ---------- ---------- $ 26,251 $1,359,429 $112,989 $1,445,912 $ 286,266 $1,618,593 -------- ---------- -------- ---------- ---------- ---------- Deduct-- Cash dividends declared on common stock........ $ 86,774 $ 86,564 $173,513 $ 173,048 $ 346,689 $ 345,631 Other capital stock transactions--net... 309 7 308 6 409 104 -------- ---------- -------- ---------- ---------- ---------- $ 87,083 $ 86,571 $173,821 $ 173,054 $ 347,098 $ 345,735 -------- ---------- -------- ---------- ---------- ---------- Balance at End of Period (Includes $292 million of appropriated retained earnings at June 30, 1998)......... $(60,832) $1,272,858 $(60,832) $1,272,858 $ (60,832) $1,272,858 ======== ========== ======== ========== ========== ==========
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 SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- -------------------- ------------------------ 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ----------- ----------- (THOUSANDS OF DOLLARS) Cash Flow from Operating Activities: Net income (loss)...... $ 80,458 $ 5,498 $ 134,173 $ 267,915 $ (986,592) $ 696,771 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........ 246,768 257,231 508,778 516,686 1,028,362 1,027,738 Deferred income taxes and investment tax credits--net........ (20,555) 11,863 6,126 3,891 (342,806) 91,268 Extraordinary loss related to write-off of certain net regulatory assets... -- -- -- -- 810,335 -- Cumulative effect of a change in accounting principle........... -- -- -- (196,700) -- (196,700) Loss on nuclear plant closure............. -- -- -- -- 885,611 -- Payments for revenue refunds............. (10,966) -- (45,470) -- -- -- Equity component of allowance for funds used during construction........ (1,960) (5,706) (3,544) (10,786) (16,529) (20,797) Recovery of regulatory assets... -- 3,818 -- 7,636 7,636 15,272 Provisions/(payments) for liability for separation costs-- net................. (389) 1,428 7,036 802 22,219 845 Net effect on cash flows of changes in: Receivables........ (204,705) (11,695) (143,254) 89,981 (209,152) 18,991 Coal and fuel oil.. (48,322) (7,513) (84,508) (39,788) (25,022) (13,169) Materials and supplies.......... (6,672) 571 (11,893) 541 29,225 18,347 Accounts payable excluding separation costs-- net............... 138,409 (3,412) 101,042 (44,760) 150,574 6,134 Accrued interest and taxes......... 81,293 (32,385) 83,027 22,980 42,144 (84,506) Other changes in certain current assets and liabilities....... 34,861 63,828 53,651 100,249 247,446 225,686 Other--net........... (4,656) 45,256 44,839 129,039 86,635 173,553 --------- --------- --------- --------- ----------- ----------- $ 283,564 $ 328,782 $ 650,003 $ 847,686 $ 1,730,086 $ 1,959,433 --------- --------- --------- --------- ----------- ----------- Cash Flow from Investing Activities: Construction expenditures.......... $(259,787) $(227,768) $(432,738) $(462,249) $(1,013,800) $ (901,297) Nuclear fuel expenditures.......... (34,418) (41,943) (94,967) (90,716) (189,625) (228,946) Sale of generating plants................ -- -- 177,454 -- 238,245 -- Equity component of allowance for funds used during construction.......... 1,960 5,706 3,544 10,786 16,529 20,797 Contributions to nuclear decommissioning funds................. -- -- (80,077) (80,181) (114,721) (116,284) Other investments and special deposits...... 12,657 (4,942) (4,862) (34,881) 16,772 (36,698) --------- --------- --------- --------- ----------- ----------- $(279,588) $(268,947) $(431,646) $(657,241) $(1,046,600) $(1,262,428) --------- --------- --------- --------- ----------- ----------- Cash Flow from Financing Activities: Issuance of securities-- Long-term debt........ $ 10,000 $ 20,000 $ 35,000 $ 317,663 $ 80,000 $ 337,663 ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities...... -- -- -- 150,000 -- 150,000 Capital stock......... 2,544 3,536 6,767 9,313 13,232 20,546 Retirement and redemption of securities-- Long-term debt........ (8,139) (72,570) (374,648) (576,453) (534,934) (741,341) Capital stock......... (6,092) (3,040) (6,225) (3,239) (47,096) (44,645) Deposits and securities held for retirement and redemption of securities............ 3,069 2,102 (995) (229) (766) 746 Premium paid on early redemption of long- term debt............. -- -- -- (9,500) -- (9,500) Cash dividends paid on common stock.......... (86,738) (86,484) (173,348) (172,805) (346,480) (345,274) Proceeds from sale/leaseback of nuclear fuel.......... 44,861 36,801 61,426 81,271 130,109 238,273 Nuclear fuel lease principal payments.... (128,823) (36,305) (161,009) (85,855) (241,566) (190,627) Increase (Decrease) in short-term borrowings............ 110,196 134,000 331,696 135,000 226,096 (70,650) --------- --------- --------- --------- ----------- ----------- $ (59,122) $ (1,960) $(281,336) $(154,834) $ (721,405) $ (654,809) --------- --------- --------- --------- ----------- ----------- Increase (Decrease) in Cash and Temporary Cash Investments............ $ (55,146) $ 57,875 $ (62,979) $ 35,611 $ (37,919) $ 42,196 Cash and Temporary Cash Investments at Beginning of Period.... 113,388 38,286 121,221 60,550 96,161 53,965 --------- --------- --------- --------- ----------- ----------- Cash and Temporary Cash Investments at End of Period................. $ 58,242 $ 96,161 $ 58,242 $ 96,161 $ 58,242 $ 96,161 ========= ========= ========= ========= =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 10 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Corporate Structure and Basis of Presentation. Unicom is the parent holding company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility, is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated subsidiary of Unicom and is engaged, through its subsidiaries, in energy service activities. The consolidated financial statements include the accounts of Unicom, ComEd, the Indiana Company, the Trusts and Unicom's unregulated subsidiaries. All significant intercompany transactions have been eliminated. ComEd's investments in other subsidiary companies, which are not material in relation to ComEd's financial position or results of operations, are accounted for in accordance with the equity method of accounting. Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Regulation. ComEd is subject to regulation as to accounting and ratemaking policies and practices by the ICC and FERC. ComEd's accounting policies and the accompanying consolidated financial statements conform to GAAP applicable to rate-regulated enterprises for the non-generation portion of its business, including the effects of the ratemaking process in accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Such effects on the non-generation portion of its business concern mainly the time at which various items enter into the determination of operating results in order to follow the principle of matching costs with the applicable revenues collected from or returned to customers through future rates. See Note 2 for information regarding the write-off of generation-related regulatory assets and liabilities in December 1997. ComEd's investment in generation-related net utility plant, including construction work in progress and nuclear fuel and excluding the decommissioning costs included in the accumulated provision for depreciation, not subject to cost-based rate regulation, was $9.2 billion and $12.4 billion at June 30, 1998 and December 31, 1997, respectively. See Note 2 regarding the plant impairment recorded by ComEd in the second quarter of 1998. 11 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED Regulatory Assets and Liabilities. Regulatory assets are incurred costs which have been deferred and are amortized for ratemaking and accounting purposes. Regulatory liabilities represent amounts to be settled with customers through future rates. Regulatory assets and liabilities reflected on the Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 were as follows:
JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ (THOUSANDS OF DOLLARS) Regulatory assets: Impaired production plant (1)........................ $3,020,365 $ -- Deferred income taxes (2)............................ 692,077 785,354 Nuclear decommissioning costs--Dresden Unit 1 (3).... 261,482 268,369 Nuclear decommissioning costs--Zion Units 1 and 2 (4)................................................. 448,581 579,777 Unamortized loss on reacquired debt (5).............. 49,184 51,735 ---------- ---------- $4,471,689 $1,685,235 ========== ========== Regulatory liabilities: Deferred income taxes (2)............................ $ 610,113 $ 698,750 ========== ==========
- -------- (1) Amortized over a transition period which is expected to end by 2006, but may be extended to 2008 with ICC approval if certain conditions are met. See Note 2 for additional information. (2) Recorded in compliance with SFAS No. 109, Accounting For Income Taxes, for non-generation related timing differences. (3) Amortized over the period 1998 to 2011. See "Depreciation and Decommissioning" below for additional information. (4) Amortized over the period 1998 to 2013. See "Depreciation and Decommissioning" below for additional information. (5) Amortized over the remaining lives of the non-generation related long-term debt issued to finance the reacquisition. See "Loss on Reacquired Debt" below for additional information. Fuel Adjustment Clause. Pursuant to an option contained in the 1997 Act, ComEd filed a tariff on December 16, 1997 to eliminate its FAC as of January 1, 1997. The FAC provided for the recovery of changes in fossil and nuclear fuel costs and the energy portion of purchased power costs, as compared to the fuel and purchased energy costs included in ComEd's base rates. As authorized by the ICC, ComEd had recorded under or overrecoveries of allowable fuel and energy costs which, under the FAC, were recoverable or refundable in subsequent months. See Note 2 for additional information regarding the effects of eliminating the FAC. See Note 4 for information concerning FAC reconciliation proceedings for the years 1994 and 1996. Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on the quantity of heat produced using the unit of production method. As authorized by the ICC, provisions for spent nuclear fuel disposal costs have been recorded at a level required to recover the fee payable on the current nuclear-generated and sold electricity and the current interest accrual on the one-time fee payable to the DOE for nuclear generation prior to April 7, 1983. The one-time fee and interest thereon have been recovered and the current fee and interest on the one-time fee are presently being recovered through base rates. See Note 14 for additional information concerning the disposal of spent nuclear fuel, one-time fee and interest accrual on the one-time fee. Nuclear fuel expenses, including leased fuel costs and provisions for spent nuclear fuel disposal costs, were $74 million and $63 million for the three months ended June 30, 1998 and 1997, respectively, $141 million and $143 million for the six months ended June 30, 1998 and 1997, respectively, and $297 million and $318 million for the twelve months ended June 30, 1998 and 1997, respectively. The balance of nuclear fuel, at amortized cost, on the Consolidated Balance Sheets includes amounts to be recovered for assessments by the DOE to fund a portion of the cost for the decontamination and decommissioning of uranium enrichment facilities owned and previously operated by the DOE. As of June 30, 1998 and December 31, 1997, an asset related to the assessments of 12 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED $148 million and $156 million, respectively, was recorded. As of June 30, 1998 and December 31, 1997, a corresponding liability of $144 million was recorded, of which $16 million was included in other current liabilities on the Consolidated Balance Sheets for each period. Coal Reserves. At June 30, 1998 and December 31, 1997, ComEd had coal reserves of $243 million and $282 million, respectively. In prior years, ComEd's commitments for the purchase of coal exceeded its requirements. Rather than take all the coal it was required to take, ComEd agreed to purchase the coal in place in the form of coal reserves. ComEd expects to recover from its customers the costs of the coal reserves, as coal is used for the generation of electricity, through base rates. Such fuel costs expected to be recovered within one year amounting to $103 million and $87 million at June 30, 1998 and December 31, 1997, respectively, have been included in current assets as prepayments and other on the Consolidated Balance Sheets. ComEd expects to recover fully the costs of the coal reserves before the year 2001. See Note 22 for additional information regarding ComEd's coal commitments. Customer Receivables and Revenues. ComEd is engaged principally in the production, purchase, transmission, distribution and sale of electricity to a diverse base of residential, commercial, industrial and wholesale customers. ComEd's electric service territory has an area of approximately 11,300 square miles and an estimated population of approximately 8 million as of June 30, 1998. It includes the city of Chicago, an area of about 225 square miles with an estimated population of approximately 3 million from which ComEd derived approximately one-third of its ultimate consumer revenues in the twelve months ended June 30, 1998. ComEd had 3.4 million electric customers at June 30, 1998. Depreciation and Decommissioning. ComEd's depreciation is provided on the straight-line basis by amortizing the cost of depreciable plant and equipment over estimated composite service lives. Non-nuclear plant and equipment is depreciated at annual rates developed for each class of plant based on their composite service lives. Provisions for depreciation were at average annual rates of 3.23%, 3.32% and 3.34% for the three months, six months and twelve months ended June 30, 1998, respectively, of average depreciable utility plant and equipment, including the effects of increased depreciation on ComEd's nuclear generating units. Provisions for depreciation were at average annual rates of 3.35% for the three months and 3.36% for the six months and twelve months ended June 30, 1997 of average depreciable utility plant and equipment, including the effects of increased depreciation on ComEd's nuclear generating units. The annual rate for nuclear plant and equipment, excluding separately collected decommissioning costs and increased depreciation, is 2.88%. The increased depreciation on ComEd's nuclear generating units primarily relates to its steam generators at Byron Unit 1, which were replaced in February 1998, and Braidwood Unit 1, which are expected to be replaced prior to year-end 1998. ComEd recorded increased depreciation charges relating to its nuclear generating units of $6 million, $23 million and $53 million for the three months, six months and twelve months ended June 30, 1998, respectively, and $15 million, $30 million and $59 million for the three months, six months and twelve months ended June 30, 1997, respectively. Nuclear plant decommissioning costs generally are accrued over the current NRC license lives of the related nuclear generating units. The accrual is based on an annual levelized cost of the unrecovered portion of estimated decommissioning costs, which are escalated for expected inflation to the expected time of decommissioning and are net of expected earnings on the trust funds. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Results of Operations--Decommissioning," for a discussion of questions raised by the staff of the SEC and a FASB review regarding the electric utility industry's method of accounting for 13 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED decommissioning costs. Dismantling is expected to occur relatively soon after the end of the current NRC license life of each generating station currently operating. The accrual for decommissioning is based on the prompt removal method authorized by NRC guidelines. ComEd's 10 operating units have remaining current NRC license lives ranging from 7 to 29 years. ComEd's Zion Station and its first nuclear unit, Dresden Unit 1, are retired and are expected to be dismantled beginning in the years 2014 and 2012, respectively, which is consistent with the regulatory treatment for the related decommissioning costs. Based on ComEd's most recent study approved by the ICC, decommissioning costs, including the cost of decontamination and dismantling, are estimated to aggregate $4.4 billion in current-year (1998) dollars, including a contingency allowance. ComEd estimates that it will expend approximately $11.6 billion, including a contingency allowance, for decommissioning costs primarily during the period from 2007 through 2034. Additionally, ComEd estimates that it will expend an aggregate of approximately $217 million in current-year (1998) dollars during the period 2000 through 2014 to maintain Zion Station in a secured mode until decommissioning begins. All such costs are expected to be funded by the external decommissioning trusts, which ComEd established in compliance with Illinois law and into which ComEd has been making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of or changes to NRC regulations, as well as changes in the assumptions used in making such estimates, including changes in technology, available alternatives for the disposal of nuclear waste and inflation. Since 1995, ComEd has collected decommissioning costs from its ratepayers in conjunction with a rider to its tariffs. The rider allows annual adjustments to decommissioning cost collections outside the context of a traditional rate proceeding and will continue under the 1997 Act. The current estimated decommissioning costs include a contingency allowance, but, except at Dresden Unit 1, exclude amounts for spent fuel storage installations, which may be necessary to store spent fuel during the period beginning at the end of the NRC license life of the plants to the date when the DOE accepts the spent fuel for permanent storage. Contingency allowances used in decommissioning cost estimates provide for currently unspecifiable costs that are likely to occur after decommissioning begins and generally range from 20% to 25% of the currently specifiable costs. In February 1998, the ICC authorized a reduction in the annual decommissioning cost accrual from $109 million to $84 million. The reduction primarily reflects stronger than expected after-tax returns on the external trust funds in 1996 and lower than expected escalation in low level waste disposal costs, partially offset by the higher current-year cost estimates, including a contingency allowance. The approved annual decommissioning cost accrual of $84 million was determined using the following assumptions: the decommissioning cost estimate of $4.4 billion in current-year (1998) dollars, after-tax earnings on the tax- qualified and nontax-qualified decommissioning funds of 7.30% and 6.26%, respectively, and an escalation rate for future decommissioning costs of 4.1%. The annual accrual of $84 million provided over the current NRC license lives of the nuclear plants, coupled with the expected fund earnings and amounts previously recovered in rates, is expected to aggregate to approximately $11.6 billion. For the 10 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 14 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED rates. As of June 30, 1998, the total decommissioning costs included in the accumulated provision for depreciation were $1,749 million. For ComEd's retired nuclear units, the total estimated liability for nuclear decommissioning in current-year (1998) dollars is recorded as a liability. The unrecovered portion of the liability was also recorded as a regulatory asset. The nuclear decommissioning liability for retired plants as of June 30, 1998 is as follows:
ZION DRESDEN UNITS UNIT 1 1 AND 2 TOTAL -------- -------- ---------- (THOUSANDS OF DOLLARS) Amounts recovered through rates and investment fund earnings.................................... $111,018 $393,619 $ 504,637 Unrecovered portion of the liability.............. 261,482 448,581 710,063 -------- -------- ---------- Nuclear decommissioning liability for retired plants.......................................... $372,500 $842,200 $1,214,700 ======== ======== ==========
The total estimated liability related to Zion Units 1 and 2, and the unrecovered portion of that liability, decreased from December 31, 1997 to June 30, 1998 due to the exclusion of estimated dry cask storage costs. Under Illinois law, decommissioning cost collections are required to be deposited into external trusts; and, consequently, such collections do not add to the cash flows available for general corporate purposes. The ICC has approved ComEd's funding plan, which provides for annual contributions of current accruals and ratable contributions of past accruals over the remaining current NRC license lives of the nuclear plants. The fair value of funds accumulated in the external trusts at June 30, 1998 was $2,118 million, which includes pre-tax unrealized appreciation of $544 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 June 30, 1998 is as follows:
(THOUSANDS OF DOLLARS) Amounts recovered through rates and investment fund earnings for operating plants (included in the accumu- lated provision for depreciation)...................... $1,748,544 Amounts recovered through rates and investment fund earnings for retired plants............................ 504,637 Less past accruals not yet contributed to the trusts.... (134,918) ---------- Fair value of external trust funds..................... $2,118,263 ==========
Income Taxes. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book/tax timing differences reverse. Prior years' deferred investment tax credits are amortized through credits to income generally over the lives of the related property. Income tax credits resulting from interest charges applicable to nonoperating activities, principally construction, are classified as other income. AFUDC and Interest Capitalized. In accordance with the uniform systems of accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC, compounded semiannually, which represents the estimated cost of funds used to finance its construction program for the non-generation portion of its business. The equity component of AFUDC is recorded on an after-tax basis and the borrowed funds 15 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED component of AFUDC is recorded on a pre-tax basis. The average annual capitalization rates were 8.09% and 9.16% for the three months ended June 30, 1998 and 1997, respectively, 8.53% and 9.25% for the six months ended June 30, 1998 and 1997, respectively, and 9.02% and 9.26% for the twelve months ended June 30, 1998 and 1997, respectively. ComEd discontinued SFAS No. 71 regulatory accounting practices in December 1997 for the generation portion of its business. As a result, beginning in 1998, ComEd is capitalizing interest costs on its generation-related construction work in progress and nuclear fuel in process. Interest costs capitalized were $6 million for the three months and $8 million for the six months and twelve months ended June 30, 1998. AFUDC and interest capitalized do not contribute to the current cash flow of Unicom or ComEd. Interest. Total interest costs incurred on debt, leases and other obligations were $137 million and $149 million for the three months ended June 30, 1998 and 1997, respectively, $277 million and $303 million for the six months ended June 30, 1998 and 1997, respectively, and $572 million and $612 million for the twelve months ended June 30, 1998 and 1997, respectively. Debt Discount, Premium and Expense. Discount, premium and expense on long- term debt of ComEd are being amortized over the lives of the respective issues. Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss from ComEd's reacquisition in connection with the refinancing of first mortgage bonds, sinking fund debentures and pollution control obligations prior to their scheduled maturity dates is deferred and amortized over the lives of the long-term debt issued to finance the reacquisition for non- generation related financings. See "Regulatory Assets and Liabilities" above and Note 2 for additional information. Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure purposes only. Unicom accounts for its stock option awards and ESPP under APB Opinion No. 25, Accounting for Stock Issued to Employees. See Note 8 for additional information. Earnings per Share. Unicom has presented basic and diluted EPS on the Statements of Consolidated Operations for the three months, six months and twelve months ended June 30, 1998 and 1997. Basic and diluted EPS for the periods presented are the same. The diluted average number of common shares outstanding was 217,643,000 and 216,468,000 for the three months ended June 30, 1998 and 1997, respectively, 217,504,000 and 216,311,000 for the six months ended June 30, 1998 and 1997, respectively, and 216,625,000 and 216,034,000 for the twelve months ended June 30, 1998 and 1997, respectively. Energy Risk Management Contracts. In the normal course of business ComEd utilizes contracts for the forward sale and purchase of energy to manage effectively the utilization of its available generating capability. ComEd also utilizes put and call option contracts and energy swap arrangements to limit the market price risk associated with the forward commodity contracts. As ComEd does not currently utilize financial or commodity instruments for trading or speculative purposes, any gains or losses on forward commodity contracts are recognized when the underlying transactions affect earnings. Revenues and expenses associated with market price risk management contracts are amortized over the terms of such contracts. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the 16 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED Consolidated Balance Sheets as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item on the Statements of Consolidated Operations, and requires Unicom and ComEd to formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. Unicom and ComEd may also implement SFAS No. 133 as of the beginning of any fiscal quarter after issuance, but cannot be applied retroactively. SFAS No. 133 must be applied to (i) derivative instruments and (ii) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the company's election, before January 1, 1998). Unicom and ComEd have not yet quantified the effects of adopting SFAS No. 133 on their financial statements and have not determined the timing or method of their adoption of SFAS No. 133. However, adoption of SFAS No. 133 could increase volatility in earnings and other comprehensive income. Reclassifications. Certain prior year amounts have been reclassified to conform with current period presentation. These reclassifications had no effect on operating results. See Note 3 for information regarding the restatement of 1997 interim financial statements for a change in accounting principle. Statements of Consolidated Cash Flows. For purposes of the Statements of Consolidated Cash Flows, temporary cash investments, generally investments maturing within three months at the time of purchase, are considered to be cash equivalents. Supplemental cash flow information for the three months, six months and twelve months ended June 30, 1998 and 1997 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ------------------- ----------------- ------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- (THOUSANDS OF DOLLARS) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized). $98,454 $98,665 $253,335 $259,593 $505,792 $524,608 Income taxes (net of refunds)............ $ 506 $ 48,503 $ 506 $ 55,501 $ 210,806 $ 280,960 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obliga- tions incurred by subsidiary companies.. $45,983 $ 39,376 $ 63,979 $ 85,773 $ 136,618 $ 244,261
(2) ACCOUNTING EFFECTS RELATED TO THE 1997 ACT. On December 16, 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased- process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act, as it applies to ComEd, provides for, among other things, a 15% residential base rate reduction which commenced on August 1, 1998, an additional 5% residential base rate reduction commencing on May 1, 2002, and gradual customer access to other electric suppliers. Access for commercial and industrial customers will occur over a period from October 1999 to December 2000, and access for residential customers will occur after May 1, 2002. The 15% residential base rate reduction, which commenced on August 1, 1998, is expected to reduce ComEd's operating revenues by approximately $160 million and $375 million in 1998 and 1999, respectively, compared to 1997 rate levels. ComEd is engaged in certain pricing experiments contemplated by the 1997 Act, which are expected to reduce ComEd's operating 17 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED revenues by approximately $30 million and $60 million in 1998 and 1999, respectively, compared to 1997 rate levels; however, such reductions are expected to be offset by the effects of customer growth. The 1997 Act also provides for the collection of a CTC from customers who choose another electric service provider during a transition period that extends through 2006, and can be extended through 2008 with ICC approval if certain factors are met. The CTC will be established in accordance with a formula defined in the 1997 Act. The CTC, which will be applied on a cents per kilowatthour basis, considers the revenue which would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. Notwithstanding these rate reductions, and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. During this period, utilities may reorganize, sell or assign assets, retire or remove plants from service, and accelerate depreciation or amortization of assets with limited ICC regulatory review. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, a portion of the excess earnings must be refunded to customers. A utility may request a rate increase during the rate freeze period when necessary to ensure the utility's financial viability, but not before January 1, 2000. Under the 1997 Act, utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select an alternative energy supplier can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based regulated rates. The 1997 Act also requires utilities to establish or join an ISO that will independently manage and control utility transmission systems. Additionally, the 1997 Act includes the leveling of certain regulatory requirements to permit operational flexibility, the leveling of certain regulatory and tax provisions as applied to various electric suppliers and a new, more stringent, liability standard applicable to ComEd in the event of a major outage. The 1997 Act also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a special purpose financing entity. The proceeds from such security issuances must be used to refinance outstanding debt or equity or for certain other limited purposes. The total amount of such securities that may be issued is approximately $6.8 billion; approximately one-half of that amount can be issued in the twelve-month period which commenced on August 1, 1998. On July 21, 1998, the ICC issued an order under the 1997 Act approving the issuance of up to $3.4 billion of such securities. ComEd anticipates the issuance will occur sometime in the fourth quarter of 1998. ComEd plans to use the proceeds of the securities issuance to refinance its debt and equity, including using between $750 million and $1.14 billion to repurchase shares of ComEd common stock held by Unicom. Unicom in turn will use the funds it receives from ComEd's share repurchase to repurchase publicly held shares of Unicom's common stock. At current market prices, this repurchase would involve between 22 million and 33 million shares, or 10 to 15 percent of Unicom's outstanding common stock. The Boards of Directors of Unicom and ComEd have each approved the repurchase of up to 33 million shares of common stock. ComEd plans to use the remaining proceeds, net of transaction costs, to redeem preference stock and debt. As a result of the 1997 Act, prices for the supply of electric energy are expected to transition from cost-based, regulated rates to rates determined by competitive market forces. The CTC allows ComEd 18 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED 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 potential asset dispositions. Because the 1997 Act is expected ultimately to lead to market-based pricing of electric generation services, ComEd discontinued SFAS No. 71 regulatory accounting practices for the generation portion of its business in December 1997. ComEd evaluated the regulatory assets and liabilities related to the generation portion of its business and determined that it was not probable that such costs would be recovered through the cash flows from the regulated portion of its business. Accordingly, the generation-related regulatory assets and liabilities were written off in the fourth quarter of 1997, resulting in an extraordinary charge of $810 million (after-tax), or $3.75 per common share. These write-offs related principally to previously incurred costs originally expected to be collected through future revenues, including income tax benefits previously flowed through to customers, deferred carrying charges on the Byron Unit 2 and Braidwood Units 1 and 2 nuclear generating plants, generation-related unamortized loss on reacquired debt and other miscellaneous generation-related costs. The regulatory asset for the unrecovered nuclear decommissioning costs of currently retired nuclear plants was not written off, as the 1997 Act provides for the ongoing recovery of decommissioning costs through regulated rates. See "Regulatory Assets and Liabilities" and "Depreciation and Decommissioning" in Note 1 for additional information. Pursuant to an option contained in the 1997 Act, ComEd filed a tariff on December 16, 1997 to eliminate its FAC as of January 1, 1997. Under ComEd's regulated rates, the FAC provided for the recovery of changes in fossil and nuclear fuel costs and the energy portion of purchased power costs, as compared to the fuel and purchased energy costs included in ComEd's base rates. Elimination of the FAC required ComEd to refund to customers the net FAC charges billed during the calendar year 1997 of $25 million (after-tax), or $0.12 per common share. These costs, as well as deferred underrecovered energy costs of $19 million (after-tax), or $0.08 per common share, which ComEd would have been entitled to recover if the FAC had remained in effect, were recorded as a charge to operating results in the fourth quarter of 1997. Additionally, elimination of the FAC and a transition to market-based pricing for generation-related costs required ComEd to write down its investment in uranium-related properties. Projections of the market price for uranium indicate that the expected incremental costs of mining and milling uranium at such properties would exceed the expected market price for uranium. Such costs are not expected to be recoverable in a competitive market. A write down of ComEd's investment in uranium-related properties to realizable value resulted in a charge of $60 million (after-tax), or $0.28 per common share, in December 1997. The staff of the SEC issued interpretive guidance in the second quarter of 1998, regarding the application of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, when a regulated enterprise such as an electric utility discontinues regulatory accounting practices for separable portions of its operations and assets. Under SFAS No. 121, an asset is considered impaired, and should be written down to fair value, if its future cash flows are insufficient to recover the carrying value of the asset. The interpretive guidance concludes that for purposes of applying SFAS No. 121, supplemental regulated cash flows, such as a CTC, should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If such assets are determined to be impaired, a regulatory asset should be established if 19 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED such costs are recoverable through regulated cash flows. The guidance also addresses the extent to which assets should be grouped to determine impairment. ComEd discontinued the application of regulatory accounting principles in December 1997 for the generation portion of its business and performed a SFAS No. 121 impairment analysis that concluded that future revenues, including the collection of the CTC, expected to be recovered from electric supply services will be sufficient to cover the costs of its generating assets. However, reflecting the SEC's recent interpretive guidance, ComEd's revised impairment evaluation resulted in a plant impairment of $3 billion. Because future CTC revenues collected through regulated cash flows are expected to provide recovery of the impaired plant assets, a regulatory asset has been recorded for the same amount. Accordingly, the impairment, recorded in the second quarter of 1998, had no effect on results of operations.The regulatory asset will be amortized as it is recovered through regulated cash flows over a transition period that ends in 2006, but may be extended to 2008 with ICC approval if certain conditions are met. Recovery of the regulatory asset will be realized through future regulatory revenues, including CTC revenues, and potential gains on generation asset sales, and will vary from year to year. (3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. In the fourth quarter of 1997, ComEd changed its accounting method for revenue recognition to record revenues associated with service which has been provided to customers but has not yet been billed at the end of each accounting period, retroactive to January 1, 1997. This change in accounting method increased operating results for the six months and twelve months ended June 30, 1997 to reflect the one-time cumulative effect of the change for years prior to 1997 of $197 million (after-tax), or $0.91 per common share. The results per common share for the first, second, third and fourth quarters of 1997, reflecting the results of restatement for the effect of the change in accounting principle, were $1.21, $0.03, $1.11 and $(6.29), respectively. If the new accounting method had been in effect for the full twelve months ended June 30, 1997, the pro forma unaudited net income would have been $528,287,000, or $2.45 per common share, excluding the cumulative effect of a change in accounting principle. (4) RATE MATTERS. In January 1995, the ICC issued its Rate Order in the proceedings relating to ComEd's February 1994 rate increase request. The Rate Order provided, among other things, for an increase in ComEd's total revenues of approximately $302 million (excluding add-on revenue taxes) on an annual basis. Appeals related to the Rate Order have been completed without changing the rates authorized in the Rate Order. Final ICC orders have been issued in fuel reconciliation proceedings related to ComEd's FAC collections for years prior to 1994 and for the year 1995. In the fuel reconciliation proceeding for 1994, an intervenor and the ICC staff have filed briefs proposing a refund of approximately $42 million and $34 million, respectively, relating to nuclear station performance. In the fuel reconciliation proceeding for 1996, an intervenor has filed testimony seeking a refund of approximately $78 million relating to nuclear station performance, and the ICC staff also has filed testimony proposing a refund of approximately $104 million. The 1997 Act provides that the fuel reconciliation proceedings for 1994 and 1996 must be concluded by the end of 1998. If refunds are required in these proceedings, the refunds could have a material adverse effect on results of operations. The 1997 Act also provides that, because ComEd eliminated its FAC effective January 1, 1997, the ICC shall not conduct a fuel reconciliation proceeding for the year 1997 or any subsequent years. See Note 2 for information regarding the 1997 Act and the elimination of ComEd's FAC. 20 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED (5) CLOSURE AND SALE OF PLANTS. On January 14, 1998, the Boards of Directors of Unicom and ComEd authorized the permanent cessation of nuclear generation operations and retirement of facilities at ComEd's 2,080 megawatt Zion nuclear generating station. Such retirement resulted in a charge in the fourth quarter of 1997 of $523 million (after-tax), or $2.42 per common share. The decision to close Zion Station was a result of ComEd's ongoing analysis of the economic value of its generating assets in light of the expected changes in the manner in which electric energy is marketed and sold. The passage of the 1997 Act provided a clearer basis for evaluating the costs and benefits of alternative courses of action. In reaching the decision to cease nuclear generation operations at Zion Station, the Boards also considered the significant uncertainty associated with continued operation of the station due to the degradation of the steam generators and the expected operating costs associated with continued station operation. ComEd's fourth quarter 1997 financial results reflect a charge of $406 million (after-tax), representing the undepreciated costs of Zion Station (excluding the portion which will remain in use to provide voltage support), materials and supplies inventories, and nuclear fuel inventories. In addition, as required by GAAP, a liability for future closing costs associated with the retirement of Zion Station, excluding severance costs, was recorded resulting in a charge of $117 million (after-tax) in the fourth quarter of 1997. See Note 17 for information regarding costs of voluntary employee separation plans. ComEd has completed the sale of two of its coal-fired generating stations, representing 1,598 megawatts of generating capacity, and has entered into exclusive 15-year purchased power agreements for the output of the stations. The sale of State Line and Kincaid Stations was completed in December 1997 and February 1998, respectively. The net proceeds of the sales, after income tax effects and closing costs, were approximately $190 million. The proceeds were used to retire or redeem existing debt in the first quarter of 1998. (6) AUTHORIZED SHARES AND VOTING RIGHTS AND STOCK RIGHTS OF CAPITAL STOCK. At June 30, 1998, Unicom's authorized shares consisted of 400,000,000 shares of common stock. The authorized shares of ComEd preferred and preference stocks at June 30, 1998 were: preference stock--22,308,560 shares; $1.425 convertible preferred stock--58,851 shares; and prior preferred stock--850,000 shares. The preference and prior preferred stocks are issuable in series and may be issued with or without mandatory redemption requirements. Holders of outstanding Unicom shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders; and holders of outstanding ComEd shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders. All such shares have the right to cumulate votes in elections for the directors of the corporation which issued the shares. Pursuant to a plan adopted by Unicom's Board of Directors on February 2, 1998, each share of Unicom's common stock carries the right (referred to herein as a "Right") to purchase one-thousandth of one share of Unicom's common stock at a purchase price of $100 per whole share of common stock, subject to adjustment. The Rights are tradable only with Unicom's common stock until they become exercisable. The Rights become exercisable upon the earlier of ten days following a public announcement that a person (an "Acquiring Person") has acquired 15% or more of Unicom's outstanding common stock or ten business days (or such later date as may be determined by action of Unicom's Board of Directors) following the commencement of a tender or exchange offer which, if consummated, would result in a person or group becoming an Acquiring Person. The Rights are subject to redemption by Unicom at a price of $0.01 per Right, subject to certain limitations, and will 21 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED expire on February 2, 2008. If a person or group becomes an Acquiring Person, each holder of a Right will thereafter have the right to receive, upon exercise, Unicom common stock at a 50% discount from the then current market price. If Unicom is acquired in a merger or other business combination transaction in which Unicom is not the survivor, or 50% or more of Unicom's assets or earning power is sold or transferred, each holder of a Right shall then have the right to receive, upon exercise, common stock of the acquiring company at a 50% discount from the then current market price of such common stock. Rights held by an Acquiring Person become void upon the occurrence of such events. See Note 2 regarding the ICC's order approving ComEd's proposed issuance of up to $3.4 billion of securities and the planned use of the proceeds to refinance debt and equity, as permitted under the 1997 Act. (7) COMMON EQUITY. At June 30, 1998, shares of Unicom common stock were reserved for the following purposes: Long-Term Incentive Plan........................................ 2,973,775 Employee Stock Purchase Plan.................................... 455,055 Shareholder Rights Plan......................................... 400,000 Exchange for ComEd common stock not held by Unicom.............. 91,413 1996 Directors' Fee Plan........................................ 174,036 --------- 4,094,279 =========
Common stock issued for the three months, six months and twelve months ended June 30, 1998 and 1997 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ------------------- ------------------ -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- Shares of Common Stock Issued: Long-Term Incentive Plan.................. 29,504 -- 203,791 45,144 366,751 204,090 Employee Stock Purchase Plan.................. 52,512 114,964 52,512 114,964 133,551 213,589 Employee Savings and Investment Plan....... -- 71,503 -- 274,203 -- 435,803 Exchange for ComEd com- mon stock not held by Unicom................ 3,063 4,016 6,540 10,685 8,225 33,575 1996 Directors' Fee Plan.................. 2,603 3,631 6,677 7,580 13,272 11,470 -------- --------- -------- -------- --------- --------- 87,682 194,114 269,520 452,576 521,799 898,527 ======== ========= ======== ======== ========= ========= (THOUSANDS OF DOLLARS) Amount of Common Stock Issued: Total issued........... $ 2,558 $ 3,585 $ 6,756 $ 9,311 $ 13,212 $ 20,562 Held by trustee for Unicom Stock Bonus De- ferral Plan........... 50 (43) (1,947) (2,386) (2,036) (2,451) Other.................. (13) (49) 12 2 20 -- -------- --------- -------- -------- --------- --------- $ 2,595 $ 3,493 $ 4,821 $ 6,927 $ 11,196 $ 18,111 ======== ========= ======== ======== ========= =========
At June 30, 1998 and December 31, 1997, 76,472 and 76,868 ComEd common stock purchase warrants, respectively, were outstanding. The warrants entitle the holders to convert such warrants into common stock of ComEd at a conversion rate of one share of common stock for three warrants. Unicom's retained earnings account had a deficit balance of $61 million and $21 million at June 30, 1998 and December 31, 1997, respectively. As of June 30, 1998 and December 31, 1997, $292 million and $331 million, respectively, of retained earnings had been appropriated for future dividend payments. 22 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED See Note 2 regarding the ICC's order approving ComEd's proposed issuance of up to $3.4 billion of securities and the planned use of the proceeds to refinance debt and equity, as permitted under the 1997 Act. (8) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN. Unicom has a nonqualified stock option awards program under its Long-Term Incentive Plan. The stock option awards program was adopted by Unicom in July 1996 to reward valued employees responsible for, or contributing to, the management, growth and profitability of Unicom and its subsidiaries. The stock options granted will expire ten years from their grant date. One-third of the shares subject to the options vest on each of the first three anniversaries of the option grant date. In addition, the stock options will become fully vested immediately if the holder dies, retires, is terminated by the Company other than for cause or qualifies for long-term disability and will also vest in full upon a change in control. Stock options transactions through June 30, 1998 are summarized as follows:
NUMBER OF WEIGHTED AVERAGE OPTIONS EXERCISE PRICE --------- ---------------- Outstanding at the beginning of 1996............... -- $ -- Granted during the year............................ 1,205,500 25.500 Expired/cancelled during the year.................. (17,500) 25.500 --------- Outstanding as of December 31, 1996................ 1,188,000 25.500 Granted during the year............................ 1,339,350 22.313 Exercised during the year.......................... (23,423) 25.500 Expired/cancelled during the year.................. (212,549) 23.632 --------- Outstanding as of December 31, 1997................ 2,291,378 23.810 Granted during the six months ended June 30, 1998.. 260,000 33.010 Exercised during the six months ended June 30, 1998.............................................. (193,665) 24.439 Expired/cancelled during the six months ended June 30, 1998.......................................... (64,815) 23.440 --------- Outstanding as of June 30, 1998.................... 2,292,898 24.811 =========
Of the stock options outstanding at June 30, 1998, 469,614 have vested with a weighted average exercise price of $24.993. In July 1998, Unicom granted 1,109,525 additional stock options. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
STOCK OPTION GRANT DATE ----------------------- 1998 1997 1996 ------- ------- ------- Expected option life.................................. 7 years 7 years 7 years Dividend yield........................................ 4.80% 7.20% 6.30% Expected volatility................................... 22.85% 22.29% 20.98% Risk-free interest rate............................... 5.63% 6.25% 6.64%
The estimated fair value for each stock option granted in the six months ended June 30, 1998 and in the years 1997 and 1996 was $6.22, $2.79 and $3.74, respectively. The ESPP allows employees to purchase Unicom common stock at a 10% discount from market value. Substantially all of the employees of Unicom, ComEd and certain subsidiaries are eligible to participate in the ESPP. Unicom issued 133,551 and 213,589 shares of common stock for the twelve months ended June 30, 1998 and 1997, respectively, under the ESPP at a weighted average annual purchase price of $25.55 and $19.65, respectively. 23 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED Unicom has adopted the disclosure-only provisions of SFAS No. 123. For financial reporting purposes, Unicom has adopted APB No. 25, and thus no compensation cost has been recognized for the stock option awards program or ESPP. If Unicom had recorded compensation expense for the stock options granted and the shares of common stock issued under the ESPP in accordance with SFAS No. 123 using the fair value based method of accounting, the additional charge to operations would have been $2 million (after-tax), or $0.01 per common share, and $1 million (after-tax), or $0.01 per common share, for the twelve months ended June 30, 1998 and 1997, respectively. (9) COMED PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS. No shares of ComEd preferred or preference stocks without mandatory redemption requirements were issued or redeemed during the twelve months ended June 30, 1998 and 1997. The series of ComEd preference stock without mandatory redemption requirements outstanding at June 30, 1998 are summarized as follows:
INVOLUNTARY SHARES AGGREGATE REDEMPTION LIQUIDATION SERIES OUTSTANDING STATED VALUE PRICE(1) PRICE(1) ------ ----------- ------------ ---------- ----------- (THOUSANDS OF DOLLARS) $1.90 4,249,549 $106,239 $ 25.25 $25.00 $2.00 2,000,000 51,560 $ 26.04 $25.00 $1.96 2,000,000 52,440 $ 27.11 $25.00 $7.24 750,000 74,340 $101.00 $99.12 $8.40 750,000 74,175 $101.00 $98.90 $8.38 750,000 73,566 $100.16 $98.09 $2.425 3,000,000 72,637 $ 25.00 $25.00 ---------- -------- 13,499,549 $504,957 ========== ========
-------- (1) Per share plus accrued and unpaid dividends, if any. The outstanding shares of ComEd's $1.425 convertible preferred stock are convertible at the option of the holders thereof, at any time, into common stock of ComEd at the rate of 1.02 shares of common stock for each share of convertible preferred stock, subject to future adjustment. The convertible preferred stock may be redeemed by ComEd at $42 per share, plus accrued and unpaid dividends, if any. The involuntary liquidation price of the $1.425 convertible preferred stock is $31.80 per share, plus accrued and unpaid dividends, if any. (10) COMED PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS. During the twelve months ended June 30, 1998 and 1997, no shares of ComEd preference stock subject to mandatory redemption requirements were issued. The series of ComEd preference stock subject to mandatory redemption requirements outstanding at June 30, 1998 are summarized as follows:
SHARES AGGREGATE SERIES OUTSTANDING STATED VALUE OPTIONAL REDEMPTION PRICE(1) - -------------- ----------- ------------ ----------------------------------------------- (THOUSANDS OF DOLLARS) $8.20 178,560 $ 17,856 $101 $8.40 Series B 240,000 23,838 $101 $8.85 225,000 22,500 $103 through July 31, 1998; and $101 thereafter $9.25 525,000 52,500 $103 through July 31, 1999; and $101 thereafter $9.00 130,000 12,886 Non-callable $6.875 700,000 69,476 Non-callable --------- -------- 1,998,560 $199,056 ========= ========
- -------- (1) Per share plus accrued and unpaid dividends, if any. 24 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED The annual sinking fund requirements and sinking fund and involuntary liquidation prices per share of the outstanding series of ComEd preference stock subject to mandatory redemption requirements are summarized as follows:
SINKING ANNUAL SINKING FUND INVOLUNTARY SERIES FUND REQUIREMENT PRICE(1) LIQUIDATION PRICE(1) - -------------- ----------------- ------- ------------------- $8.20 35,715 shares $100 $100.00 $8.40 Series B 30,000 shares(2) $100 $ 99.326 $8.85 37,500 shares $100 $100.00 $9.25 75,000 shares $100 $100.00 $9.00 130,000 shares $100 $ 99.125 $6.875 (3) $100 $ 99.25
- -------- (1) Per share plus accrued and unpaid dividends, if any. (2) ComEd has a non-cumulative option to increase the annual sinking fund payment on each sinking fund redemption date to retire an additional number of shares, not in excess of the sinking fund requirement, at the applicable redemption price. (3) All shares are required to be redeemed on May 1, 2000. Annual remaining sinking fund requirements through 2002 on ComEd preference stock outstanding at June 30, 1998 will aggregate to $28 million in 1998, $18 million in 1999, $88 million in 2000 and $18 million in each of 2001 and 2002. During each of the twelve months ended June 30, 1998 and 1997, 468,215 and 438,215 shares, respectively, of ComEd preference stock subject to mandatory redemption requirements were reacquired to meet sinking fund requirements plus any optional additional sinking fund payments. Sinking fund requirements due within one year are included in current liabilities. (11) COMED-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY COMED'S SUBORDINATED DEBT SECURITIES. In September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd, issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred securities. The sole asset of ComEd Financing I is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust of ComEd, issued 150,000 of its 8.50% ComEd-obligated mandatorily redeemable capital securities. The sole asset of ComEd Financing II is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. There is a full and unconditional guarantee by ComEd of the Trusts' obligations under the securities issued by the Trusts. However, ComEd's obligations are subordinate and junior in right of payment to certain other indebtedness of ComEd. ComEd has the right to defer payments of interest on the subordinated deferrable interest notes by extending the interest payment period, at any time, for up to 20 consecutive quarters. Similarly, ComEd has the right to defer payments of interest on the subordinated deferrable interest debentures by extending the interest payment period, at any time, for up to 10 consecutive semi-annual periods. If interest payments on the subordinated deferrable interest notes or debentures are so deferred, distributions on the preferred securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, ComEd may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock. The subordinated deferrable interest notes are redeemable by ComEd, in whole or in part, from time to time, on or after September 30, 2000, and with respect to the subordinated deferrable interest debentures, on or after January 15, 2007, or at any time in the event of certain income tax circumstances. If the subordinated deferrable interest notes or debentures are redeemed, the Trusts must redeem preferred securities having an aggregate liquidation amount equal to the aggregate principal amount of the subordinated deferrable interest notes or debentures so redeemed. In the event 25 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED of the dissolution, winding up or termination of the Trusts, the holders of the preferred securities will be entitled to receive, for each preferred security, a liquidation amount of $25 for the securities of ComEd Financing I and $1,000 for the securities of ComEd Financing II, plus accrued and unpaid distributions thereon, including interest thereon, to the date of payment, unless in connection with the dissolution, the subordinated deferrable interest notes or debentures are distributed to the holders of the preferred securities. (12) LONG-TERM DEBT. Sinking fund requirements and scheduled maturities remaining through 2002 for ComEd's first mortgage bonds, sinking fund debentures and other long-term debt outstanding at June 30, 1998, after deducting deposits made for retirement of sinking fund debentures and sinking fund debentures reacquired for satisfaction of future sinking fund requirements, are summarized as follows: 1998--$130 million; 1999--$150 million; 2000--$462 million; 2001--$108 million; and 2002--$305 million. Unicom Enterprises' note payable to bank of $195 million will mature in 1999. At June 30, 1998, ComEd's outstanding first mortgage bonds maturing through 2002 were as follows:
PRINCIPAL AMOUNT SERIES ---------------------- (THOUSANDS OF DOLLARS) 6 3/4% due July 1, 1998............................ $ 50,000 6 3/8% due October 1, 1998......................... 75,000 9 3/8% due February 15, 2000....................... 125,000 6 1/2% due April 15, 2000.......................... 230,000 6 3/8% due July 15, 2000........................... 100,000 7 1/2% due January 1, 2001......................... 100,000 7 3/8% due September 15, 2002...................... 200,000 -------- $880,000 ========
Other long-term debt outstanding at June 30, 1998 is summarized as follows:
PRINCIPAL DEBT SECURITY AMOUNT INTEREST RATE - ---------------- ---------- -------------------------------------------------- (THOUSANDS OF DOLLARS) Unicom-- Loans Payable: Loan due Janu- ary 1, 2003 $ 6,775 Interest rate of 8.31% Loan due Janu- ary 1, 2004 7,690 Interest rate of 8.44% ---------- $ 14,465 ---------- ComEd-- Notes: Medium Term Notes, Series 3N due various dates through October 15, 2004 $ 296,000 Interest rates ranging from 9.00% to 9.20% Notes due Janu- ary 15, 2004 150,000 Interest rate of 7.375% Notes due Octo- ber 15, 2005 235,000 Interest rate of 6.40% Notes due Janu- ary 15, 2007 150,000 Interest rate of 7.625% ---------- $ 831,000 ---------- Purchase Con- tract Obliga- tion due April 30, 2005 $ 345 Interest rate of 3.00% ---------- Total ComEd $ 831,345 ---------- Unicom Enter- prises-- Long-Term Note Payable to Bank due November 15, 1999 $ 195,000 Prevailing interest rate of 6.63% at June 30, 1998 ---------- Total Unicom $1,040,810 ==========
26 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. See Note 2 regarding the ICC's order approving the proposed issuance of up to $3.4 billion of securities and the planned use of the proceeds to refinance debt and equity, as permitted under the 1997 Act. (13) LINES OF CREDIT. ComEd had total bank lines of credit of $581 million and unused bank lines of credit of $573 million at June 30, 1998. Of that amount, $573 million (of which $146 million expires on September 27, 1998, $9 million expires on September 30, 1998 and $418 million expires in equal quarterly installments commencing on September 30, 1998 and ending on September 30, 1999) may be borrowed on secured or unsecured notes of ComEd at various interest rates. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread which is dependent upon the credit rating of ComEd's outstanding first mortgage bonds or on a prime interest rate. Amounts under the remaining lines of credit may be borrowed at prevailing prime interest rates on unsecured notes of ComEd. Collateral, if required for the borrowings, would consist of first mortgage bonds issued under and in accordance with the provisions of ComEd's mortgage. ComEd is obligated to pay commitment fees with respect to the unused portion of such lines of credit. Unicom Enterprises has a $200 million credit facility which will expire on November 15, 1999, of which $5 million was unused as of June 30, 1998. The credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including UT Holdings and Unicom Energy Services, and for general corporate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Enterprises' operations. Such covenants include, among other things, (i) a requirement that Unicom and its consolidated subsidiaries maintain a tangible net worth at least $10 million over that of ComEd and its consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the indebtedness for borrowed money that Unicom (excluding ComEd) and Unicom Enterprises may incur, and (iv) a requirement that Unicom own 100% of the outstanding stock of Unicom Enterprises and at least 80% of the outstanding stock of ComEd; and provide that Unicom may not declare or pay dividends during the continuance of an event of default. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime interest rate or a floating rate bank index plus a spread which varies with the credit rating of ComEd's outstanding first mortgage bonds. Unicom Enterprises is obligated to pay commitment fees with respect to the unused portion of such lines of credit. (14) DISPOSAL OF SPENT NUCLEAR FUEL. Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. ComEd, as required by that Act, has signed a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste from ComEd's nuclear generating stations. That contract provided for acceptance by the DOE of such materials to begin in January 1998; however, that date was not met by the DOE and is expected to be delayed significantly. The DOE's current estimate for opening a facility to accept such waste is 2010. Extended delays in spent nuclear fuel acceptance by the DOE would lead to ComEd's consideration of costly storage alternatives. On July 30, 1998, ComEd filed a complaint against the United States in the United States Court of Federal Claims seeking to recover damages caused by the DOE's failure to honor its contractual obligation to begin disposing of spent nuclear fuel in January 1998. See "Depreciation and Decommissioning" under Note 1 for additional information. The contract with the DOE requires ComEd to pay the DOE a one- time fee applicable to nuclear generation through April 6, 1983 of $277 million, 27 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED 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 elected to pay the one-time fee, with interest, just prior to the first delivery of spent nuclear fuel to the DOE. The liability for the one-time fee and the related interest is reflected on the Consolidated Balance Sheets. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS. The following methods and assumptions were used to estimate the fair value of financial instruments either held or issued and outstanding. The disclosure of such information does not purport to be a market valuation of Unicom and subsidiary companies as a whole. The impact of any realized or unrealized gains or losses related to such financial instruments on the financial position or results of operations of Unicom and subsidiary companies is 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 June 30, 1998 and December 31, 1997, were as follows:
JUNE 30, 1998 DECEMBER 31, 1997 -------------------------------- -------------------------------- UNREALIZED UNREALIZED COST BASIS GAINS FAIR VALUE COST BASIS GAINS FAIR VALUE ---------- ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Short-term investments.......... $ 48,815 $ 30 $ 48,845 $ 33,524 $ 2 $ 33,526 U.S. Government and Agency issues........ 193,609 17,930 211,539 170,240 15,882 186,122 Municipal bonds....... 364,236 19,554 383,790 306,104 20,598 326,702 Corporate bonds....... 250,187 5,699 255,886 231,738 4,293 236,031 Common stock.......... 710,373 496,566 1,206,939 667,657 385,851 1,053,508 Other................. 7,347 3,917 11,264 17,300 2,508 19,808 ---------- -------- ---------- ---------- -------- ---------- $1,574,567 $543,696 $2,118,263 $1,426,563 $429,134 $1,855,697 ========== ======== ========== ========== ======== ==========
At June 30, 1998, the debt securities held by the nuclear decommissioning funds had the following maturities:
COST BASIS FAIR VALUE ---------- ---------- (THOUSANDS OF DOLLARS) Within 1 year....................................... $ 61,850 $ 61,856 1 through 5 years................................... 160,947 165,208 5 through 10 years.................................. 255,951 269,731 Over 10 years....................................... 387,490 413,019
The net earnings of the nuclear decommissioning funds, which are recorded as increases to the accumulated provision for depreciation, for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ---------------------- ------------------------ 1998 1997 1998 1997 1998 1997 --------- --------- --------- ----------- ----------- ----------- (THOUSANDS OF DOLLARS) Gross proceeds from sales of securities.... $ 520,460 $ 551,707 $ 948,463 $ 1,122,476 $ 1,989,510 $ 2,195,786 Less cost based on spe- cific identification... (499,050) (542,265) (893,384) (1,099,773) (1,881,911) (2,159,467) --------- --------- --------- ----------- ----------- ----------- Realized gains on sales of securities.......... $ 21,410 $ 9,442 $ 55,079 $ 22,703 $ 107,599 $ 36,319 Other realized fund earnings net of expenses............... 9,237 14,314 12,848 22,781 29,189 42,207 --------- --------- --------- ----------- ----------- ----------- Total realized net earn- ings of the funds...... $ 30,647 $ 23,756 $ 67,927 $ 45,484 $ 136,788 $ 78,526 Unrealized gains........ 524 144,496 114,562 130,439 182,864 210,719 --------- --------- --------- ----------- ----------- ----------- Total net earnings of the funds............. $ 31,171 $ 168,252 $ 182,489 $ 175,923 $ 319,652 $ 289,245 ========= ========= ========= =========== =========== ===========
28 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED Current Assets. Cash, temporary cash investments and other cash investments, which include U.S. Government obligations and other short-term marketable securities, and special deposits, which primarily includes cash deposited for the redemption, refund or discharge of debt securities, are stated at cost, which approximates their fair value because of the short maturity of these instruments. The securities included in these categories have been classified as "available for sale" securities. Capitalization. The estimated fair values of ComEd preferred and preference stocks, ComEd- obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities 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 June 30, 1998 and December 31, 1997 were as follows:
JUNE 30, 1998 DECEMBER 31, 1997 -------------------------------- -------------------------------- CARRYING UNREALIZED CARRYING UNREALIZED FAIR VALUE LOSSES FAIR VALUE VALUE LOSSES VALUE ---------- ---------- ---------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) ComEd preferred and preference stocks.... $ 705,885 $ 14,620 $ 720,505 $ 712,069 $ 11,970 $ 724,039 ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities...... $ 350,000 $ 17,448 $ 367,448 $ 350,000 $ 21,701 $ 371,701 Long-term debt........ $5,693,753 $431,696 $6,125,449 $5,913,942 $380,890 $6,294,832
Long-term notes payable, which are not included in the above table, amounted to $210 million and $327 million at June 30, 1998 and December 31, 1997, respectively. Such notes, for which interest is paid at fixed and prevailing rates, are included in the consolidated financial statements at cost, which approximates their fair value. Current Liabilities. The carrying value of notes payable, which consists of commercial paper and bank loans maturing within one year, approximates the fair value because of the short maturity of these instruments. See "Capitalization" above for a discussion of the fair value of the current 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 June 30, 1998 and December 31, 1997; therefore, the carrying value is equal to the fair value. (16) PENSION AND POSTRETIREMENT BENEFITS. As of June 30, 1998, ComEd had a qualified non-contributory defined benefit pension plan which covers all regular employees. Benefits under this plan reflect each employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. The June 30, 1998 and December 31, 1997 pension liabilities and related data were determined using the January 1, 1997 actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental retirement plan which covers any excess pension benefits that would be payable to management employees under the qualified plan but which are limited by the Internal Revenue Code. On January 19, 1998, the qualified defined benefit plan of the Indiana Company was merged into the ComEd pension plan as a result of the sale of the Indiana Company's State Line Station and the transfer of its remaining employees to ComEd. ComEd and the Indiana Company provide certain postretirement medical care, dental care, vision care and life insurance for retirees and their dependents and for the surviving dependents of eligible 29 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED employees and retirees. The employees become eligible for postretirement benefits when they reach age 55 with 10 years of service. The liability for postretirement benefits is funded through trust funds based upon actuarially determined contributions that take into account the amount deductible for income tax purposes. The health care plans are contributory, funded jointly by the companies and the participating retirees. The June 30, 1998 and December 31, 1997 postretirement benefit liabilities and related data were determined using the January 1, 1997 actuarial valuations. 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 six months ended June 30, 1998 and the twelve months ended December 31, 1997 are as follows:
SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30, 1998 DECEMBER 31, 1997 -------------------------- -------------------------- OTHER OTHER PENSION POSTRETIREMENT PENSION POSTRETIREMENT BENEFITS BENEFITS BENEFITS BENEFITS ---------- -------------- ---------- -------------- (THOUSANDS OF DOLLARS) CHANGE IN BENEFIT OBLIGATION - ----------------- Benefit obligation at beginning of period.... $4,074,000 $1,084,000 $3,579,000 $1,035,000 Service cost............ 62,000 18,000 100,000 34,000 Interest cost........... 139,000 37,000 261,000 76,000 Plan participants' con- tributions............. -- 2,000 -- 3,000 Curtailment gain........ -- -- (5,000) -- Actuarial loss (gain)... 6,000 -- 346,000 (23,000) Benefits paid........... (109,000) (21,000) (207,000) (41,000) ---------- ---------- ---------- ---------- Benefit obligation at end of period......... $4,172,000 $1,120,000 $4,074,000 $1,084,000 ---------- ---------- ---------- ---------- CHANGE IN PLAN ASSETS - --------------------- Fair value of plan as- sets at beginning of period................. $3,706,000 $ 768,000 $3,281,000 $ 665,000 Actual return on plan assets................. 362,000 83,000 631,000 130,000 Employer contribution... -- -- 1,000 11,000 Plan participants' con- tributions............. -- 2,000 -- 3,000 Benefits paid........... (109,000) (21,000) (207,000) (41,000) ---------- ---------- ---------- ---------- Fair value of plan as- sets at end of period. $3,959,000 $ 832,000 $3,706,000 $ 768,000 ---------- ---------- ---------- ---------- Plan assets less than benefit obligation..... $ (213,000) $ (288,000) $ (368,000) $ (316,000) Unrecognized net actuar- ial loss (gain)........ (54,000) (448,000) 132,000 (406,000) Unrecognized prior serv- ice cost (asset)....... (62,000) 50,000 (64,000) 52,000 Unrecognized transition obligation (asset)..... (107,000) 334,000 (114,000) 345,000 ---------- ---------- ---------- ---------- Accrued liability for benefits.............. $ (436,000) $ (352,000) $ (414,000) $ (325,000) ========== ========== ========== ==========
The fair value of pension plan assets excludes $19 million and $17 million held in grantor trust as of June 30, 1998 and December 31, 1997, respectively, for payment of benefits under the supplemental plan. In accounting for the pension costs and other postretirement benefit costs under the plans, the following weighted average actuarial assumptions were used for the periods during 1998, 1997 and 1996:
OTHER PENSION BENEFITS POSTRETIREMENT BENEFITS ----------------- ----------------------- 1998 1997 1996 1998 1997 1996 ----- ----- ----- ------- ------- ------- Annual discount rate................. 7.00% 7.50% 7.50% 7.00% 7.50% 7.50% Annual long-term rate of return on plan assets......................... 9.50% 9.75% 9.75% 9.20% 9.40% 9.38% Annual rate of increase in future compensation levels................. 4.00% 4.00% 4.00% -- -- --
30 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED The components of pension and other postretirement benefit costs, portions of which were recorded as components of construction costs, for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- -------------------- -------------------- 1998 1997 1998 1997 1998 1997 PENSION COSTS --------- --------- --------- --------- --------- --------- - ------------- (THOUSANDS OF DOLLARS) Service cost............ $ 31,000 $ 25,000 $ 62,000 $ 50,000 $ 113,000 $ 92,000 Interest cost on pro- jected benefit obliga- tion................... 69,000 64,000 139,000 129,000 271,000 252,000 Expected return on plan assets................. (85,000) (78,000) (171,000) (156,000) (326,000) (299,000) Amortization of transi- tion asset............. (3,000) (3,000) (6,000) (6,000) (13,000) (13,000) Amortization of prior service cost (asset)... (1,000) (1,000) (2,000) (2,000) (4,000) (4,000) Recognized loss......... -- -- -- -- 2,000 1,000 Curtailment gain........ -- -- -- -- (5,000) -- --------- --------- --------- --------- --------- --------- Net periodic benefit cost.................. $ 11,000 $ 7,000 $ 22,000 $ 15,000 $ 38,000 $ 29,000 ========= ========= ========= ========= ========= =========
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ------------------ -------------------- OTHER POSTRETIREMENT 1998 1997 1998 1997 1998 1997 BENEFIT COSTS --------- --------- -------- -------- --------- --------- - -------------------- (THOUSANDS OF DOLLARS) Service cost............ $ 9,000 $ 8,000 $ 18,000 $ 17,000 $ 35,000 $ 34,000 Interest cost on accumu- lated benefit obliga- tion................... 18,000 20,000 37,000 40,000 73,000 78,000 Expected return on plan assets................. (17,000) (16,000) (34,000) (31,000) (64,000) (58,000) Amortization of transi- tion obligation........ 6,000 5,000 11,000 11,000 22,000 22,000 Amortization of prior service cost........... 1,000 1,000 2,000 2,000 4,000 4,000 Recognized gain......... (4,000) (1,000) (9,000) (4,000) (18,000) (8,000) Severance plan cost..... 1,000 2,000 2,000 2,000 8,000 5,000 --------- --------- -------- -------- --------- --------- Net periodic benefit cost.................. $ 14,000 $ 19,000 $ 27,000 $ 37,000 $ 60,000 $ 77,000 ========= ========= ======== ======== ========= =========
The pension curtailment gain in December 1997 represents the recognition of prior service costs, the transition asset and the decrease in the projected benefit obligation related to the reduction in the number of employees due to the sale of State Line Station by the Indiana Company. Postretirement health care costs for the twelve months ended June 30, 1998 and 1997 included $8 million and $5 million, respectively, related to voluntary separation offers to certain employees of ComEd and the Indiana Company. The health care cost trend rates used to measure the expected cost of the postretirement medical benefits are assumed to be 8.5% for pre-Medicare recipients and 6.5% for Medicare recipients for 1998. Those rates are assumed to decrease in 0.5% annual increments to 5% for the years 2005 and 2001, respectively, and to remain level thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care cost trend rates would have the following effects:
1 PERCENTAGE 1 PERCENTAGE POINT INCREASE POINT DECREASE -------------- -------------- (THOUSANDS OF DOLLARS) Effect on total annual service and interest cost components...................................... $ 21,000 $ (16,000) Effect on postretirement benefit obligation...... 187,000 (151,000)
31 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED In addition, an employee savings and investment plan is available to eligible employees of ComEd and certain of its and Unicom's subsidiaries. Under the plan, each participating employee may contribute up to 20% of such employee's base pay and the participating companies match the first 6% of such contribution equal to 100% of the first 2% of contributed base salary, 70% of the next 3% of contributed base salary and 25% of the next 1% of contributed base salary. The participating companies' contributions were $7 million for each of the three months ended June 30, 1998 and 1997, $15 million and $16 million for the six months ended June 30, 1998 and 1997, respectively, and $32 million and $31 million for the twelve months ended June 30, 1998 and 1997, respectively. (17) SEPARATION PLAN COSTS. O&M expenses included $8 million and $4 million for the three months ended June 30, 1998 and 1997, respectively, $24 million and $7 million for the six months ended June 30, 1998 and 1997, respectively, and $56 million and $16 million for the twelve months ended June 30, 1998 and 1997, respectively, for costs related to voluntary separation offers to certain employees of ComEd and the Indiana Company, as well as certain one- time, employee-related costs. Such costs resulted in charges of $5 million (after-tax), or $0.02 per common share, and $3 million (after-tax), or $0.01 per common share, for the three months ended June 30, 1998 and 1997, respectively, $14 million (after-tax), or $0.07 per common share, and $4 million (after-tax), or $0.02 per common share, for the six months ended June 30, 1998 and 1997, respectively, and $34 million (after-tax), or $0.15 per common share, and $10 million (after-tax), or $0.05 per common share, for the twelve months ended June 30, 1998 and 1997, respectively. (18) INCOME TAXES. The components of the net deferred income tax liability at June 30, 1998 and December 31, 1997 were as follows:
JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ (THOUSANDS OF DOLLARS) Deferred income tax liabilities: Accelerated cost recovery and liberalized deprecia- tion, net of removal costs.......................... $4,007,056 $4,062,801 Overheads capitalized................................ 119,701 131,509 Repair allowance..................................... 224,810 231,697 Regulatory assets recoverable through future rates... 692,077 785,354 Deferred income tax assets: Postretirement benefits.............................. (324,346) (305,242) Unamortized investment tax credits................... (197,991) (206,112) Regulatory liabilities to be settled through future rates............................................... (610,113) (698,750) Nuclear plant closure................................ (65,173) (194,244) Other--net........................................... (150,118) (136,258) ---------- ---------- Net deferred income tax liability..................... $3,695,903 $3,670,755 ========== ==========
The $25 million increase in the net deferred income tax liability from December 31, 1997 to June 30, 1998 is comprised of $30 million of deferred income tax expense reflected in operations and a $5 million decrease in regulatory assets net of regulatory liabilities pertaining to income taxes for the period. The amount of accelerated cost recovery and liberalized depreciation included in deferred income tax liabilities as of June 30, 1998, includes amounts related to the regulatory asset for impaired production plant. The amount of regulatory assets included in deferred income tax liabilities primarily relates to the equity component of AFUDC which is recorded on an after-tax basis, the borrowed funds component of AFUDC which was previously recorded net of tax and other temporary differences for which the related tax effects were not previously recorded. The amount of other regulatory liabilities included in deferred income tax assets primarily relates to deferred income taxes provided at rates in excess of the current statutory rate. 32 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED The components of net income tax expense charged (credited) to continuing operations for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS TWELVE MONTHS ENDED SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 JUNE 30 ---------------- ------------------ ------------------- 1998 1997 1998 1997 1998 1997 ------- ------- -------- -------- --------- -------- (THOUSANDS OF DOLLARS) Operating income: Current income taxes... $75,359 $10,811 $132,307 $ 76,076 $ 304,888 $265,794 Deferred income taxes.. (14,424) 20,436 (19,821) 20,424 28,103 124,686 Investment tax credits deferred--net......... (6,888) (7,897) (14,048) (15,794) (29,270) (34,840) Other (income) and de- ductions, primarily de- ferred income taxes in 1997................... (3,360) (1,836) (13,556) (2,119) (419,061) (4,466) ------- ------- -------- -------- --------- -------- Net income taxes charged (credited) to continu- ing operations......... $50,687 $21,514 $ 84,882 $ 78,587 $(115,340) $351,174 ======= ======= ======== ======== ========= ========
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, six months and twelve months ended June 30, 1998 and 1997:
THREE MONTHS TWELVE MONTHS ENDED SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 JUNE 30 ----------------- ------------------ ------------------- 1998 1997 1998 1997 1998 1997 -------- ------- -------- -------- --------- -------- (THOUSANDS OF DOLLARS) Net income (loss) before extraordinary item and cumulative effect of change in accounting princi- ple.............................................. $ 80,458 $ 5,498 $134,173 $ 71,215 $(176,257) $500,071 Net income taxes charged to continuing operations. 50,687 21,514 84,882 78,587 (115,340) 351,174 Provision for dividends on ComEd preferred and preference stocks................................ 14,462 15,485 29,009 31,012 58,483 62,450 -------- ------- -------- -------- --------- -------- Pre-tax income (loss) before extraordinary item, cumulative effect and provision for dividends.... $145,607 $42,497 $248,064 $180,814 $(233,114) $913,695 ======== ======= ======== ======== ========= ======== Effective income tax rate......................... 34.8% 50.6% 34.2% 43.5% 49.5% 38.4% ======== ======= ======== ======== ========= ========
The principal differences between net income taxes charged (credited) to continuing operations and the amounts computed at the federal statutory rate of 35% for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS TWELVE MONTHS ENDED SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 JUNE 30 ---------------- ----------------- ------------------- 1998 1997 1998 1997 1998 1997 ------- ------- ------- -------- --------- -------- (THOUSANDS OF DOLLARS) Federal income taxes computed at statutory rate................... $50,962 $ 1,504 $86,822 $ 76,165 $ (81,590) $332,673 Equity component of AFUDC which was ex- cluded from taxable income................. (110) (1,997) (198) (3,775) (4,743) (7,279) Amortization of investment tax credits, net of deferred income taxes.................. (4,517) (7,897) (13,728) (15,794) (43,274) (34,840) State income taxes, net of federal income tax- es..................... 6,817 2,804 12,655 14,451 (1,343) 48,715 Differences between book and tax accounting, primarily property- related deductions..... (2,465) 27,100 (669) 7,540 15,610 11,905 ------- ------- ------- -------- --------- -------- Net income taxes charged (credited) to continuing operations.. $50,687 $21,514 $84,882 $ 78,587 $(115,340) $351,174 ======= ======= ======= ======== ========= ========
The effects of an income tax refund related to prior years were recorded in the third quarter of 1996, resulting in a positive impact of $26 million (after-tax), or $0.12 per common share. 33 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED (19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes, for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ------------------- ----------------- ------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- (THOUSANDS OF DOLLARS) Illinois public utility revenue................ $ 44,247 $ 55,654 $101,928 $107,409 $ 222,869 $ 223,978 Illinois invested capi- tal.................... -- 25,827 -- 52,017 47,486 104,501 Illinois electricity distribution tax....... 24,911 -- 51,629 -- 51,629 -- Municipal utility gross receipts............... 38,556 37,967 81,107 79,070 170,131 168,384 Real estate............. 29,589 34,112 65,080 73,280 143,308 149,272 Municipal compensation.. 24,214 17,815 44,085 36,925 85,446 78,665 Other--net.............. 23,545 17,607 48,659 41,479 82,389 71,272 --------- --------- -------- -------- --------- --------- $ 185,062 $ 188,982 $392,488 $390,180 $ 803,258 $ 796,072 ========= ========= ======== ======== ========= =========
Effective January 1, 1998, the Illinois invested capital tax was repealed and the Illinois electricity distribution tax was enacted as a replacement. The new tax is based on the kilowatthours delivered to ultimate consumers. (20) LEASE OBLIGATIONS OF SUBSIDIARY COMPANIES. Under its nuclear fuel lease arrangement, ComEd may sell and lease back nuclear fuel from a lessor who may borrow an aggregate of $700 million, consisting of $300 million of commercial paper/bank borrowings and $400 million of intermediate term notes, to finance the transactions. With respect to the commercial paper/bank borrowing portion, $300 million will expire on November 23, 1999. With respect to the intermediate term notes, $74 million expires on November 23, 1998, and an additional portion each November 23 thereafter through November 23, 2003. At June 30, 1998, ComEd's obligation to the lessor for leased nuclear fuel amounted to approximately $581 million. As a result of the cessation of nuclear generation operations at Zion Station, ComEd was required to repurchase approximately $100 million of nuclear fuel assemblies held under the nuclear fuel lease arrangements at Zion Station. See Note 5 for additional information regarding the cessation of operations at Zion Station. ComEd repurchased the required nuclear fuel assemblies in June 1998. ComEd has agreed to make lease payments which cover the amortization of the nuclear fuel used in ComEd's reactors plus the lessor's related financing costs. ComEd has an obligation for spent nuclear fuel disposal costs of leased nuclear fuel. Future minimum rental payments, including the repurchase of Zion Station nuclear fuel assemblies discussed above and net of executory costs, at June 30, 1998 for capital leases are estimated to aggregate $670 million, including $97 million in 1998, $181 million in 1999, $143 million in 2000, $92 million in 2001, $65 million in 2002 and $92 million in 2003-2006. The estimated interest component of such rental payments aggregates $91 million. The estimated portions of obligations due within one year under capital leases of $163 million and $241 million at June 30, 1998 and December 31, 1997, respectively, were included in current liabilities on the Consolidated Balance Sheets. Future minimum rental payments at June 30, 1998 for operating leases are estimated to aggregate $351 million, including $22 million in 1998, $41 million in 1999, $38 million in 2000, $32 million in 2001, $28 million in 2002 and $190 million in 2003-2043. (21) JOINT PLANT OWNERSHIP. ComEd has a 75% undivided ownership interest in the Quad Cities nuclear generating station. Further, ComEd is responsible for 75% of all costs which are charged to appropriate investment and O&M accounts, and provides its own financing. ComEd's net plant 34 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED investment on the Consolidated Balance Sheets does not reflect an investment in Quad Cities Station due to the accounting impairment recorded in the second quarter of 1998. See Note 2 for additional information. (22) COMMITMENTS AND CONTINGENT LIABILITIES. Purchase commitments, principally related to construction and nuclear fuel, approximated $322 million at June 30, 1998, comprised of $282 million for ComEd, $32 million for UT Holdings and $8 million for Unicom Energy Services. In addition, ComEd has substantial commitments for the purchase of coal. ComEd's coal costs are high compared to those of other utilities. ComEd's western coal contracts and its rail contracts for delivery of the western coal provide for the purchase of certain coal at prices substantially above currently prevailing market prices. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources," for additional information regarding ComEd's purchase commitments. See "Coal Reserves" under Note 1 for additional information regarding ComEd's coal reserves. ComEd is a member of NEIL which provides insurance coverage against property damage and associated replacement power costs occurring at members' nuclear generating facilities. All companies insured with NEIL are subject to retrospective premium adjustments if losses exceed accumulated reserve funds. Capital has been accumulated in the reserve funds such that ComEd would not be liable for any single incident. However, ComEd could be subject to assessments in any policy year for each of three types of coverage provided. The maximum assessments are approximately $53 million for primary property damage, $73 million for excess property damage and $22 million for replacement power. Prior to January 1, 1998, the primary property damage coverage described was provided by NML, another mutual insurance company which merged into NEIL. The merger did not affect ComEd's obligations or coverage. The NRC's indemnity for public liability coverage under the Price-Anderson Act is supported by a mandatory industry-wide program under which owners of nuclear generating facilities could be assessed in the event of nuclear incidents. Based on the number of nuclear reactors with operating licenses, ComEd would currently be subject to a maximum assessment of $1,030 million in the event of an incident, limited to a maximum of $130 million in any calendar year. In addition, ComEd participates in the American Nuclear Insurers Masters Worker Program, which provides coverage for worker tort claims filed for bodily injury caused by the nuclear energy hazard. This program was modified, effective January 1, 1998, to provide coverage to all workers whose "nuclear related employment" began on or after the commencement date of reactor operations. ComEd will not be liable for a retrospective assessment under this new policy. However, ComEd is still subject to a maximum retroactive assessment of up to $36 million in the event losses incurred under the small number of policies in the old program exceed accumulated reserves. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects. ComEd was dismissed as a defendant in both actions. With respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts against Cotter on eight bellwether plaintiffs' claims in the 1989 cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions have been settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v. Cotter (United States District Court for the District of Colorado, Civil Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in 35 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONCLUDED the 1991 cases. The verdict against Cotter included compensatory and punitive damages totaling approximately $3 million (not including prejudgment interest, which has not yet been calculated, and which Cotter anticipates may bring the total award to under $6 million), together with medical monitoring. Cotter intends to appeal the verdict. Although the other 1991 cases will necessarily involve the resolution of numerous contested issues of fact and law, Unicom and ComEd's determination is that these actions will not have a material impact on their financial position or results of operations. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. ComEd generally did not operate MGPs as a corporate entity but did, however, acquire MGP sites as part of the absorption of smaller utilities. Approximately half of these sites were transferred to Northern Illinois Gas Company as part of a general conveyance in 1954. ComEd also acquired former MGP sites as vacant real estate on which ComEd facilities have been constructed. To date, ComEd has identified 44 former MGP sites for which it may be liable for remediation. ComEd presently estimates that its costs of former MGP site investigation and remediation will aggregate from $25 million to $150 million in current-year (1998) dollars. It is expected that the costs associated with investigation and remediation of former MGP sites will be incurred over a period not to exceed 30 years. Because ComEd is not able to determine the most probable liability for such MGP costs, in accordance with accounting standards, a reserve of $25 million has been included in other noncurrent liabilities on the Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997, which reflects the low end of the range of ComEd's estimate of the liability associated with former MGP sites. In addition, as of June 30, 1998 and December 31, 1997, a reserve of $8 million has been included in other noncurrent liabilities on the Consolidated Balance Sheets, representing ComEd's estimate of the liability associated with cleanup costs of remediation sites other than former MGP sites. Approximately half of this reserve relates to anticipated cleanup costs associated with a property formerly used as a tannery which was purchased by ComEd in 1973. Unicom and ComEd presently estimate that ComEd's costs of investigating and remediating the former MGP and other remediation sites, pursuant to CERCLA and state environmental laws, will not have a material impact on the financial position or results of operations of Unicom or ComEd. These cost estimates are based on currently available information regarding the responsible parties likely to share in the costs of responding to site contamination, the extent of contamination at sites for which the investigation has not yet been completed and the cleanup levels to which sites are expected to have to be remediated. (23) SUBSEQUENT EVENTS. In July 1998, ComEd issued $225 million principal amount of 6.95% Notes due July 15, 2018, the proceeds of which were used for general corporate purposes, including the refinancing of existing debt. Also, in July 1998, a subsidiary of UT Holdings issued $120 million principal amount of senior unsecured 7.38% Notes due in July 2012, the proceeds of which will be used to refinance existing debt. 36 UNICOM CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN THE ELECTRIC UTILITY INDUSTRY Unicom and its predominant business, electric energy generation, transmission and distribution, are in a period of fundamental change. These changes are attributable to changes in technology and changes in regulation. Federal law and regulations have been amended to provide for open transmission system access, and various states, including Illinois, are considering, or have adopted, new regulatory structures to allow access by some or all customers to energy suppliers, in addition to the local utility. Electric Utility Industry. The electric utility industry historically has consisted of vertically integrated companies which combine generation, transmission and distribution assets; serve customers within relatively defined service territories; and operate under extensive regulation with respect to rates, operations and other matters. Utilities have operated under a regulatory compact with the state, with a statutory obligation to serve all of the electricity needs within their service territory in a nondiscriminatory manner. Historically, investment and operating decisions have been made based upon the utilities' respective assessment of the current and projected needs of their customers. In view of this obligation, regulation has focused on investment and operating costs, and rates have been based on a recovery of some or all of such prudently incurred costs plus a return on invested capital. Such rate regulation, and the ability of utilities to recover investment and other costs through rates, have provided the basis for recording certain costs as regulatory assets. These assets represent costs which are allocated over future periods reflecting related regulatory treatment, rather than expensed in the current period. The 1997 Act. On December 16, 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased-process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act, as it applies to ComEd, provides for, among other things, a 15% residential base rate reduction which commenced on August 1, 1998, an additional 5% residential base rate reduction commencing on May 1, 2002, and gradual customer access to other electric suppliers. Access for commercial and industrial customers will occur over a period from October 1999 to December 2000, and access for residential customers will occur after May 1, 2002. The 15% residential base rate reduction, which commenced on August 1, 1998, is expected to reduce ComEd's operating revenues by approximately $160 million and $375 million in 1998 and 1999, respectively, compared to 1997 rate levels. ComEd is engaged in certain pricing experiments contemplated by the 1997 Act, which are expected to reduce ComEd's operating revenues by approximately $30 million and $60 million in 1998 and 1999, respectively, compared to 1997 rate levels; however, such reductions are expected to be offset by the effects of customer growth. The 1997 Act also provides for the collection of a CTC from customers who choose another electric service provider during a transition period that extends through 2006, and can be extended through 2008 with ICC approval if certain factors are met. The CTC will be established in accordance with a formula defined in the 1997 Act. The CTC, which will be applied on a cents per kilowatthour basis, considers the revenue which would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. Notwithstanding these rate reductions, and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. During this period, utilities may reorganize, sell or 37 assign assets, retire or remove plants from service, and accelerate depreciation or amortization of assets with limited ICC regulatory review. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, a portion of the excess earnings must be refunded to customers. A utility may request a rate increase during the rate freeze period when necessary to ensure the utility's financial viability, but not before January 1, 2000. Under the 1997 Act, utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select an alternative energy supplier can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based regulated rates. The 1997 Act also requires utilities to establish or join an ISO that will independently manage and control utility transmission systems. Additionally, the 1997 Act includes the leveling of certain regulatory requirements to permit operational flexibility, the leveling of certain regulatory and tax provisions as applied to various electric suppliers and a new, more stringent, liability standard applicable to ComEd in the event of a major outage. The 1997 Act also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a special purpose financing entity. The proceeds from such security issuances must be used to refinance outstanding debt or equity or for certain other limited purposes. The total amount of such securities that may be issued is approximately $6.8 billion; approximately one-half of that amount can be issued in the twelve-month period which commenced on August 1, 1998. On July 21, 1998, the ICC issued an order under the 1997 Act approving the issuance of up to $3.4 billion of such securities. ComEd anticipates the issuance will occur sometime in the fourth quarter of 1998. ComEd plans to use the proceeds of the securities issuance to refinance its debt and equity, including using between $750 million and $1.14 billion to repurchase shares of ComEd common stock held by Unicom. Unicom in turn will use the funds it receives from ComEd's share repurchase to repurchase publicly held shares of Unicom's common stock. At current market prices, this repurchase would involve between 22 million and 33 million shares, or 10 to 15 percent of Unicom's outstanding common stock. The Boards of Directors of Unicom and ComEd have each approved the repurchase of up to 33 million shares of common stock. ComEd plans to use the remaining proceeds, net of transaction costs, to redeem preference stock and debt. As a result of the 1997 Act, prices for the supply of electric energy are expected to transition from cost-based, regulated rates to rates determined by competitive market forces. The CTC allows ComEd to recover 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 potential asset dispositions. See "Response to Regulatory Changes" below for additional information. See Note 2 of Notes to Financial Statements for the accounting effects related to the 1997 Act. Federal Regulation. The Federal Energy Policy Act of 1992, among other things, empowered the FERC to introduce a greater level of competition into the wholesale marketplace for electric energy. Under the FERC Order, 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. The FERC Order requires the separation of the transmission operations and wholesale marketing functions so as to ensure that unaffiliated third parties have access to the same information as to system availability and other requirements. The FERC Order further requires utilities to operate an electronic bulletin board to make transmission price and access data available to all potential users. A key feature of the FERC Order is that it contemplates full recovery of a utility's 38 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. Response to Regulatory Changes. Unicom has announced several business and operational objectives designed to focus efforts in responding to the energy market changes that are expected to develop from the 1997 Act. These objectives contemplate that ComEd will seek additional improvements in its transmission and distribution operations in order to meet customers' expectations for reliable delivery and will seek to refocus its generation activities, with a concentration on improved nuclear generation, and that Unicom and ComEd will seek to expand their offerings of energy-related products and services. See Unicom and ComEd's Current Report on Form 8-K dated July 6, 1998 for more information regarding the objectives announced by Unicom. Under the 1997 Act, the role of electric utilities in the supply and delivery of energy is expected to change. Utilities, such as ComEd, traditionally have been responsible for providing both adequate supply and reliable delivery of electricity to customers within their service areas. In the future, ComEd will continue to be obligated to provide a reliable delivery system; however, it 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. Given the tight capacity situation in ComEd's market, ComEd will be working to restore and maintain its available capacity as well as working to assist in the development of a competitive supply marketplace in Illinois. ComEd has a large commitment to, and investment in, nuclear generating capacity. ComEd has installed a new management team responsible for improving nuclear operations. Such improvements will be 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 will also be made to control capital and operating costs through increased efficiencies, such as the reduction of downtime and expense associated with generating unit maintenance and refueling outages. ComEd has also evaluated its generating plant investment. This evaluation, based upon recent interpretative guidance issued by the SEC, resulted in a conclusion that the investment had been impaired and should be reduced. See Note 2 of Notes to Financial Statements for additional information. Notwithstanding these efforts, there will continue to be an ongoing analysis of the ability of ComEd's various nuclear plants to generate and deliver electric energy safely at competitive prices in the competitive market for energy. Although short-term system reliability and capacity constraints are likely to support the continued operations of ComEd's nuclear units in the near term, expected longer term developments are likely to make decision- making a function of economic considerations. In the absence of the short-term reliability and capacity constraints, if a plant cannot produce power safely at a cost below the competitive market price, it will be disposed of or closed. Although plant impairment adjustments have reduced the carrying value of nuclear plants and depreciation rates, reflecting shortened estimated useful lives for certain stations, will reduce the carrying value further during the next several years, closure of a plant could involve additional charges associated with the write-off of its then carrying value. In January 1998, Unicom and ComEd decided to cease nuclear generating operations at ComEd's Zion Station. The related retirement resulted in a charge in the fourth quarter of 1997 of $523 million (after-tax), or $2.42 per common share, reflecting both a write down of the plant's carrying value, as well as a liability for future closing costs. A portion of Zion Station is used to provide voltage support in the transmission system that serves ComEd's northern region. See Note 5 of Notes to Financial Statements for additional information. 39 ComEd is also undertaking steps to offer for sale approximately 5,600 megawatts of coal-fired generating capacity, representing six generating stations located in Northern Illinois. Such plants have an aggregate book value of approximately $1.1 billion. As a part of such sales, ComEd expects to enter into short-term power purchase agreements with the purchasers in order to assure the availability of power during the period that the wholesale power market is developing in Illinois. ComEd would retain its existing nuclear, oil and gas-fired generating units, which represent an aggregate capacity of approximately 13,500 megawatts, and its transmission and distribution facilities. ComEd has completed the sale of two of its coal-fired generating stations, representing 1,598 megawatts of generating capacity, and has entered into exclusive 15-year purchased power agreements for the output of the stations. The sale of State Line and Kincaid Stations was completed in December 1997 and February 1998, respectively. The net proceeds of the sales, after income tax effects and closing costs, were approximately $190 million. The proceeds were used to retire or redeem existing debt in the first quarter of 1998. ComEd joined with eight Midwestern utilities to form a regional Midwest ISO in January 1998. To date, four other utilities have joined the Midwest ISO. The Midwest ISO is a key element in accommodating the restructuring of the electric industry and will promote enhanced reliability of the transmission system, equal access to the transmission system and increased competition. The Midwest ISO will establish an independent body that will ultimately direct the planning and operation of the transmission system for the utilities involved. The Midwest ISO will have operational control over the transmission system and will have authority to require modification in the operation of generators connected to that system during system emergencies. ComEd will retain ownership of its transmission lines. The formation of the Midwest ISO is subject to FERC approval. LIQUIDITY AND CAPITAL RESOURCES UTILITY OPERATIONS Construction Program. ComEd has a construction program for the year 1998, which consists principally of improvements to its existing nuclear and other electric production, transmission and distribution facilities. It does not include funds to add new generating capacity to ComEd's system. The program, as currently approved by ComEd, includes the following estimated expenditures (excluding nuclear fuel expenditures of approximately $160 million).
1998 --------- (MILLIONS OF DOLLARS) Production........................................... $ 425 Transmission and Distribution........................ 415 General.............................................. 90 ------ $930 ======
Such estimated expenditures include $95 million toward the replacement of the steam generators at ComEd's Byron Unit 1, which were replaced in February 1998, and Braidwood Unit 1, which are expected to be replaced prior to year- end 1998, in addition to approximately $35 million for removal costs. The total replacement cost is estimated to be $455 million, including approximately $80 million of removal costs. Approximately $350 million has been incurred through June 30, 1998 and $30 million will be incurred in 1999. ComEd's forecasts of peak load indicate a need for additional resources to meet demand, either through generating capacity, equivalent purchased power and/or the development of additional demand-side management resources, in 1998 and each year thereafter for the foreseeable future. However, ComEd believes that adequate resources, including cost-effective demand-side management resources, non-utility generation resources and other-utility power purchases, can be obtained in sufficient quantities to meet such forecasted needs. 40 Purchase commitments for ComEd, principally related to construction and nuclear fuel, approximated $282 million at June 30, 1998. In addition, ComEd's estimated commitments for the purchase of coal are as follows:
CONTRACT PERIOD COMMITMENT(1) -------- --------- ------------- Black Butte Coal Co. ............................. 1998-2000 $ 560 Decker Coal Co. .................................. 1998-2014 480 Other commitments................................. 1998-2000 66 ------ $1,106 ======
-------- (1) In millions of dollars, excluding transportation costs. No estimate of future cost escalation has been made. For additional information concerning these coal contracts and ComEd's fuel supply, see "Results of Operations," subcaption "Fuel Supply" below, and Notes 1 and 22 of Notes to Financial Statements. Capital Resources. ComEd forecasts that internal sources will provide approximately three-fourths of the funds required for ComEd's 1998 construction program and other capital requirements, including nuclear fuel expenditures, contributions to nuclear decommissioning funds, sinking fund obligations and scheduled debt maturities. See Notes 10 and 12 of Notes to Financial Statements for the summaries of the annual sinking fund requirements and scheduled maturities for ComEd preference stock and long-term debt, respectively. The forecast takes into consideration the effects of the 1997 Act, but does not take into consideration the proposed issuance by ComEd of up to $3.4 billion of securities to refinance debt and equity, as permitted under the 1997 Act. See "Changes in the Electric Utility Industry," subcaption "The 1997 Act" above, for additional information. The type and amount of external financing will depend on financial market conditions and the needs and capital structure of ComEd at the time of such financing. A portion of ComEd's financing is expected to be provided through the continued sale and leaseback of nuclear fuel through ComEd's existing nuclear fuel lease facility. See Note 20 of Notes to Financial Statements for additional information concerning ComEd's nuclear fuel lease facility. ComEd has $573 million of unused bank lines of credit at June 30, 1998, which may be borrowed at various interest rates and may be secured or unsecured. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread, which is dependent upon the credit ratings of ComEd's outstanding first mortgage bonds or on a prime interest rate. Collateral, if required for the borrowings, would consist of first mortgage bonds issued under and in accordance with the provisions of ComEd's mortgage. See Note 13 of Notes to Financial Statements for additional information concerning lines of credit, including scheduled commitment reductions. See the Statements of Consolidated Cash Flows for the construction expenditures and cash flow from operating activities for the three months, six months and twelve months ended June 30, 1998. During the first six months of 1998, ComEd sold and leased back $61 million of nuclear fuel through its existing nuclear fuel lease facility. In July 1998, ComEd issued $225 million principal amount of 6.95% Notes due July 15, 2018, the proceeds of which were used for general corporate purposes, including the refinancing of existing debt. See the Statements of Consolidated Cash Flows and Note 7 of Notes to Financial Statements for information regarding common stock activity. As of August 10, 1998, ComEd has an effective "shelf" registration statement with the SEC for the future sale of up to an additional $280 million of debt securities and cumulative preference stock for general corporate purposes of ComEd, including the discharge or refund of other outstanding securities. ComEd's securities and other securities guaranteed by ComEd are currently rated by three principal securities rating agencies as follows:
STANDARD DUFF & MOODY'S & POOR'S PHELPS ------- -------- ------ First mortgage and secured pollution control bonds........................................... Baa2 BBB BBB Publicly-held debentures and unsecured pollution control obligations............................. Baa3 BBB- BBB- Convertible preferred stock...................... baa3 BBB- BBB- Preference stock................................. baa3 BBB- BBB- Trust Securities................................. baa3 BBB- BBB- Commercial paper................................. P-2 A-2 D-2
41 As of July 1998, Moody's rating outlook on ComEd's securities is "Stable", Duff & Phelps has classified ComEd's securities as "Rating Watch-Down" and S&P's rating outlook is "Positive." See "Part II, Item 5. Market for Registrant's Common Equity and Related Stockholder Matters" in Unicom and ComEd's Annual Reports on Form 10-K for the year ended December 31, 1997 for additional information regarding ComEd's securities ratings. See "Changes in the Electric Utility Industry," subcaption "The 1997 Act" above, regarding the ICC's order approving ComEd's proposed issuance of up to $3.4 billion of securities and the planned use of the proceeds to refinance debt and equity, as permitted under the 1997 Act. Capital Structure. ComEd's ratio of long-term debt to total capitalization has increased slightly to 48.7% at June 30, 1998 from 48.5% at December 31, 1997. Unicom's retained earnings account had a deficit balance of $61 million and $21 million as of June 30, 1998 and December 31, 1997, respectively. As of June 30, 1998 and December 31, 1997, $292 million and $331 million, respectively, of retained earnings had been appropriated for future dividend payments. ComEd's retained earnings account had a deficit balance of $43 million and $19 million as of June 30, 1998 and December 31, 1997, respectively. As of June 30, 1998 and December 31, 1997, $360 million and $384 million, respectively, of retained earnings had been appropriated for future dividend payments. Year 2000 Conversion. Unicom, including ComEd, uses various software, systems and technology throughout its businesses that will be affected by so- called "Year 2000 Issues." The issues concern the ability of electronic processing equipment (including microprocessors embedded in other equipment), which have been programmed to track only the last two digits of a date, to recognize properly the date change to 2000 (as opposed to 1900) or to recognize "00" as valid. A failure to correct any such processing problems prior to January 1, 2000 could result in material operational and financial risks if the affected systems either cease to function or produce erroneous data. Such risks could include an inability to operate ComEd's nuclear or fossil generating plants, disruptions in the operation of its transmission and distribution systems and an inability to access interconnections with the systems of neighboring utilities. Since July 1996, Unicom has been working to identify and address Year 2000 issues. It has been reviewing all systems and is contacting software vendors, equipment suppliers and customers as well as neighboring utilities. To date, approximately 50% of the software applications and 15% of the embedded systems have been analyzed for Year 2000 compliance status. Once issues have been identified, Unicom's approach to them has been to upgrade or remediate software, systems and technology that are not Year 2000 compliant and that are not otherwise being replaced in accordance with Unicom's business plans. In accordance with its business plans, Unicom has replaced certain of its financial, human resources and customer service and billing software, and is planning to replace its payroll system in early 1999, with new software that is Year 2000 compliant. Unicom is upgrading or remediating certain embedded technology systems in its nuclear and fossil electricity generation, its transmission and distribution, and its supply management business units. Overall, Unicom estimates that implementation of Year 2000 compliant software and systems is approximately 30% complete as of July 31, 1998 and that such efforts will be over 50% complete by the end of 1998. The total cost of remediating or upgrading software that is not being replaced, in accordance with business plans, is estimated to be $20 million, and the total cost of upgrading or remediating embedded technology systems is estimated to be approximately $20-$40 million. Such costs are expensed as incurred. An independent consultant has been engaged to assist Unicom in the assessment of the process being used to address the Year 2000 issue. All Unicom systems and software are expected to be Year 2000 ready by the end of 1999. In addition to the steps described above, Unicom is working with various industry groups including NERC, the EPRI and EEI to coordinate electric utility industry Year 2000 efforts with the Clinton Administration's Year 2000 Conversion Council, the DOE and Congress. The DOE has requested from NERC a status report and coordination plan by September 1998, and a full status report by July 1999, as to the measures that are being taken to prepare electric power supply and delivery systems for transition into the Year 2000. 42 Unicom has identified, and has started a process to develop contingency plans to address, various worst case scenarios that could occur in the unlikely event that various Year 2000 issues are not resolved in a timely manner. Contingency plans are also being developed to address the impact on Unicom if Year 2000 remediation efforts of other parties, such as suppliers, surrounding utilities and interfacing regulatory, governmental and financial institutions, are not successful. The failure of such parties to resolve Year 2000 issues could result in significant disruptions in Unicom's operations. Market Risks. ComEd is exposed to market risk due to changes in interest rates and changes in the market price for electricity. Exposure for interest rate changes relates to its long-term debt and preferred equity obligations. Exposure to electricity market price risk relates to forward activities taken to manage effectively the supply of, and demand for, the electric generation capability of ComEd's generating plants. ComEd does not currently utilize derivative commodity or financial instruments for trading or speculative purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--Interest Rate Exposure" and "--Market Price Exposure," in Unicom and ComEd's Current Reports on Form 8-K dated January 30, 1998. There has not been a material change in ComEd's exposure to interest rate risk or market price risk since December 31, 1997. See "Energy Risk Management Contracts" in Note 1 of Notes to Financial Statements regarding the accounting for energy risk management contracts. UNREGULATED OPERATIONS Unicom Enterprises is engaged, through subsidiaries, in energy service activities which are not subject to utility regulation by federal or state agencies. One of these subsidiaries, UT Holdings, provides district cooling, heating and related services to offices and other buildings in the central business district of the city of Chicago and in other cities in North America, generally working with local utilities. District cooling involves, in essence, the production of chilled water at one or more central locations and its circulation to customers' buildings through a closed circuit of supply and return piping. Such water is circulated through customers' premises primarily for air conditioning. This process is used by customers in lieu of self- generated cooling. As a result of the Clean Air Amendments, the manufacture of CFCs has been curtailed since January 1996, thereby creating a marketing opportunity for non-CFC based systems, such as UT Holdings' district cooling. Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged in providing energy services, including gas services, performance contracting, distributed energy, active energy management systems and energy infrastructure services. In 1997, Unicom Energy Services entered into a joint venture with Sonat Marketing Company L.P. to market natural gas and related services to larger gas purchasers within ComEd's service area in Northern Illinois and other Midwestern areas. As an entry into the distributed energy market, Unicom Energy Services also entered into an alliance with AlliedSignal Power Systems, Inc., a subsidiary of AlliedSignal Inc., to market, install and service an electric energy generator developed by AlliedSignal, known as a TurboGenerator, in a 12-state region, the province of Ontario, Canada and Puerto Rico. Unicom Energy Services entered into an exclusive national distributorship agreement with Engage Networks, Inc. to market active energy management software and related hardware and services. As of June 30, 1998, Unicom Energy Services had purchase commitments of approximately $8 million. Construction Program. Unicom has approved capital expenditures for 1998 of approximately $92 million for UT Holdings, primarily related to an expansion of two of its four Chicago district cooling facilities and the related distribution piping and plants in other cities. As of June 30, 1998, UT Holdings' purchase commitments, principally related to construction, were approximately $32 million. Capital Resources. Unicom expects to obtain funds to invest in its unregulated subsidiaries principally from dividends received on its ComEd common stock and from borrowings. The availability of ComEd's dividends to Unicom is dependent on ComEd's financial performance and cash position, 43 as well as legal restrictions on the payment of dividends by public utilities. Other forms of financing by ComEd to Unicom or the unregulated subsidiaries of Unicom, such as loans or additional equity investments, which are not expected, would be subject to prior approval by the ICC. Unicom Enterprises has a $200 million credit facility which will expire in 1999, of which $5 million was unused as of June 30, 1998. The credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including UT Holdings and Unicom Energy Services, and for general corporate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Enterprises' operations. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime interest rate or a floating rate bank index plus a spread which varies with the credit rating of ComEd's outstanding first mortgage bonds. See Note 13 of Notes to Financial Statements for additional information regarding certain covenants with respect to Unicom and Unicom Enterprises' operations. In July 1998, a subsidiary of UT Holdings issued $120 million of senior unsecured 7.38% Notes due in July 2012, the proceeds of which will be used to refinance existing debt. On April 1, 1998, S&P issued a rating on Unicom's senior debt obligations of BBB-. Ratings have not been obtained from Moody's or Duff & Phelps. See "Part II, Item 5. Market for Registrant's Common Equity and Related Stockholder Matters" in Unicom and ComEd's Annual Reports on Form 10-K for the year ended December 31, 1997 for additional information regarding securities ratings. REGULATION ComEd and the Indiana Company are subject to federal and state regulation in the conduct of their respective businesses, including the operations of Cotter. Such regulation includes rates, securities issuance, nuclear operations, environmental and other matters. Particularly in the cases of nuclear operations and environmental matters, such regulation can and does affect operational and capital expenditures. Rate Matters. In January 1995, the ICC issued its Rate Order in the proceedings relating to ComEd's February 1994 rate increase request. The Rate Order provided, among other things, for an increase in ComEd's total revenues of approximately $302 million (excluding add-on revenue taxes) on an annual basis. Appeals related to the Rate Order have been completed without changing the rates authorized in the Rate Order. See "Changes in the Electric Utility Industry," subcaption "The 1997 Act" above, for information regarding the effect of the 1997 Act on rate matters. See "Nuclear Matters" below for information regarding fuel reconciliation proceedings for the years 1994 and 1996. Nuclear Matters. Nuclear operations have been, and remain, an important focus of ComEd--given the impact of such operations on overall O&M expenditures and the ability of nuclear power plants to produce electric energy at a relatively low marginal cost. ComEd operates a large number of nuclear plants, ranging from the older Dresden and Quad Cities Stations to the more recently completed LaSalle, Byron and Braidwood Stations, and is intent upon safe, reliable and efficient operation. See "Changes in the Electric Utility Industry," subcaption "Response to Regulatory Changes" above, for information regarding ComEd's cessation of nuclear generation operations at its Zion Station. ComEd's LaSalle nuclear generating station is currently on the NRC's list of plants that require increased regulatory scrutiny by the NRC. Dresden Station had been included on the list since 1992 and LaSalle and Zion Stations were added in January 1997. On July 29, 1998, the NRC removed Dresden Station from the list because of improved performance at the station, and also administratively removed Zion Station from the list because of ComEd's decision to cease further nuclear operations at the plant. The listing of LaSalle Station does not prevent ComEd from operating the generating units; however, it does mean that the NRC will devote additional resources to monitoring ComEd's operating performance and that ComEd will need to work to demonstrate to the NRC the sustainability of 44 improvements which it believes it has undertaken and is continuing to implement. In January 1998, the NRC had noted a declining performance trend at Quad Cities Station. In a meeting on March 3, 1998, the NRC stated that weaknesses were observed with respect to certain operations, maintenance and engineering activities at Quad Cities Station. On July 29, 1998, the NRC stated that there has not been sufficient operational data to enable it to assess Quad Cities Station performance. The NRC has indicated that it is monitoring ComEd's ability to manage its nuclear operations in their entirety and that the performance at any one facility will be viewed by the NRC in context with the performance of ComEd's nuclear generating group as a whole. In late January 1997, the NRC also took the unusual step of requiring ComEd to submit information to allow the NRC to determine what actions, if any, should be taken to assure that ComEd can safely operate its then six nuclear generating stations while sustaining performance improvement at each site. The request stated the NRC staff's concerns with the "cyclical safety performance of ComEd nuclear stations," noting the presence on the list of plants that require increased regulatory scrutiny by the NRC of Dresden, LaSalle and Zion Stations at various times during the past 10 years. It also noted concerns regarding "ComEd's ability to establish lasting and effective programs that result in sustained performance improvement." The NRC and representatives of ComEd's management have met, and will continue to meet periodically in the future, to discuss the status of recovery and restart efforts and overall performance of the ComEd nuclear program. INPO, a nuclear power industry funded organization, also has been critical of ComEd's nuclear operations and the progress made by ComEd at correcting problems INPO previously identified. In the past, INPO has raised concerns with respect to management and performance of ComEd's nuclear operations, including accountability and the effectiveness of efforts aimed at engaging the workforce in the improvement process. ComEd continues to address INPO's concerns. ComEd has devoted, and intends to continue to devote, significant resources to the management and operations of its nuclear generating stations. Over the past several years, it has increased and reinforced station management with managers drawn from other utilities which have resolved similar operational and performance issues, including the appointment of a new Chief Nuclear Officer in late 1997. It has also sought to identify, anticipate and address operating and performance issues in a safe, cost-effective manner while seeking to improve the availability and capacity factors of its nuclear generating units. ComEd's activities with respect to its nuclear generating stations have included improvements in operating and personnel procedures and repair and replacement of equipment. Although performing such improvements can result in longer unit outages, the improvements are expected to result in improved operational performance when completed. LaSalle Units 1 and 2 were shutdown for extensive improvement work in September 1996. On July 24, 1998, the NRC determined that ComEd has made sufficient improvements at LaSalle Unit 1 for the unit to resume operations. It currently is expected that LaSalle Unit 1 will restart in August 1998 and LaSalle Unit 2 is expected to restart by the end of the first quarter of 1999. The restart of LaSalle Unit 2 requires the resolution of material condition issues similar to those of LaSalle Unit 1. The NERC has forecasted the possibility of electric energy shortages in the summer of 1998 in light of continued outages at nuclear plants operated by ComEd and other utilities in the Midwest power grid. ComEd has taken numerous steps to support the reliability of its system during the summer of 1998. Such steps include maximizing available on-system generating capacity during periods of peak demand, arrangements to purchase power from other utilities, reinforcements to the transmission systems of ComEd and neighboring utilities to increase capacity and to provide voltage support, and working with customers to manage the use of and demand for power. As a result of a unique combination of heat, storms and equipment problems affecting utilities throughout the Midwest region, 45 on June 25, 1998, ComEd declared a NERC generation deficiency alert Level 3, which is a statement that firm load loss is possible. As of August 10, 1998, a firm load loss has not been experienced. See "Results of Operations," subcaption "Purchased Power" below, regarding the expected increase in purchased power expense in 1998. Generating station availability and performance during a year have been issues in fuel reconciliation proceedings in assessing the prudence of fuel and purchased power costs during such year. Final ICC orders have been issued in fuel reconciliation proceedings related to ComEd's FAC collections for years prior to 1994 and for the year 1995. In the fuel reconciliation proceeding for 1994, an intervenor and the ICC staff have filed briefs proposing a refund of approximately $42 million and $34 million, respectively, relating to nuclear station performance. In the fuel reconciliation proceeding for 1996, an intervenor has filed testimony seeking a refund of approximately $78 million relating to nuclear station performance, and the ICC staff also has filed testimony proposing a refund of approximately $104 million. The 1997 Act provides that the fuel reconciliation proceedings for 1994 and 1996 must be concluded by the end of 1998. If refunds are required in these proceedings, the refunds could have a material adverse effect on results of operations. The 1997 Act also provides that, because ComEd eliminated its FAC effective January 1, 1997, the ICC shall not conduct a fuel reconciliation proceeding for the year 1997 or any subsequent years. Based on ComEd's most recent study approved by the ICC, decommissioning costs, including the cost of decontamination and dismantling, are estimated to aggregate $4.4 billion in current-year (1998) dollars, including a contingency allowance. ComEd estimates that it will expend approximately $11.6 billion, including a contingency allowance, for decommissioning costs primarily during the period from 2007 through 2034. Additionally, ComEd estimates that it will expend an aggregate of approximately $217 million in current-year (1998) dollars during the period 2000 through 2014 to maintain Zion Station in a secured mode until decommissioning begins. All such costs are expected to be funded by the external decommissioning trusts, which ComEd established in compliance with Illinois law and into which ComEd has been making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of or changes to NRC regulations, as well as changes in the assumptions used in making such estimates, including changes in technology, available alternatives for the disposal of nuclear waste and inflation. See Note 1 of Notes to Financial Statements, under "Depreciation and Decommissioning," for additional information regarding decommissioning costs. Environmental Matters. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. See Note 22 of Notes to Financial Statements and "Part II. Other Information, Item 1. Legal Proceedings." RESULTS OF OPERATIONS Unicom's basic and diluted earnings (loss) per common share were $0.37 for the three months ended June 30, 1998, compared to $0.03 for the three months ended June 30, 1997, $0.62 for the six months ended June 30, 1998, compared to $1.24 for the six months ended June 30, 1997, and $(4.55) for the twelve months ended June 30, 1998, compared to $3.23 for the twelve months ended June 30, 1997. Earnings for the three months, six months and twelve months ended June 30, 1997 have been restated for a change in accounting method for revenue recognition. The earnings for the six months and twelve months ended June 30, 1997 also include the one-time positive impact of a change in accounting principle of $197 million (after-tax), or $0.91 per common share. Restated earnings per common share, excluding the one-time positive effect of the change in accounting principle, were $0.03, $0.33 and $2.32 for the three months, six months and twelve months ended June 30, 1997, respectively. Substantially all of the results of operations for Unicom are the results of operations for ComEd. The results of Unicom's unregulated subsidiaries currently are not material to the results of 46 Unicom and subsidiary companies as a whole. As such, the following section discusses the effect of ComEd's operations on Unicom's financial results. Net Income for the Three Months Ended June 30, 1998. The increase in ComEd's net income in the recent three-month period reflects, among other factors, unusually hot weather, which increased both operating revenues and energy costs, compared to mild weather experienced in the same period in 1997. Also contributing to the increase in net income were reduced O&M expenses, compared to the same period in 1997. Kilowatthour sales increased 2% for the three months ended June 30, 1998, compared to the same period in 1997, driven largely by increased sales to retail customers due to unusally hot weather conditions experienced during the second quarter of 1998, as well as continued economic growth in ComEd's service territory. Operating revenues increased 5% during the recent three-month period, compared to the same period in 1997. See "Operating Revenues" below for additional information. Fuel and purchased power costs increased 24% in the second quarter of 1998, compared to the second quarter of 1997, reflecting the effects of an extraordinary combination of heat, storms and equipment problems experienced throughout the Midwest in late June 1998 which resulted in unprecedented purchased power price levels, as well as the effects of higher purchases from other utilities. See "Purchased Power" below for additional information. O&M expenses decreased by 14% for the second quarter of 1998, compared to the same period in 1997, as discussed in "Operation and Maintenance Expenses" below. Net Income for the Six Months Ended June 30, 1998. The decrease in ComEd's net income in the recent six-month period reflects, among other factors, the one-time positive impact of a change in accounting principle of $197 (after- tax), reflected in the June 30, 1997 results, and increased fuel and purchased power costs, partially offset by increased kilowatthour sales and decreased O&M expenses. Kilowatthour sales increased 2% for the six months ended June 30, 1998, compared to the same period in 1997, reflecting increased sales to retail customers due to unusually hot weather conditions experienced during the second quarter of 1998, as well as continued economic growth in ComEd's service territory. Operating revenues increased 4% during the recent six-month period, compared to the same period in 1997. See "Operating Revenues" below for additional information. Fuel and purchased power costs increased 23% during the six months ended June 30, 1998, compared to the same period in 1997, reflecting the effects of an extraordinary combination of heat, storms and equipment problems experienced throughout the Midwest in late June 1998 which resulted in unprecedented purchased power price levels, as well as the effects of higher purchases from other utilities. See "Purchased Power" below for additional information. O&M expenses decreased by 8% for the six months ended June 30, 1998, compared to the same period in 1997, as discussed in "Operation and Maintenance Expenses" below. In the fourth quarter of 1997, ComEd changed its accounting method for revenue recognition to record ComEd's revenues associated with service which has been provided to customers but has not yet been billed at the end of each accounting period, retroactive to January 1, 1997. This change in accounting method, included in restated six months and twelve months ended June 30, 1997 results, had a cumulative one-time positive impact for years prior to 1997 of $197 million (after-tax), or $0.91 per common share. Net Income (Loss) for the Twelve Months Ended June 30, 1998. The decrease in ComEd's net income (loss) in the recent twelve-month period was primarily due to ComEd's discontinuation of regulatory accounting practices for the generation portion of its business and other charges recorded in response to the enactment of the 1997 Act. The results for the twelve months ended June 30, 1998 also include the write-off for the closure of Zion Station. 47 ComEd discontinued regulatory accounting practices for the generation portion of its business in the fourth quarter of 1997 due to the expected transition of electric generation services to market- based pricing as a result of the 1997 Act. Accordingly, ComEd's generation-related net regulatory assets (which represent assets and liabilities properly recorded under regulatory accounting practices but which would not be recorded under GAAP for non-regulated entities) were written off, resulting in an extraordinary charge in the fourth quarter of 1997 of $810 million (after-tax), or $3.75 per common share. In addition, as permitted under the 1997 Act, ComEd elected to eliminate its FAC in December 1997, which resulted in a charge in the fourth quarter of 1997 of $44 million (after-tax), or $0.20 per common share. The reduction includes $25 million (after-tax), or $0.12 per common share, in net FAC charges billed to its customers in 1997, which was refunded to customers as of June 30, 1998. The reduction also includes a write-off of $19 million (after-tax), or $0.08 per common share, in underrecovered energy costs that ComEd would have been entitled to recover if the FAC had remained in effect. Also, the results for the twelve months ended June 30, 1998 include the write down of ComEd's investment in uranium-related properties to reflect costs which are not expected to be recovered in a competitive market. The write down resulted in a charge of $60 million (after-tax), or $0.28 per common share, in the fourth quarter of 1997. In the fourth quarter of 1997, ComEd changed its accounting method for revenue recognition to record ComEd's revenues associated with service which has been provided to customers but has not yet been billed at the end of each accounting period, retroactive to January 1, 1997. This change in accounting method, included in restated six months and twelve months ended June 30, 1997 results, had a cumulative one-time positive impact for years prior to 1997 of $197 million (after-tax), or $0.91 per common share. The fourth quarter of 1997 also includes a charge of $523 million (after- tax), or $2.42 per common share, reflecting the write-off of the unrecoverable portion of the cost of ComEd's Zion Station plant and inventories and a liability for future closing costs, resulting from the decision in January 1998 to cease nuclear generation operations at Zion Station. ComEd's kilowatthour sales, including sales to wholesale customers, increased 4% in the twelve months ended June 30, 1998, compared to the same period last year. Operating Revenues increased 2% in the recent twelve-month period. See "Operating Revenues" below for additional information. Also reducing operating results for the recent twelve-month period was a 21% increase in fuel and purchased power costs. See "Purchased Power" below for additional information. Operating Revenues. ComEd's electric operating revenues reflect revenues from sales to ultimate consumers (including residential, commercial and industrial customers within its service territory), revenues from sales for resale (i.e., sales to wholesale customers, principally other electric utilities), and revenues from collections under its FAC for years prior to 1997 (which were intended to recover variations in ComEd's fuel cost for generating electric energy and the energy portion of purchased power costs in relation to the amount included in ComEd's base rates). Operating revenues are affected by kilowatthour sales and rate levels. Kilowatthour sales, in turn, are affected by weather, the level of economic activity within ComEd's service area, and off-system or wholesale sales to other utilities. Off-system sales are affected by a number of factors, including nuclear generating availability and performance. Operating revenues increased $92 million in the three months ended June 30, 1998, compared to the three months ended June 30, 1997, primarily due to increased kilowatthour sales. Kilowatthour sales to retail customers during the recent three-month period increased 10%, compared to the same period in 1997, reflecting unusally hot weather experienced in the second quarter of 1998, as well as continued economic growth. Operating revenues increased $132 million in the six months ended June 48 30, 1998, compared to the six months ended June 30, 1997, primarily due to increased kilowatthour sales. Kilowatthour sales to retail customers increased 5%, compared to the same period in 1997, reflecting unusually hot weather experienced in the second quarter of 1998, as well as continued economic growth. Operating revenues increased $147 million in the twelve months ended June 30, 1998, compared to the same period in 1997, primarily due to a 4% increase in kilowatthour sales to retail and wholesale customers. Fuel Costs. Changes in fuel expense for the three months, six months and twelve months ended June 30, 1998, compared to the same periods ended June 30, 1997, primarily resulted from changes in the average cost of fuel consumed, changes in the mix of fuel sources of electric energy generated and changes in net generation of electric energy. Fuel mix is determined primarily by system load, the costs of fuel consumed and the availability of nuclear generating units. The cost of fuel consumed, net generation of electric energy and fuel sources of kilowatthour generation were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ------------------ -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- Cost of fuel consumed (per million Btu): Nuclear..................................... $0.60 $0.60 $0.62 $0.57 $0.59 $0.55 Coal........................................ $2.46 $2.37 $2.18 $2.41 $2.17 $2.37 Oil......................................... $3.72 $4.49 $3.45 $3.86 $3.64 $3.72 Natural gas................................. $2.50 $2.37 $2.46 $2.57 $2.60 $2.59 Average all fuels........................... $1.29 $1.45 $1.27 $1.37 $1.29 $1.28 Net generation of electric energy (millions of kilowatthours)............................... 18,163 18,761 35,491 41,080 80,271 88,813 Fuel sources of kilowatthour generation: Nuclear..................................... 64% 52% 61% 57% 59% 61% Coal........................................ 28 43 31 39 35 36 Oil......................................... -- -- 1 1 1 -- Natural gas................................. 8 5 7 3 5 3 --------- --------- -------- -------- --------- --------- 100% 100% 100% 100% 100% 100% ========= ========= ======== ======== ========= =========
The decreases in the net generation of electric energy, for the six months and twelve months ended June 30, 1998, compared to the same periods ended June 30, 1997, are due to the sale of State Line and Kincaid Stations and lower nuclear plant availability. See "Regulation," subcaption "Nuclear Matters" above, for information regarding outages at certain of ComEd's nuclear generating stations. Fuel Supply. Compared to other utilities, ComEd has relatively low average fuel costs as a result of its reliance predominantly on lower cost nuclear generation. ComEd's coal costs, however, are high compared to those of other utilities. ComEd's western coal contracts and its rail contracts for delivery of the western coal provide for the purchase of certain coal at prices substantially above currently prevailing market prices, and ComEd has significant purchase commitments under its contracts. In addition, as of June 30, 1998, ComEd had coal reserves of $243 million. In prior years, ComEd's commitments for the purchase of coal exceeded its requirements. Rather than take all the coal it was required to take, ComEd agreed to purchase the coal in place in the form of coal reserves. For additional information concerning ComEd's coal purchase commitments see "Liquidity and Capital Resources" above and for information concerning ComEd's fuel reconciliation proceedings see "Regulation," subcaption "Nuclear Matters" above. Also see Note 1 of Notes to Financial Statements, under "Coal Reserves" and "Fuel Adjustment Clause," concerning ComEd's coal reserves and FAC, respectively. Purchased Power. Amounts of purchased power are primarily affected by system load, the availability of ComEd's generating units and the availability and cost of power from other utilities. Purchased power increased $160 million, $316 million and $452 million for the three months, six months and twelve months ended June 30, 1998, respectively, compared to the same periods ended 49 June 30, 1997. Such increases include $43 million for the three months and $75 million for the six months and twelve months ended June 30, 1998 for the agreements entered into in connection with the sale of State Line and Kincaid Stations in December 1997 and February 1998, respectively. The increases in purchased power costs also reflect the effects of an extraordinary combination of heat, storms and equipment problems experienced throughout the Midwest in late June 1998 which resulted in unprecedented purchased power price levels. In addition, the increases for the six months and twelve months ended June 30, 1998 reflect outages at certain of ComEd's nuclear generating stations. See "Regulation," subcaption "Nuclear Matters" above, for information regarding outages at certain of ComEd's nuclear generating stations. The number and average cost of kilowatthours purchased were as follows:
THREE MONTHS SIX MONTHS ENDED TWELVE MONTHS ENDED ENDED JUNE 30 JUNE 30 JUNE 30 -------------- ------------------ -------------------- 1998 1997 1998 1997 1998 1997 ------ ------ -------- -------- --------- --------- Kilowatthours (millions)............. 5,764 5,530 14,449 8,982 22,139 12,264 Cost per kilowatthour... 4.85c 2.16c 3.46c 2.04c 3.24c 2.16c
ComEd expects purchased power costs to increase significantly in the year 1998, compared to the year 1997, due to higher costs for power purchased from other utilities, purchase power agreements entered into in connection with the sale of State Line and Kincaid generating stations, increased kilowatthour sales and lower nuclear generation. 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. Operation and Maintenance Expenses. O&M expenses include the expenses associated with operating and maintaining ComEd's generation, transmission and distribution assets, as well as administrative overhead and support. Given the variety of expense categories covered, there are a number of factors which affect the level of such expenses within any given period. Two major components of such expenses, however, are the costs associated with operating and maintaining ComEd's nuclear and fossil generating facilities. Generating station expenses are affected by the cost of materials, regulatory requirements and expectations, the age of facilities and cost control efforts. During the three months, six months and twelve months ended June 30, 1998, the aggregate level of O&M expenses decreased 14%, 8% and increased less than 1%, respectively, compared to the same periods ended June 30, 1997. O&M expenses associated with nuclear generating stations decreased $92 million, $133 million and $173 million during the three months, six months and twelve months ended June 30, 1998, respectively, compared to the same periods ended June 30, 1997. The decreases in the recent three-month, six-month and twelve-month periods were primarily due to the permanent cessation of nuclear generation operations at Zion Station and to activities associated with the repair, replacement and improvement of nuclear generating facility equipment. Beginning in 1995, ComEd increased the number and scope of maintenance activities associated with its nuclear generating stations. Such efforts are the result of station performance evaluations performed to identify the sources and causes of unplanned equipment repairs. The goal of such efforts is to design and implement cost effective repairs and improvements to increase station availability. The efforts begun in 1995 are expected to continue through 1998. See "Changes in the Electric Utility Industry," subcaption "Response to Regulatory Changes," regarding the permanent cessation of nuclear operations at Zion Station. O&M expenses associated with nuclear generating stations have been driven by ComEd's objective to improve station availability, as well as to meet regulatory requirements and expectations. ComEd is pursuing a program to improve the quality of nuclear operations, including safety and efficiency, which is also expected to achieve a longer term goal of improved availability and to be positioned to take advantage of opportunities in a more competitive market. Over the past several years, ComEd has increased and reinforced station management with managers drawn from other 50 utilities which have resolved similar operating issues. It has also sought to identify, anticipate and address nuclear station operation and performance issues in a safe, cost-effective manner while seeking to improve the availability and capacity factors of its nuclear generating units. Such activities have included improvements in operating and personnel procedures and repair and replacement of equipment, and can result in longer unit outages. Such activities have involved increased maintenance and repair expenses in recent years. During the three months, six months and twelve months ended June 30, 1998, O&M expenses associated with fossil generating stations increased $1 million, $10 million and $47 million, respectively, compared to the same periods ended June 30, 1997. The increases related to fossil generating stations for the recent six-month and twelve-month periods are primarily due to increases in plant refurbishment costs, partially offset by a reduction in personnel costs and the sale of State Line and Kincaid Stations, which were sold in December 1997 and February 1998, respectively, compared to the same periods ended June 30, 1997. O&M expenses associated with ComEd's transmission and distribution system decreased $3 million and increased $10 million and $16 million in the three months, six months and twelve months ended June 30, 1998, respectively, compared to the same periods ended June 30, 1997. The increases in the recent six-month and twelve-month periods reflect higher maintenance costs, including costs associated with emergency storm restoration of electric service. O&M expenses associated with customer-related activities increased $5 million, $10 million and $24 million in the three months, six months and twelve months ended June 30, 1998, respectively, compared to the same periods ended June 30, 1997, primarily due to increased marketing initiatives and customer service personnel costs. O&M expenses also include employee benefits expenses. Since 1995, ComEd has reduced the size of its workforce by offering incentives for employees to leave the company voluntarily. Such incentives included both current payments and earlier eligibility for post-retirement health care benefits, in addition to certain other one-time employee-related costs, resulting in charges of $8 million and $4 million for the three months ended June 30, 1998 and 1997, respectively, $24 million and $7 million for the six months ended June 30, 1998 and 1997, respectively, and $56 million and $16 million for the twelve months ended June 30, 1998 and 1997, respectively. Other employee benefits expenses, excluding the effects of employee separation plans and certain other one-time employee-related costs, increased $1 million and decreased $10 million and $26 million for the three months, six months and twelve months ended June 30, 1998, respectively, compared to the same periods ended June 30, 1997. The decreases for the recent six-month and twelve-month periods are primarily due to a reduction in medical costs for active and retired employees. O&M expenses also reflect $41 million and $38 million for employee incentive compensation plan costs for the twelve months ended June 30, 1998 and 1997, respectively. The payments, which were made partly in cash and partly in shares of Unicom common stock, were made under Unicom's Long-Term Incentive Plans as the result of the achievements during the years 1997 and 1996, respectively, of specified financial performance, operating performance and increased shareholder value. O&M expenses for the twelve months ended June 30, 1998 also include $25 million for the additional write-off of obsolete materials and supplies, compared to the twelve months ended June 30, 1997. O&M expenses associated with certain administrative and general costs decreased $4 million and increased $4 million and $47 million for the three months, six months and twelve months ended June 30, 1998, respectively, compared to the same periods ended June 30, 1997. The increase in the recent twelve-month period is due to a variety of reasons including an increase in the provision for vacation pay liability, and costs associated with legal services and supply management. The effects of inflation have also increased O&M expenses during the years and are also reflected in the increases and decreases discussed herein. Depreciation. Depreciation expense decreased for the three months, six months and twelve months ended June 30, 1998, compared to the same periods ended June 30, 1997. The decreases in 51 the recent three-month, six-month and twelve-month periods reflect the retirement of Zion Station, partially offset by plant additions. The decreases in the recent six-month and twelve-month periods also reflect the sale of the State Line and Kincaid Stations. Depreciation expense includes increased depreciation on ComEd's nuclear generating units primarily related to its steam generators at Byron Unit 1, which were replaced in February 1998, and Braidwood Unit 1, which are expected to be replaced prior to year-end 1998. This increased depreciation resulted in charges of $6 million and $15 million for the three months ended June 30, 1998 and 1997, respectively, $23 million and $30 million for the six months ended June 30, 1998 and 1997, respectively, and $53 million and $59 million for the twelve months ended June 30, 1998 and 1997, respectively. Depreciation expense is expected to decline in the remainder of 1998 and future years as a result of the reduction in depreciable plant balances due to the $3.0 billion plant impairment; however, the reduction will be offset by amortization of the regulatory asset related to impaired plant and an increase in nuclear depreciation related to shortened useful lives for certain stations. See Note 1 of Notes to Financial Statements, under "Depreciation and Decommissioning." Interest on Debt. Changes in interest on long-term debt and notes payable for the three months, six months and twelve months ended June 30, 1998, compared to the same periods ended June 30, 1997, were due to changes in average interest rates and in the amounts of long-term debt and notes payable outstanding. Changes in interest on ComEd's long-term debt also reflected new issues of debt, the retirement and early redemption of debt, and the retirement and redemption of issues which were refinanced at generally lower rates of interest. The average amounts of ComEd's long-term debt and notes payable outstanding and average interest rates thereon were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 --------------------- --------------------- --------------------- 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ---------- ---------- Long-term debt outstand- ing: Average amount (mil- lions)................ $5,696 $6,245 $5,847 $6,395 $5,973 $6,493 Average interest rate.. 7.37% 7.64% 7.43% 7.65% 7.56% 7.63% Notes payable outstand- ing: Average amount (mil- lions)................ $ 402 $ 222 $ 308 $ 180 $ 217 $ 170 Average interest rate.. 5.88% 5.95% 5.90% 5.87% 5.95% 5.81%
Decommissioning. The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including ComEd, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the FASB is reviewing the accounting for nuclear decommissioning costs and issued an exposure draft in February 1996 requesting written comment. If current electric utility industry accounting practices for such decommissioning costs are changed, annual provisions for decommissioning could increase and the estimated cost for the decommissioning of operating nuclear plants after retirement could be recorded as a liability rather than as accumulated depreciation. Decommissioning costs of currently retired nuclear plants are recorded as a liability. Unicom and ComEd do not believe that such changes, if required, would have an adverse effect on the results of operations due to ComEd's ability to recover decommissioning costs through rates. Other Items. The amounts of AFUDC reflect changes in the average levels of investment subject to AFUDC and changes in the average annual capitalization rates as discussed in Note 1 of Notes to Financial Statements, under "AFUDC and Interest Capitalized." ComEd discontinued SFAS No. 71 regulatory accounting practices in December 1997 for the generation portion of its business. As a result, beginning in 1998, ComEd is capitalizing interest costs on its generation-related construction work in progress and nuclear fuel in process. Interest costs capitalized were $6 million for the three months and $8 million for the six months and twelve months ended June 30, 1998. AFUDC and interest capitalized do not contribute to the current cash flow of Unicom or ComEd. ComEd's ratios of earnings to fixed charges for the twelve months ended June 30, 1998 and December 31, 1997 were 0.71 and 0.58, respectively. ComEd's ratios of earnings to fixed charges and preferred and preference stock dividend requirements for the twelve months ended June 30, 1998 and 52 December 31, 1997 were 0.61 and 0.49, respectively. Earnings for the twelve months ended June 30, 1998 and December 31, 1997 were inadequate to cover fixed charges by approximately $170 million and $259 million, respectively, and fixed charges and preferred and preference stock dividend requirements by approximately $267 million and $359 million, respectively. The deficiency is principally attributable to the earnings impact of the closure of Zion Station. Business corporations, in general, have been adversely affected by inflation because amounts retained after the payment of all costs have been inadequate to replace, at increased costs, the productive assets consumed. Electric utilities, in particular, have been especially affected as a result of their capital intensive nature and regulation which limits capital recovery and prescribes installation or modification of facilities to comply with increasingly stringent safety and environmental requirements. Because the regulatory process limits the amount of depreciation expense included in ComEd's revenue allowance to the original cost of utility plant investment, the resulting cash flows are inadequate to provide for replacement of that investment in future years or preserve the purchasing power of common equity capital previously invested. FORWARD-LOOKING INFORMATION. Except for historical data, the information contained herein constitutes forward-looking statements. Forward-looking statements are inherently uncertain and subject to risks. Such statements should be viewed with caution. Actual results or experience could differ materially from the forward-looking statements as a result of many factors. Forward-looking statements in this report include, but are not limited to: (1) statements regarding expectations of revenue reductions and collections of future CTC revenues as a result of the 1997 Act in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Changes in the Electric Utility Industry--The 1997 Act," and in Note 2 of Notes to Financial Statements, (2) statements regarding estimated capital expenditures in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaptions "Liquidity and Capital Resources-- UTILITY OPERATIONS--Construction Program" and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--Construction Program," (3) statements regarding the estimated return to service of certain nuclear generating units and an increase in purchased power costs for 1998 in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation--Nuclear Matters," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Results of Operations--Purchased Power," respectively, (4) statements regarding the costs of decommissioning nuclear generating stations in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation--Nuclear Matters," and in Note 1 of Notes to Financial Statements, under "Depreciation and Decommissioning," (5) statements regarding cleanup costs associated with MGPs and other remediation sites in Note 22 of Notes to Financial Statements, and (6) statements regarding the estimated costs and risks of Year 2000 conversion in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--Year 2000 Conversion." 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, estimated return to service of nuclear generation units, decommissioning costs, cleanup costs and Year 2000 conversion costs are subject to changes in the scope of work and manner in which the work is performed and consequent changes in the timing and level of the projected expenditure, and are also subject to changes in laws and regulations or their interpretation or enforcement. The statements regarding the estimated return to service of nuclear generating units are subject to the concurrence of the NRC with proceeding to power operations. The statements regarding expectations for Year 2000 readiness are subject to the risk that Year 2000 remediation efforts of Unicom and other parties are not successful. 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. 53 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Commonwealth Edison Company: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Commonwealth Edison Company (an Illinois corporation) and subsidiary companies as of June 30, 1998 and December 31, 1997, and the related statements of consolidated operations, retained earnings (deficit) and cash flows for the three-month, six-month and twelve-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Edison Company and subsidiary companies as of June 30, 1998 and December 31, 1997, and the results of their operations and their cash flows for the three-month, six-month and twelve-month periods ended June 30, 1998 and 1997, in conformity with generally accepted accounting principles. As discussed in Note 3, effective January 1, 1997, the Company changed its method of accounting for revenue recognition. Arthur Andersen LLP Chicago, Illinois August 10, 1998 54 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months, six months and twelve months ended June 30, 1998 and 1997 reflect the results of past operations and are not intended as any representation as to results of operations for any future period. Future operations will necessarily be affected by various and diverse factors and developments, including changes in electric prices, regulation, population, business activity, competition, taxes, environmental control, energy use, fuel, cost of labor, purchased power and other matters, the nature and effect of which cannot now be determined.
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ---------------------- ---------------------- ----------------------- 1998 1997 1998 1997 1998 1997 ---------- ---------- ---------- ---------- ----------- ---------- (THOUSANDS OF DOLLARS) Electric Operating Revenues............... $1,776,972 $1,685,157 $3,486,585 $3,354,742 $ 7,204,930 $7,058,169 ---------- ---------- ---------- ---------- ----------- ---------- Electric Operating Expenses and Taxes: Fuel................... $ 250,923 $ 308,722 $ 482,299 $ 617,790 $ 1,103,947 $1,237,114 Purchased power........ 279,359 119,333 500,089 183,640 716,503 264,440 Operation.............. 336,237 428,611 680,227 828,821 1,565,866 1,598,428 Maintenance............ 213,371 209,073 434,130 377,497 746,362 712,000 Depreciation........... 231,008 245,966 478,766 495,086 969,557 986,512 Recovery of regulatory assets................ -- 3,818 -- 7,636 7,636 15,272 Taxes (except income).. 184,599 188,149 391,565 389,250 801,482 794,437 Income taxes-- Current--Federal..... 67,677 11,970 119,178 62,677 270,849 218,480 --State.............. 14,277 3,997 24,868 22,040 68,115 63,574 Deferred--Federal-- net................. (12,001) 15,210 (19,017) 18,523 18,571 107,296 --State--net......... (2,028) 3,381 (2,591) (1,605) 1,559 9,159 Investment tax credits deferred--net......... (6,888) (7,897) (14,048) (15,794) (29,270) (34,840) ---------- ---------- ---------- ---------- ----------- ---------- $1,556,534 $1,530,333 $3,075,466 $2,985,561 $ 6,241,177 $5,971,872 ---------- ---------- ---------- ---------- ----------- ---------- Electric Operating Income................. $ 220,438 $ 154,824 $ 411,119 $ 369,181 $ 963,753 $1,086,297 ---------- ---------- ---------- ---------- ----------- ---------- Other Income and (Deductions): Interest on long-term debt.................. $ (104,892) $ (119,363) $ (217,337) $ (244,472) $ (451,395) $ (495,691) Interest on notes payable............... (5,897) (3,298) (9,016) (5,249) (12,900) (9,869) Allowance for funds used during construction-- Borrowed funds....... 2,738 4,952 4,314 9,004 13,865 17,164 Equity funds......... 1,960 5,706 3,544 10,786 16,529 20,797 Income taxes applicable to nonoperating activities............ 3,314 2,052 6,198 2,418 15,009 5,165 Provision for dividends on company- obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities............ (7,428) (7,428) (14,855) (14,076) (29,639) (22,556) Loss on nuclear plant closure............... -- -- -- -- (885,611) -- Income tax effect of nuclear plant closure............... -- -- -- -- 362,952 -- Miscellaneous--net..... (5,780) (12,378) (7,681) (21,250) (82,757) (26,935) ---------- ---------- ---------- ---------- ----------- ---------- $ (115,985) $ (129,757) $ (234,833) $ (262,839) $(1,053,947) $ (511,925) ---------- ---------- ---------- ---------- ----------- ---------- Net Income (Loss) Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle.............. $ 104,453 $ 25,067 $ 176,286 $ 106,342 $ (90,194) $ 574,372 Extraordinary Loss, Less Applicable Income Taxes.................. -- -- -- -- (810,335) -- Cumulative Effect of Change in Accounting Principle.............. -- -- -- 196,700 -- 196,700 ---------- ---------- ---------- ---------- ----------- ---------- Net Income (Loss)....... $ 104,453 $ 25,067 $ 176,286 $ 303,042 $ (900,529) $ 771,072 Provision for Dividends on Preferred and Preference Stocks...... 14,462 15,485 29,009 31,012 58,483 62,450 ---------- ---------- ---------- ---------- ----------- ---------- Net Income (Loss) on Common Stock........... $ 89,991 $ 9,582 $ 147,277 $ 272,030 $ (959,012) $ 708,622 ========== ========== ========== ========== =========== ==========
The accompanying Notes to Financial Statements are an integral part of the above statements. 55 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31, ASSETS 1998 1997 ------ ----------- ------------ (THOUSANDS OF DOLLARS) Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $1,006 million and $1,131 million, respectively)................. $27,461,861 $27,519,365 Less--Accumulated provision for depreciation....... 14,924,147 11,645,985 ----------- ----------- $12,537,714 $15,873,380 Nuclear fuel, at amortized cost.................... 920,081 906,043 ----------- ----------- $13,457,795 $16,779,423 ----------- ----------- Investments: Nuclear decommissioning funds...................... $ 2,118,263 $ 1,855,697 Subsidiary companies............................... 50,160 48,605 Other investments, at cost......................... 40,778 39,002 ----------- ----------- $ 2,209,201 $ 1,943,304 ----------- ----------- Current Assets: Cash............................................... $ 170 $ -- Temporary cash investments......................... 23,207 72,634 Special deposits................................... 1,043 271 Receivables-- Customers........................................ 1,085,057 873,418 Other............................................ 68,060 130,537 Provisions for uncollectible accounts............ (17,304) (17,544) Coal and fuel oil, at average cost................. 205,172 120,664 Materials and supplies, at average cost............ 258,689 255,338 Deferred income taxes related to current assets and liabilities....................................... 53,760 179,493 Prepayments and other.............................. 133,466 125,507 ----------- ----------- $ 1,811,320 $ 1,740,318 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Regulatory assets.................................. $ 4,471,689 $ 1,685,235 Coal reserves...................................... 140,533 194,769 Other.............................................. 85,996 115,354 ----------- ----------- $ 4,698,218 $ 1,995,358 ----------- ----------- $22,176,534 $22,458,403 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 56 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER CAPITALIZATION AND LIABILITIES 1998 31, 1997 ------------------------------ ----------- ----------- (THOUSANDS OF DOLLARS) Capitalization (see accompanying statements): Common stock equity.................................. $ 4,842,554 $ 4,866,438 Preferred and preference stocks without mandatory redemption requirements............................. 506,829 507,053 Preference stock subject to mandatory redemption requirements........................................ 168,368 174,328 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities*............. 350,000 350,000 Long-term debt....................................... 5,559,783 5,562,883 ----------- ----------- $11,427,534 $11,460,702 ----------- ----------- Current Liabilities: Notes payable........................................ $ 489,846 $ 158,150 Current portion of long-term debt, redeemable preference stock and capitalized lease obligations.. 327,448 772,831 Accounts payable..................................... 611,823 490,124 Accrued interest..................................... 164,872 167,807 Accrued taxes........................................ 299,450 198,556 Dividends payable.................................... 105,957 106,083 Customer deposits.................................... 54,383 55,214 Accrued plant closing costs.......................... 110,376 135,000 Other................................................ 123,265 164,897 ----------- ----------- $ 2,287,420 $ 2,248,662 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes................................ $ 3,735,093 $ 3,839,607 Nuclear decommissioning liability for retired plants. 1,214,700 1,301,000 Accumulated deferred investment tax credits.......... 580,601 602,122 Accrued spent nuclear fuel disposal fee and related interest............................................ 710,810 692,673 Obligations under capital leases..................... 417,910 437,950 Regulatory liabilities............................... 610,113 698,750 Other................................................ 1,192,353 1,176,937 ----------- ----------- $ 8,461,580 $ 8,749,039 ----------- ----------- Commitments and Contingent Liabilities (Note 22) $22,176,534 $22,458,403 =========== ===========
*As described in Note 11 of Notes to Financial Statements, the sole asset of ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. The accompanying Notes to Financial Statements are an integral part of the above statements. 57 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CAPITALIZATION
JUNE 30, DECEMBER 31, 1998 1997 ----------- ------------ (THOUSANDS OF DOLLARS) Common Stock Equity: Common stock, $12.50 par value per share-- Outstanding--214,235,397 shares and 214,228,077 shares, respectively............................. $ 2,677,942 $ 2,677,851 Premium on common stock and other paid-in capital.. 2,223,696 2,223,564 Capital stock and warrant expense.................. (15,789) (15,805) Retained earnings (deficit)........................ (43,295) (19,172) ----------- ----------- $ 4,842,554 $ 4,866,438 ----------- ----------- Preferred and Preference Stocks Without Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--13,499,549 shares ................... $ 504,957 $ 504,957 $1.425 convertible preferred stock, cumulative, without par value-- Outstanding--58,851 shares and 65,912 shares, re- spectively....................................... 1,872 2,096 Prior preferred stock, cumulative, $100 par value per share-- No shares outstanding............................. -- -- ----------- ----------- $ 506,829 $ 507,053 ----------- ----------- Preference Stock Subject to Mandatory Redemption Re- quirements: Preference stock, cumulative, without par value-- Outstanding--1,998,560 shares and 2,058,560 shares, respectively............................. $ 199,056 $ 205,016 Current redemption requirements for preference stock included in current liabilities............. (30,688) (30,688) ----------- ----------- $ 168,368 $ 174,328 ----------- ----------- Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securities.............. $ 350,000 $ 350,000 ----------- ----------- Long-Term Debt: First mortgage bonds: Maturing 1998 through 2002--6.00% to 9 3/8%...... $ 880,000 $ 1,060,000 Maturing 2003 through 2012--3.70% to 8 3/8%...... 1,440,400 1,440,400 Maturing 2013 through 2022--5.85% to 9 7/8%...... 1,791,000 1,791,000 Maturing 2023--7 3/4% to 8 3/8%.................. 560,000 560,000 ----------- ----------- $ 4,671,400 $ 4,851,400 Sinking fund debentures, due 1999 through 2011-- 2 3/4% to 7 5/8%.................................. 95,167 100,298 Pollution control obligations, due 2007 through 2014--3.45% to 5 7/8%............................. 140,700 142,200 Other long-term debt............................... 831,345 1,016,889 Deposit for retirement of long-term debt........... (995) -- Current maturities of long-term debt included in current liabilities............................... (133,320) (501,445) Unamortized net debt discount and premium.......... (44,514) (46,459) ----------- ----------- $ 5,559,783 $ 5,562,883 ----------- ----------- $11,427,534 $11,460,702 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 58 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS (DEFICIT)
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- -------------------- ---------------------- 1998 1997 1998 1997 1998 1997 -------- ---------- -------- ---------- ---------- ---------- (THOUSANDS OF DOLLARS) Balance at Beginning of Period................. $(47,579) $1,334,714 $(19,172) $1,157,956 $1,258,599 $ 892,836 Add--Net income (loss).. 104,453 25,067 176,286 303,042 (900,529) 771,072 -------- ---------- -------- ---------- ---------- ---------- $ 56,874 $1,359,781 $157,114 $1,460,998 $ 358,070 $1,663,908 -------- ---------- -------- ---------- ---------- ---------- Deduct-- Dividends declared on-- Common stock........ $ 85,694 $ 85,691 $171,387 $ 171,381 $ 342,769 $ 342,755 Preferred and preference stocks.. 14,419 15,463 28,966 30,990 58,135 62,121 Other capital stock transactions--net... 56 28 56 28 461 433 -------- ---------- -------- ---------- ---------- ---------- $100,169 $ 101,182 $200,409 $ 202,399 $ 401,365 $ 405,309 -------- ---------- -------- ---------- ---------- ---------- Balance at End of Period (Includes $360 million of appropriated retained earnings at June 30, 1998)......... $(43,295) $1,258,599 $(43,295) $1,258,599 $ (43,295) $1,258,599 ======== ========== ======== ========== ========== ==========
The accompanying Notes to Financial Statements are an integral part of the above statements. 59 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- -------------------- ----------------------- 1998 1997 1998 1997 1998 1997 --------- --------- --------- --------- ---------- ----------- (THOUSANDS OF DOLLARS) Cash Flow from Operating Activities: Net income (loss)...... $ 104,453 $ 25,067 $ 176,286 $ 303,042 $(900,529) $ 771,072 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........ 245,342 256,426 506,061 515,140 1,023,251 1,025,019 Deferred income taxes and investment tax credits--net........ (20,160) 10,018 4,340 385 (344,933) 83,038 Extraordinary loss related to write-off of certain net regulatory assets... -- -- -- -- 810,335 -- Cumulative effect of a change in accounting principle........... -- -- -- (196,700) -- (196,700) Loss on nuclear plant closure............. -- -- -- -- 885,611 -- Payments for revenue refunds............. (10,966) -- (45,470) -- -- -- Equity component of allowance for funds used during construction........ (1,960) (5,706) (3,544) (10,786) (16,529) (20,797) Recovery of regulatory assets... -- 3,818 -- 7,636 7,636 15,272 Provisions/(payments) for liability for separation costs-- net................. (389) 1,428 7,036 802 22,219 845 Net effect on cash flows of changes in: Receivables........ (213,687) (12,911) (149,402) 90,081 (218,289) 21,105 Coal and fuel oil.. (48,322) (7,513) (84,508) (39,788) (25,022) (13,169) Materials and supplies.......... (2,899) 571 (6,638) 541 34,480 18,347 Accounts payable excluding separation costs-- net............... 138,721 (20,957) 116,763 (59,693) 154,778 (3,032) Accrued interest and taxes......... 89,692 (27,787) 97,959 33,605 57,889 (76,297) Other changes in certain current assets and liabilities....... 34,984 62,415 51,688 98,583 247,016 224,151 Other--net........... (480) 47,457 57,686 113,359 122,247 189,050 --------- --------- --------- --------- ---------- ----------- $ 314,329 $ 332,326 $ 728,257 $ 856,207 $1,860,160 $ 2,037,904 --------- --------- --------- --------- ---------- ----------- Cash Flow from Investing Activities: Construction expenditures.......... $(249,136) $(216,138) $(420,122) $(425,844) $ (963,904) $ (857,834) Nuclear fuel expenditures.......... (34,418) (41,943) (94,967) (90,716) (189,625) (228,946) Sale of generating plants................ -- -- 177,454 -- 238,245 -- Equity component of allowance for funds used during construction.......... 1,960 5,706 3,544 10,786 16,529 20,797 Contributions to nuclear decommissioning funds................. -- -- (80,077) (80,181) (114,721) (116,284) Other investments and special deposits...... (85) (4,998) (946) (29,300) 23,651 (29,304) --------- --------- --------- --------- ---------- ----------- $(281,679) $(257,373) $(415,114) $(615,255) $ (989,825) $(1,211,571) --------- --------- --------- --------- ---------- ----------- Cash Flow from Financing Activities: Issuance of securities-- Long-term debt........ $ -- $ -- $ -- $ 297,663 $ -- $ 297,663 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities........... -- -- -- 150,000 -- 150,000 Capital stock......... 91 39 224 238 274 802 Retirement and redemption of securities-- Long-term debt........ (8,139) (72,571) (372,183) (574,482) (532,469) (739,370) Capital stock......... (6,092) (3,040) (6,225) (3,239) (47,096) (44,645) Deposits and securities held for retirement and redemption of securities............ 3,069 2,102 (995) (229) (766) 746 Premium paid on early redemption of long- term debt............. -- -- -- (9,500) -- (9,500) Cash dividends paid on capital stock......... (104,480) (105,457) (215,334) (210,913) (431,336) (427,052) Proceeds from sale/leaseback of nuclear fuel.......... 44,861 36,801 61,426 81,271 130,109 238,273 Nuclear fuel lease principal payments.... (128,823) (36,305) (161,009) (85,855) (241,566) (190,627) Increase (Decrease) in short-term borrowings............ 110,196 134,000 331,696 135,000 226,096 (70,650) --------- --------- --------- --------- ---------- ----------- $ (89,317) $ (44,431) $(362,400) $(220,046) $ (896,754) $ (794,360) --------- --------- --------- --------- ---------- ----------- Increase (Decrease) in Cash and Temporary Cash Investments............ $ (56,667) $ 30,522 $ (49,257) $ 20,906 $ (26,419) $ 31,973 Cash and Temporary Cash Investments at Beginning of Period.... 80,044 19,274 72,634 28,890 49,796 17,823 --------- --------- --------- --------- ---------- ----------- Cash and Temporary Cash Investments at End of Period................. $ 23,377 $ 49,796 $ 23,377 $ 49,796 $ 23,377 $ 49,796 ========= ========= ========= ========= ========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 60 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. See Unicom's Note 1 of Notes to Financial Statements for a discussion of significant accounting policies, except for the following specific policies discussed below and the subcaption "Earnings per Share" in Unicom's Note 1. Income Taxes. ComEd is included in the consolidated federal and state income tax returns filed by Unicom. Current and deferred income taxes of the consolidated group are allocated to ComEd as if ComEd filed separate tax returns. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book/tax timing differences reverse. Prior years' deferred investment tax credits are amortized through credits to income generally over the lives of the related property. Income tax credits resulting from interest charges applicable to nonoperating activities, principally construction, are classified as other income. Interest. Total interest costs incurred on debt, leases and other obligations were $133 million and $147 million for the three months ended June 30, 1998 and 1997, respectively, $270 million and $299 million for the six months ended June 30, 1998 and 1997, respectively, and $559 million and $604 million for the twelve months ended June 30, 1998 and 1997, respectively. Statements of Consolidated Cash Flows. For purposes of the Statements of Consolidated Cash Flows, temporary cash investments, generally investments maturing within three months at the time of purchase, are considered to be cash equivalents. Supplemental cash flow information for the three months, six months and twelve months ended June 30, 1998 and 1997 was as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ------------------- ----------------- ------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- (THOUSANDS OF DOLLARS) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized). $95,583 $97,518 $246,120 $255,253 $493,127 $518,027 Income taxes (net of refunds)............ $ 506 $ 48,503 $ 506 $ 55,501 $ 226,373 $ 285,137 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obliga- tions incurred........ $ 45,983 $ 39,376 $ 63,979 $ 85,773 $ 136,618 $244,261
(2) ACCOUNTING EFFECTS RELATED TO THE 1997 ACT. See Unicom's Note 2 of Notes to Financial Statements, except for EPS information. (3) CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. See Unicom's Note 3 of Notes to Financial Statements, except for pro forma and EPS information. If the new accounting method had been in effect for the full twelve months ended June 30, 1997, the pro forma unaudited net income would have been $540,138,000, excluding the cumulative effect of a change in accounting principle. (4) RATE MATTERS. See Unicom's Note 4 of Notes to Financial Statements. (5) CLOSURE AND SALE OF PLANTS. See Unicom's Note 5 of Notes to Financial Statements, except for EPS information. 61 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED (6) AUTHORIZED SHARES AND VOTING RIGHTS OF CAPITAL STOCK. At June 30, 1998, the authorized shares of capital stock were: common stock--250,000,000 shares; preference stock--22,308,560 shares; $1.425 convertible preferred stock-- 58,851 shares; and prior preferred stock--850,000 shares. The preference and prior preferred stocks are issuable in series and may be issued with or without mandatory redemption requirements. Holders of shares at any time outstanding, regardless of class, are entitled to one vote for each share held on each matter submitted to a vote at a meeting of shareholders, with the right to cumulate votes in all elections for directors. See Unicom's Note 2 of Notes to Financial Statements regarding the ICC's order approving ComEd's proposed issuance of up to $3.4 billion of securities and the planned use of the proceeds to refinance debt and equity, as permitted under the 1997 Act. (7) COMMON EQUITY. At June 30, 1998, shares of common stock were reserved for the following purposes: Conversion of $1.425 convertible preferred stock................... 60,028 Conversion of warrants............................................. 25,490 ------ 85,518 ======
Shares of common stock issued for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
SIX MONTHS THREE MONTHS ENDED ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ------------- -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- ------ ------ --------- ---------- Conversion of $1.425 convertible preferred stock.................. 2,927 1,272 7,196 7,654 8,803 26,365 Conversion of warrants.. 40 131 124 312 174 1,271 --------- --------- ----- ----- --------- ---------- 2,967 1,403 7,320 7,966 8,977 27,636 ========= ========= ===== ===== ========= ==========
At June 30, 1998 and December 31, 1997, 76,472 and 76,868 common stock purchase warrants, respectively, were outstanding. The warrants entitle the holders to convert such warrants into common stock at a conversion rate of one share of common stock for three warrants. ComEd's retained earnings account had a deficit balance of $43 million and $19 million at June 30, 1998 and December 31, 1997, respectively. As of June 30, 1998 and December 31, 1997, $360 million and $384 million, respectively, of retained earnings had been appropriated for future dividend payments. See Unicom's Note 2 of Notes to Financial Statements regarding the ICC's order approving ComEd's proposed issuance of up to $3.4 billion of securities and the planned use of the proceeds to refinance debt and equity, as permitted under the 1997 Act. (8) STOCK OPTION AWARDS/EMPLOYEE STOCK PURCHASE PLAN. See Unicom's Note 8 of Notes to Financial Statements, except for EPS information. (9) PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS. See Unicom's Note 9 of Notes to Financial Statements. (10) PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS. See Unicom's Note 10 of Notes to Financial Statements. 62 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED (11) COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY THE COMPANY'S SUBORDINATED DEBT SECURITIES. See Unicom's Note 11 of Notes to Financial Statements. (12) LONG-TERM DEBT. See Unicom's Note 12 of Notes to Financial Statements. (13) LINES OF CREDIT. See the first paragraph of Unicom's Note 13 of Notes to Financial Statements. (14) DISPOSAL OF SPENT NUCLEAR FUEL. See Unicom's Note 14 of Notes to Financial Statements. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS. See Unicom's Note 15 of Notes to Financial Statements. (16) PENSION AND POSTRETIREMENT BENEFITS. See Unicom's Note 16 of Notes to Financial Statements. (17) SEPARATION PLAN COSTS. See Unicom's Note 17 of Notes to Financial Statements, except for EPS information. (18) INCOME TAXES. The components of the net deferred income tax liability at June 30, 1998 and December 31, 1997 were as follows:
JUNE 30, DECEMBER 31, 1998 1997 ---------- ------------ (THOUSANDS OF DOLLARS) Deferred income tax liabilities: Accelerated cost recovery and liberalized deprecia- tion, net of removal costs.......................... $3,992,741 $4,051,191 Overheads capitalized................................ 119,701 131,509 Repair allowance..................................... 224,810 231,697 Regulatory assets recoverable through future rates... 692,077 785,354 Deferred income tax assets: Postretirement benefits.............................. (324,322) (305,220) Unamortized investment tax credits................... (197,991) (206,112) Regulatory liabilities to be settled through future rates............................................... (610,113) (698,750) Nuclear plant closure................................ (65,173) (194,244) Other--net........................................... (150,397) (135,311) ---------- ---------- Net deferred income tax liability..................... $3,681,333 $3,660,114 ========== ==========
The $21 million increase in the net deferred income tax liability from December 31, 1997 to June 30, 1998 is comprised of $26 million in deferred income tax expenses reflected in operations and a $5 million decrease in regulatory assets net of regulatory liabilities pertaining to income taxes for the period. The amount of accelerated cost recovery and liberalized depreciation included in deferred income tax liabilities as of June 30, 1998, includes amounts related to the regulatory asset for impaired production plant. The amount of regulatory assets included in deferred income tax liabilities primarily relates to the equity component of AFUDC which is recorded on an after-tax basis, the borrowed funds component of AFUDC which was previously recorded net of tax and other temporary differences for which the related tax effects were not previously recorded. The amount of other regulatory liabilities included in deferred income tax assets primarily relates to deferred income taxes provided at rates in excess of the current statutory rate. 63 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONTINUED The components of net income tax expense charged (credited) to continuing operations for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ------------------ -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- (THOUSANDS OF DOLLARS) Electric operating in- come: Current income taxes... $ 81,954 $ 15,967 $144,046 $ 84,717 $ 338,964 $ 282,054 Deferred income taxes.. (14,029) 18,591 (21,608) 16,918 20,130 116,455 Investment tax credits deferred--net......... (6,888) (7,897) (14,048) (15,794) (29,270) (34,840) Other (income) and de- ductions, primarily de- ferred income taxes in 1997................... (3,360) (1,836) (13,556) (2,119) (419,061) (4,466) --------- -------- -------- -------- --------- --------- Net income taxes charged (credited) to continu- ing operations......... $ 57,677 $ 24,825 $ 94,834 $ 83,722 $ (89,237) $ 359,203 ========= ======== ======== ======== ========= =========
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, six months and twelve months ended June 30, 1998 and 1997:
TWELVE MONTHS THREE MONTHS ENDED SIX MONTHS ENDED ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ------------------ ------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- -------- Pre-tax book income (loss) (thousands)..... $162,130 $49,892 $271,120 $190,064 $(179,431) $933,575 Effective income tax rate................... 35.6% 49.8% 35.0% 44.0% 49.7% 38.5%
The principal differences between net income taxes charged (credited) to continuing operations and the amounts computed at the federal statutory rate of 35% for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 -------------------- ----------------- -------------------- 1998 1997 1998 1997 1998 1997 --------- --------- ------- -------- --------- --------- (THOUSANDS OF DOLLARS) Federal income taxes computed at statutory rate................... $ 56,745 $ 4,092 $94,892 $ 79,402 $ (62,801) $ 339,632 Equity component of AFUDC which was excluded from taxable income................. (110) (1,997) (198) (3,775) (4,743) (7,279) Amortization of invest- ment tax credits, net of deferred income taxes ................. (4,517) (7,897) (13,728) (15,794) (43,274) (34,840) State income taxes, net of federal income tax- es..................... 7,529 2,804 13,663 14,451 4,242 48,709 Differences between book and tax accounting, primarily property-re- lated deductions....... (1,970) 27,823 205 9,438 17,339 12,981 --------- --------- ------- -------- --------- --------- Net income taxes charged (credited) to continu- ing operations......... $ 57,677 $ 24,825 $94,834 $ 83,722 $ (89,237) $ 359,203 ========= ========= ======= ======== ========= =========
The effects of an income tax refund related to prior years were recorded in the third quarter of 1996, resulting in a positive impact of $26 million (after-tax). (19) TAXES, EXCEPT INCOME TAXES. Provisions for taxes, except income taxes, for the three months, six months and twelve months ended June 30, 1998 and 1997 were as follows:
THREE MONTHS ENDED SIX MONTHS ENDED TWELVE MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 ------------------- ----------------- ------------------- 1998 1997 1998 1997 1998 1997 --------- --------- -------- -------- --------- --------- (THOUSANDS OF DOLLARS) Illinois public utility revenue................ $ 44,247 $ 55,654 $101,928 $107,409 $ 222,869 $ 223,978 Illinois invested capi- tal.................... -- 25,827 -- 52,017 47,486 104,501 Illinois electricity distribution tax....... 24,911 -- 51,629 -- 51,629 -- Municipal utility gross receipts............... 38,556 37,967 81,107 79,070 170,131 168,384 Real estate............. 29,229 33,395 64,360 72,562 141,976 148,770 Municipal compensation.. 24,214 17,815 44,085 36,925 85,446 78,665 Other--net.............. 23,442 17,491 48,456 41,267 81,945 70,139 --------- --------- -------- -------- --------- --------- $ 184,599 $ 188,149 $391,565 $389,250 $ 801,482 $ 794,437 ========= ========= ======== ======== ========= =========
64 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--CONCLUDED Effective January 1, 1998, the Illinois invested capital tax was repealed and the Illinois electricity distribution tax was enacted as a replacement. The new tax is based on the kilowatthours delivered to ultimate consumers. (20) LEASE OBLIGATIONS. See the first and second paragraphs of Unicom's Note 20 of Notes to Financial Statements. Future minimum rental payments at June 30, 1998 for operating leases are estimated to aggregate $321 million, including $21 million in 1998, $40 million in 1999, $37 million in 2000, $31 million in 2001, $27 million in 2002 and $165 million in 2003-2024. (21) JOINT PLANT OWNERSHIP. See Unicom's Note 21 of Notes to Financial Statements. (22) COMMITMENTS AND CONTINGENT LIABILITIES. See Unicom's Note 22 of Notes to Financial Statements. (23) SUBSEQUENT EVENTS. See Unicom's Note 23 of Notes to Financial Statements, expect for Notes issued by UT Holdings. 65 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CHANGES IN THE ELECTRIC UTILITY INDUSTRY. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Changes in the Electric Utility Industry," which is incorporated herein by this reference, except for EPS information. LIQUIDITY AND CAPITAL RESOURCES. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS," which is incorporated herein by this reference. REGULATION. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation," which is incorporated herein by this reference. RESULTS OF OPERATIONS. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Results of Operations" (other than the first paragraph thereof), which is incorporated herein by this reference, except for EPS information. 66 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Since January 1, 1998, civil penalties were imposed on ComEd on three occasions for violations of NRC regulations in amounts aggregating $495,000. To ComEd's knowledge, there is one current enforcement issue outstanding and under review by the NRC. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects. ComEd was dismissed as a defendant in both actions. With respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts against Cotter on eight bellwether plaintiffs' claims in the 1989 cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions have been settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v. Cotter (United States District Court for the District of Colorado, Civil Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991 cases. The verdict against Cotter included compensatory and punitive damages totaling approximately $3 million (not including prejudgment interest, which has not yet been calculated, and which Cotter anticipates may bring the total award to under $6 million), together with medical monitoring. Cotter intends to appeal the verdict. Although the other 1991 cases will necessarily involve the resolution of numerous contested issues of fact and law, Unicom and ComEd's determination is that these actions will not have a material impact on their financial position or results of operations. CERCLA provides for immediate response and removal actions coordinated by the U.S. EPA to releases of hazardous substances into the environment and authorizes the U.S. Government either to clean up sites at which hazardous substances have created actual or potential environmental hazards or to order persons responsible for the situation to do so. Under CERCLA, generators and transporters of hazardous substances, as well as past and present owners and operators of hazardous waste sites, are made strictly, jointly and severally liable for the cleanup costs of waste at sites, most of which are listed by the U.S. EPA on the NPL. These responsible parties can be ordered to perform a cleanup, can be sued for costs associated with a U.S. EPA directed cleanup, may voluntarily settle with the U.S. Government concerning their liability for cleanup costs, or may voluntarily begin a site investigation and site remediation prior to listing on the NPL under state oversight. Various states, including Illinois, have enacted statutes which contain provisions substantially similar to CERCLA. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. See Note 22 of Notes to Financial Statements for information regarding costs associated with investigating and remediating former MGP sites. From time to time, Unicom and its subsidiaries are, or are claimed to be, in violation of or in default under orders, statutes, rules or regulations relating to environmental controls and other matters, compliance plans imposed upon or agreed to by them or permits issued by various state and federal agencies for the construction or operation of their facilities. Unicom and ComEd do not believe, so far as they now foresee, that such violations or defaults will have a material adverse effect on their future business and operating results, except for events otherwise described in Unicom and ComEd's Annual Reports on Form 10-K for the year ended December 31, 1997 or in these Quarterly Reports on Form 10-Q for the quarterly period ended June 30, 1998, which could have such an effect. 67 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Unicom's annual meeting of shareholders was held on May 28, 1998. At that meeting, each of the persons named in the table below was elected as a director. Vote totals for each director are shown below:
SHARES SHARES NOMINEE VOTED FOR WITHHELD FROM ------- ----------- ------------- Edward A. Brennan..................................... 178,533,032 3,196,722 James W. Compton...................................... 178,483,240 3,246,514 Bruce DeMars.......................................... 178,579,587 3,150,167 Sue L. Gin............................................ 178,560,206 3,169,548 Donald P. Jacobs...................................... 178,485,515 3,244,239 Edgar D. Jannotta..................................... 178,607,541 3,122,213 George E. Johnson..................................... 178,416,504 3,313,250 John W. Rowe.......................................... 178,722,784 3,006,970
Also at the meeting, the appointment by Unicom's Board of Directors of Arthur Andersen LLP as auditors for the year 1998 was approved. A total of 177,725,385 shares voted to approve the appointment, 931,016 shares voted against the appointment and 3,073,353 shares abstained. In addition, the authorization of 7,000,000 additional shares for the Unicom Corporation Long-Term Incentive Plan was approved at the meeting. A total of 150,974,277 shares voted to approve the additional shares, 25,995,004 shares voted against approval of the additional shares and 4,760,473 shares abstained. Also, the authorization of 500,000 additional shares for the Unicom Corporation ESPP was approved at the meeting. A total of 172,458,246 shares voted to approve the additional shares, 4,772,517 shares voted against approval of the additional shares and 4,498,991 shares abstained. ComEd's annual meeting of shareholders was held on May 28, 1998. At that meeting, each of the persons named in the table below was elected as a director. Vote totals for each director are shown below:
SHARES NOMINEE VOTED FOR ------- ----------- Edward A. Brennan................................................... 214,226,742 James W. Compton.................................................... 214,226,742 Bruce DeMars........................................................ 214,226,742 Sue L. Gin.......................................................... 214,226,742 Donald P. Jacobs.................................................... 214,226,742 Edgar D. Jannotta................................................... 214,226,742 George E. Johnson................................................... 214,226,742 John W. Rowe........................................................ 214,226,742
Also at the meeting, the appointment by ComEd's Board of Directors of Arthur Andersen LLP as auditors for the year 1998 was approved. A total of 214,226,742 shares voted to approve the appointment. In addition, the authorization of 7,000,000 additional shares for the Unicom Corporation Long-Term Incentive Plan was approved at the meeting. A total of 214,226,742 shares voted to approve the additional shares. 68 Also, the authorization of 500,000 additional shares for the Unicom Corporation ESPP was approved at the meeting. A total of 214,226,742 shares voted to approve the additional shares. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ------------------------------------------------------------------ (3)-3 By-Laws of Unicom Corporation, effective January 28, 1994, as amended through May 28, 1998. (3)-4 By-Laws of Commonwealth Edison Company, effective September 2, 1988, as amended through May 28, 1998. (12) Statement computing Commonwealth Edison Company ratios of earnings to fixed charges and ratios of earnings to fixed charges and preferred and preference stock dividend requirements. (23)-1 Consent of independent public accountants applicable to Unicom Corporation. (23)-2 Consent of independent public accountants applicable to Commonwealth Edison Company. (27)-1 Financial data schedule of Unicom Corporation. (27)-2 Financial data schedule of Commonwealth Edison Company.
(b) Reports on Form 8-K A Current Report on Form 8-K dated April 23, 1998 was filed by Unicom and ComEd announcing ComEd's filing with the ICC which seeks approval for ComEd to issue up to $3.4 billion in asset-backed securities, which will be backed by certain revenue streams of ComEd. 69 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on the 10th day of August, 1998. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and its subsidiaries thereof. Unicom Corporation Registrant Robert E. Berdelle By __________________________________ Robert E. Berdelle Comptroller (Chief accounting officer and officer duly authorized to sign on behalf of the registrant) Commonwealth Edison Company Registrant Robert E. Berdelle By __________________________________ Robert E. Berdelle Comptroller (Chief accounting officer and officer duly authorized to sign on behalf of the registrant) 70 EXHIBIT INDEX Exhibits filed with or incorporated by reference in Form 10-Q for the quarterly period ended June 30, 1998:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------------------------------------------------------- (3)-3 By-Laws of Unicom Corporation, effective January 28, 1994, as amended through May 28, 1998. (3)-4 By-Laws of Commonwealth Edison Company, effective September 2, 1988, as amended through May 28, 1998. (12) Statement computing Commonwealth Edison Company ratios of earnings to fixed charges and ratios of earnings to fixed charges and preferred and preference stock dividend requirements. (23)-1 Consent of independent public accountants applicable to Unicom Corporation. (23)-2 Consent of independent public accountants applicable to Commonwealth Edison Company. (27)-1 Financial data schedule of Unicom Corporation. (27)-2 Financial data schedule of Commonwealth Edison Company.
EX-3.3 2 BY-LAWS OF UNICOM Exhibit (3)-3 Unicom Corporation Form 10-Q File No. 1-11375 UNICOM CORPORATION BY-LAWS EFFECTIVE JANUARY 28, 1994 AS AMENDED THROUGH MAY 28, 1998
CONTENTS Page Number ------ ARTICLE I. Stock...................................... 1 ARTICLE II. Meetings of Shareholders................... 3 ARTICLE III. Board of Directors......................... 9 ARTICLE IV. Committees of the Board of Directors....... 11 ARTICLE V. Officers................................... 15 ARTICLE VI. Indemnification............................ 20 ARTICLE VII. Miscellaneous.............................. 21 ARTICLE VIII. Alteration, Amendment or Repeal of By-Laws. 22
UNICOM CORPORATION BY-LAWS ---------------- ARTICLE I. STOCK. SECTION 1. Each holder of fully paid stock shall be entitled to a certificate or certificates of stock stating the number and class of shares, and the designation of the series, if any, which such certificate represents. All certificates of stock shall at the time of their issuance be signed either manually or by facsimile signature by the Chairman, the President or a Vice President and by the Secretary or an Assistant Secretary. All certificates of stock shall be sealed with the seal of the Company or a facsimile of such seal, shall be countersigned either manually or by facsimile signature by a Transfer Agent and shall be authenticated by manual signature and registered by a Registrar. The Board of Directors shall appoint one or more Transfer Agents, none of whom shall be officers of the Company authorized to sign certificates of stock, and one or more Registrars, each of which Registrars shall be a bank or trust company. Certificates of stock shall not be valid until countersigned by a Transfer Agent and authenticated and registered by a Registrar in the manner provided by the Board of Directors. SECTION 2. Shares of stock shall be transferable only on the books of the Company and, except as hereinafter provided or as otherwise required by law, shall be transferred only upon proper endorsement and surrender of the certificates issued therefor. If an outstanding certificate of stock shall be lost, destroyed or stolen, the holder thereof may have a new certificate upon producing evidence satisfactory to the Board of Directors of such loss, destruction or theft, and upon furnishing to the Company, the Transfer Agents and the Registrars a bond of indemnity deemed sufficient by the Board of Directors against claims under the outstanding certificate. -1- SECTION 3. The certificates for each class or series of stock shall be numbered and issued in consecutive order and a record shall be kept of the name and address of the person to whom each certificate is issued, the number of shares represented by the certificate and the number and date of the certificate. All certificates exchanged or returned to the Company or the Transfer Agent for transfer shall be canceled and filed. SECTION 4. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination of shareholders, such date in any case to be not more than sixty days and, for a meeting of shareholders, not less than ten days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days, immediately preceding such meeting. SECTION 5. If any subscription for stock in the Company or any installment of such subscription shall be unpaid when due, as the Board of Directors shall have determined the time for payment, and shall continue unpaid for twenty days after demand for the amount due, made either in person or by written notice duly mailed to the last address, as it appears on the records of the Company, of the subscriber or other person by whom the subscription or installment shall be payable, the stock or subscription upon which payment shall be so due shall, upon the expiration of said twenty days, become and be forfeited to the Company without further action, demand or notice, and such stock or subscription may be sold at public sale, subject to payment of the amount due and unpaid, plus all costs and expenses incurred by the Company in that connection, at a time and place to be stated in a written notice to be mailed to the recorded address of the delinquent subscriber or other person in default on the subscription at least ten days prior to the time fixed for such sale; provided, that the excess of proceeds of such sale realized over the amount due and unpaid on said stock or subscription shall be paid to the delinquent subscriber of other person in default on the subscription, or to his or her legal representative; and, provided further, that no forfeiture of stock, or of any amounts paid upon a subscription therefor, -2- shall be declared as against the estate of any decedent before distribution shall have been made of the estate. The foregoing provisions for the forfeiture and sale of stock or subscriptions shall not exclude any other remedy which may lawfully be enforceable at any time, by forfeiture of stock or of amounts theretofore paid or otherwise, against any person for nonpayment of a subscription or of any installment thereof. SECTION 6. Transfers of shares shall be made only on the books of the Company by the registered holder thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney or successor thereunto authorized by power of attorney or by documents duly executed and filed with the Secretary or Transfer Agent of the Company, and upon surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the Company shall be deemed the owner thereof for all purposes as regards the Company. SECTION 7. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Illinois. ARTICLE II. MEETINGS OF SHAREHOLDERS. SECTION 1. (a) The regular annual meeting of the shareholders of the Company for the election of Directors and for the transaction of such other business as may properly come before the meeting shall be held on such day in April or May of each year as the Board of Directors may by resolution determine. Each such regular annual meeting and each special meeting of the shareholders shall be held at such place as may be fixed by the Board of Directors and at such hour as the Board of Directors shall order. (b) Only such business shall be conducted at an annual meeting of shareholders as shall have been properly brought -3- before the meeting. For business to be properly brought before the meeting, it must be: (i) authorized by the Board of Directors and specified in the notice, or a supplemental notice, of the meeting, (ii) otherwise be brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a shareholder of the Company who is a shareholder of record at the time of giving of the notice provided for in this Section, who shall be entitled to vote at such annual meeting and who complies with the procedures set forth in this Section 1(b). For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in proper written form to the Secretary of the Company. To be timely, a shareholder's notice must be delivered to or mailed and received at the principal executive offices of the Company not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder in order to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or, if earlier, the day on which public announcement of the date of the annual meeting was made. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. To be in proper written form, a shareholder's notice to the Secretary shall set forth in writing as to each matter the shareholder proposes to bring before the meeting (i) a brief description of such matter and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Company's books, of the shareholder proposing such business, (iii) the number of shares of stock of the Company which are beneficially owned by the shareholder, (iv) a description of all arrangements or understandings between such shareholder and any other person(s) (including their names) in connection with the proposal of such business by such shareholder and any material interest of the shareholder in such business and (v) a representation that such shareholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting. Notwithstanding anything in the By-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 1(b). -4- The chairman of an annual meeting at which any business is proposed by a shareholder shall have sole authority to determine, if the facts warrant, that such business was not properly brought before the meeting in accordance with the provisions of this Section 1(b), and, if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. For purposes of this Section 1(b), "public announcement" shall include disclosure in a press release issued to one or more national financial or general news services or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. SECTION 2. Special meetings of the shareholders may be called by the Chairman, by the Board of Directors, by a majority of the Directors individually or by the holders of not less than one-fifth of the total outstanding shares of capital stock of the Company. SECTION 3. Written notice stating the place, day and hour of the meeting of the shareholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets not less than twenty nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman, the Secretary or the persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at the shareholder's address as it appears upon the records of the Company, with postage thereon prepaid. SECTION 4. At all meetings of the shareholders, a majority of the outstanding shares of stock, entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum for consideration of such matter, but the shareholders represented at any meeting, though less than a quorum, may adjourn the meeting to some other day or sine die. If a quorum is present, the affirmative vote of the majority of the shares of stock represented at the meeting and entitled to vote on a matter shall be the act of the shareholders, unless the vote of -5- a greater number or voting by classes is required by law or the articles of incorporation. SECTION 5. At every meeting of the shareholders, each outstanding share of stock shall be entitled to one vote on each matter submitted for a vote. In all elections for Directors, every shareholder shall have the right to vote the number of shares owned by such shareholder for as many persons as there are Directors to be elected, or to cumulate such votes and give one candidate as many votes as shall equal the number of Directors to be elected multiplied by the number of such shares or to distribute such cumulative votes in any proportion among any number of candidates. A shareholder may vote either in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him or her by signing an appointment form and delivering it to the person so appointed. SECTION 6. Any meeting at which a quorum of shareholders is present, in person or by proxy, may adjourn from time to time without notice, other than announcement at such meeting, until its business is completed. At the adjourned meeting, the Company may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting. SECTION 7. The Secretary of the Company shall make or cause to be made, within twenty days after the record date for a meeting of shareholders of the Company or ten days before such meeting, whichever is earlier, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for at least ten days prior to such meeting, shall be kept on file at the registered office of the Company and shall be subject to inspection by any shareholder, and to copying at such shareholder's expense, at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. SECTION 8. The Chairman and the Secretary of the Company shall, when present, act as chairman and secretary, respectively, of each meeting of the shareholders. -6- SECTION 9. At any meeting of shareholders, the chairman of the meeting may, or upon the request of any shareholder shall, appoint one or more persons as inspectors for such meeting, unless an inspector or inspectors shall have been previously appointed for such meeting by the Chairman. Such inspectors shall ascertain and report the number of shares of stock represented at the meeting, based upon their determination of the validity and effect of proxies, count all votes and report the results and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the shareholders. SECTION 10. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any shareholder shall demand that voting be by ballot. Section 11. Only persons who are nominated in accordance with the procedures set forth in this Section 11 shall be eligible for election at a meeting of shareholders as directors of the Company. Nominations of persons for election to the Board of Directors of the Company may be made at a meeting of shareholders (a) by or at the direction of the Board of Directors or a committee of the Board of Directors or (b) by any shareholder of the Company who is a shareholder of record at the time of giving of notice provided for in this Section, who shall be entitled to vote for the election of directors at the meeting and who complies with the procedures set forth in this Section 11. Any nomination by a shareholder shall be made pursuant to timely notice in writing to the Secretary of the Company. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal executive offices of the Company not less than 90 days nor more than 120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 30 days before or after such anniversary date, notice by the shareholder in order to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or, if earlier, the day on which public announcement of the date of the annual meeting was made. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's -7- notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the shareholder giving the notice (i) the name and address, as they appear on the Company's books, of such shareholder, (ii) the number of shares of stock of the Company which are beneficially owned by such shareholder, (iii) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person(s) (including their names) pursuant to which the nomination(s) are made by such shareholder, (iv) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the persons named in such shareholder's notice and (v) any other information relating to such shareholder that is or would be required to be disclosed pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Company that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. The chairman of the meeting at which a shareholder nomination is presented shall have sole authority to determine, if the facts warrant, that a nomination was not made in accordance with the procedures prescribed by this Section 11, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Section 11, a shareholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Section. For purposes of this Section 11, "public announcement" shall include disclosure in a press release issued to one or more national financial or general news services or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended. -8- ARTICLE III. BOARD OF DIRECTORS. SECTION 1. The business and affairs of the Company shall be managed by or under the direction of the Board of Directors. The number of Directors of the Company shall be not less than eight nor more than thirteen. The Directors shall be elected at each annual meeting of the shareholders, but if for any reason the election shall not be held at an annual meeting, it may be subsequently held at any special meeting of the shareholders called for that purpose after proper notice. The Directors so elected shall hold office until the next annual meeting and until their respective successors, willing to serve, shall have been elected and qualified. Directors need not be residents of the State of Illinois or shareholders of the Company. No person shall be eligible for nomination or renomination as a Director by the management of the Company who, prior to the date of election, shall have attained age seventy-two. No person who is an employe or a former employe of the Company or of a subsidiary of the Company shall be eligible for nomination or renomination as a Director by the management of the Company for a term commencing after such person ceases to be such an employe; provided, however, that any Director of the Company who was a Director of Commonwealth Edison Company, an Illinois corporation, in office on June 15, 1989 who is or has been such an employe may be renominated as a Director unless such person shall have attained age sixty-five on or before the date of election of Directors. SECTION 2. Any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled by election at an annual meeting or at a special meeting of shareholders called for that purpose; provided, however, that any vacancy in the Board of Directors arising between meetings of shareholders by reason of an increase in the number of directors or otherwise may be filled by the vote of a majority of the directors then in office, although less than a quorum. Any directors so elected shall serve until the next annual meeting of shareholders. SECTION 3. A meeting of the Board of Directors shall be held immediately, or as soon as practicable, after the annual election of Directors in each year, provided a quorum for such meeting can be obtained. Notice of every meeting of the Board, -9- stating the time and place at which such meeting will be held, shall be given to each Director personally, by telephone or by other means of communication at least one day, or by depositing the same in the mails properly addressed at least two days before the day of such meeting. A meeting of the Board of Directors may be called at any time by the Chairman or by any two Directors and shall be held at such place as shall be specified in the notice for such meeting. SECTION 4. A majority of the number of Directors then in office, but not less than six, shall constitute a quorum for the transaction of business at any meeting of the Board, but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn sine die. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 5. Each member of the Board not receiving a salary from the Company or a subsidiary of the Company shall be paid such fees as the Board of Directors may from time to time, by resolution adopted by the affirmative vote of a majority of the Directors then in office, and irrespective of any personal interest of any of its members, determine. The Directors shall be paid their reasonable expenses, if any, of attendance at each meeting of the Board of Directors. Members of any committee of the Board of Directors may be allowed like fees and expenses for service on or attendance at meetings of such committee. No such payment shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. SECTION 6. A Director of the Company who is present at a meeting of the Board of Directors at which action is taken on any corporate matter shall be conclusively presumed to have assented to the action taken unless his or her dissent shall be entered in the minutes of the meeting or unless he shall file his or her written dissent to such action with the person acting as Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Company immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 7. At the first meeting of the Board of Directors following the annual meeting of shareholders each year, the Board shall elect a Lead Director. The Lead Director shall be -10- elected from among the Outside Directors of the Company. For purposes hereof, "Outside Directors" shall be those who are not and never have been employees of the Company or any of its direct or indirect subsidiaries. The duties of the Lead Director shall be to convene and chair meetings of the Outside Directors and to assume other responsibilities which the Outside Directors might designate from time to time. The Lead Director will consult with other Outside Directors as to appropriate items for discussion at each such meeting. ARTICLE IV. COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. The Board of Directors may from time to time create committees, standing or special, each committee to consist of two or more Directors of the Company, and the Board shall appoint Directors to serve on such committees and confer such powers upon such committees and revoke such powers and terminate the existence of such committees, as the Board at its pleasure may determine, subject to the limitations set forth in Section 8.40(c) of the Illinois Business Corporation Act of 1983, as amended from time to time. SECTION 2. Meetings of any committee of the Board may be called at any time by the Chairman, by any two Directors or by the chairman of the committee the meeting of which is being called and shall be held at such place as shall be designated in the notice of such meeting. Notice of each committee meeting stating the time and place at which such meeting will be held shall be given to each member of the committee personally, or by telecopy, or by depositing the same in the mails properly addressed, at least one day before the day of such meeting. A majority of the members of a committee shall constitute a quorum thereof but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn sine die. A majority vote of the members of a committee present at a meeting at which a quorum is present shall be necessary for committee action. SECTION 3. The Board of Directors may from time to time designate from among the Directors alternates to serve on one or more committees as occasion may require. Whenever a quorum cannot be secured for any meeting of any committee from among the regular members thereof and designated alternates, the -11- member or members of such committee present at such meeting and not disqualified from voting thereat, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of such absent or disqualified member. SECTION 4. Every Director of the Company, or member of any committee designated by the Board of Directors pursuant to authority conferred by these By-Laws, shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any of the Company's officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director or member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. SECTION 5. Unless otherwise limited by the Board of Directors and subject to the limitations set forth in the next sentence, each committee of the Board of Directors consisting of two or more Directors may exercise the authority of the Board. Notwithstanding any other provision of the By-Laws, no committee of the Board of Directors shall: (1) authorize distributions; (2) approve or recommend to shareholders any act required by law to be approved by shareholders; (3) fill vacancies on the Board of Directors or on any of its committees; (4) elect or remove officers or fix the compensation of any member of the committee; (5) adopt, amend or repeal the By-Laws; (6) approve a plan of merger not requiring shareholder approval; (7) authorize or approve reacquisition of stock, except according to a general formula or method prescribed by the Board of Directors; (8) authorize or approve the issuance or sale, or contract for sale, of stock or determine the designation and relative rights, preferences, and limitations of a series of stock, except that a committee may fix the specific terms of the issuance or sale or contract for sale or the number of shares of stock to be allocated to particular employees under an employee benefit plan; or (9) amend, alter, repeal, or take action inconsistent with any resolution or action of the Board of Directors when the resolution or action of the Board of Directors provides by its terms that it shall not be amended, altered or repealed by action of a committee. -12- ARTICLE V. OFFICERS. SECTION 1. There shall be elected by the Board of Directors, at its first meeting after the annual election of Directors in each year if practicable, the following principal officers of the Company, namely: a Chairman, a President, such number of Executive Vice Presidents, Senior Vice Presidents and Vice Presidents as the Board at the time may decide upon, a Secretary, a Treasurer and a Comptroller; and the Board may also provide for a Vice Chairman and such other officers, and prescribe for each of them such duties, as in its judgment may from time to time be desirable to conduct the affairs of the Company. No officer shall be elected for a term extending beyond the first day of the month following the month in which such officer attains the age of 65 years, on which date such officer shall be retired. The Chairman shall be a Director of the Company; any other officer above named may, but need not, be a Director of the Company. Any two or more offices may be held by the same person. All officers shall hold their respective offices until the first meeting of the Board of Directors after the next succeeding annual election of Directors and until their successors, willing to serve, shall have been elected, but any officer may be removed from office by the Board of Directors whenever in its judgment the best interests of the Company will be served thereby. Such removal, however, shall be without prejudice to the contract rights, if any, of the person so removed. Election of an officer shall not of itself create contract rights. SECTION 2. The Chairman shall be the chief executive officer of the Company and shall have general authority over all the affairs of the Company, including the power to appoint and discharge any and all officers, agents and employes of the Company not elected or appointed directly by the Board of Directors. The Chairman shall, when present, preside at all meetings of the shareholders and of the Board of Directors. The Chairman shall have authority to call special meetings of the shareholders and meetings of the Board of Directors, and of any committee of the Board of Directors and, when neither the Board of Directors nor the Executive Committee is in session, to suspend the authority of any other officer or officers of the Company, subject, however, to the pleasure of the Board of -13- Directors or of the Executive Committee at its next meeting. The Chairman, or such other officer as the Chairman may direct, shall be responsible for all internal audit functions, and the internal audit personnel shall report directly to the Chairman or to such other officer. SECTION 3. If, at any time, it is brought to the attention of any Director that the Chairman has or may become absent or disabled and may thereby be unable to perform the duties of Chairman for some period of time, the Lead Director shall, as promptly as practicable upon his own initiative, or after notice from another Director, convene a meeting (in person or by telephone conference call) of the Outside Directors (who for purposes hereof shall consist of all Directors who are not and have never been employees of the Company or any of its direct or indirect subsidiaries) who shall decide whether the Chairman has become absent or disabled. Upon such determination, the Outside Directors shall designate an Acting Chairman, who may be the Lead Director or any other Director of the Company, and who shall exercise the power and duties of the Chairman until the Outside Directors shall have determined that the Chairman can resume his duties as Chairman or until a new Chairman has been elected by the Board of Directors. The Acting Chairman, however, shall have no authority to make changes in the persons holding any office at the executive payroll level of the Company or to make changes in any such person's duties or responsibilities, or compensation or benefits, without prior approval of the Board of Directors. For purposes of this Section, any action of the Outside Directors shall be by majority vote of those present at a meeting of such Directors, provided that a majority of such Directors shall constitute a quorum for such a meeting. SECTION 4. Except insofar as the Board of Directors, the Executive Committee or the Chairman shall have devolved responsibilities on the other principal officers, the President shall be responsible for the general management and direction of the affairs of the Company, subject to the control of the Board of Directors, the Executive Committee and the Chairman. The President shall have such other powers and duties as usually devolve upon the President of a corporation and such further powers and duties as may be prescribed by the Board of Directors, the Executive Committee or the chairman. The President shall report to the Chairman. -14- SECTION 5. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have such powers and duties as may be prescribed for them, respectively, by the Board of Directors, the Executive committee or the Chairman. Each of such officers shall report to the Chairman or such other officer as the Chairman shall direct. SECTION 6. The Secretary shall attend all meetings of the shareholders, of the Board of Directors and of each committee of the Board of Directors, shall keep a true and faithful record thereof in proper books and shall have the custody and care of the corporate seal, records, minute books and stock books of the Company and of such other books and papers as in the practical business operations of the Company shall naturally belong in the office or custody of the Secretary or as shall be placed in the Secretary's custody by order of the Board of Directors or the Executive Committee. The Secretary shall keep or cause to be kept a suitable record of the addresses of shareholders and shall, except as may be otherwise required by statute or the by-laws, sign and issue all notices required for meetings of shareholders, of the Board of Directors and of the committees of the Board of Directors. Whenever requested by the requisite number of shareholders or Directors, the Secretary shall give notice, in the name of the shareholder or shareholders or Director or Directors making the request, of a meeting of the shareholders or of the Board of Directors or of a committee of the Board of Directors, as the case may be. The Secretary shall sign all papers to which the Secretary's signature may be necessary or appropriate, shall affix and attest the seal of the Company to all instruments requiring the seal, shall have the authority to certify the by-laws, resolutions of the shareholders and Board of Directors and committees of the Board of Directors and other documents of the Company as true and correct copies thereof and shall have such other powers and duties as are commonly incidental to the office of Secretary and as may be prescribed by the Board of Directors, the Executive Committee or the Chairman. The Secretary shall report to the Chairman or such other officer as the Chairman shall direct. SECTION 7. The Treasurer shall have charge of and be responsible for the collection, receipt, custody and disbursement of the funds of the Company. The Treasurer shall deposit the Company's funds in its name in such banks, trust companies or safe deposit vaults as the Board of Directors may direct. Such funds shall be subject to withdrawal only upon -15- checks or drafts signed or authenticated in such manner as may be designated from time to time by resolution of the Board of Directors or of the Executive Committee. The Treasurer shall have the custody of such books and papers as in the practical business operations of the Company shall naturally belong in the office or custody of the Treasurer or as shall be placed in the Treasurer's custody by order of the Board of Directors or the Executive Committee. The Treasurer shall have such other powers and duties as are commonly incidental to the office of Treasurer or as may be prescribed for the Treasurer by the Board of Directors, the Executive Committee or the Chairman. Securities owned by the Company shall be in the custody of the Treasurer or of such other officers, agents or depositaries as may be designated by the Board of Directors or the Executive Committee. The Treasurer may be required to give bond to the Company for the faithful discharge of the duties of the Treasurer in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Treasurer shall report to the Chairman or such other officer as the Chairman shall direct. SECTION 8. The Comptroller shall be responsible for the executive direction of the accounting organization and shall have functional supervision over the records of all other departments pertaining to revenues, expenses, money, securities, properties, materials and supplies. The Comptroller shall prescribe the form of all vouchers, accounts and accounting procedures, and reports required by the various departments. The Comptroller shall be responsible for the preparation and interpretation of all accounting reports and financial statements as required and for the proper review and approval of all bills received for payment. No bill or voucher shall be so approved unless the charges covered by the bill or voucher shall have been previously approved through job order, requisition or otherwise by the head of the department in which it originated, or unless the Comptroller shall otherwise be satisfied of its propriety and correctness. The Comptroller shall have such other powers and duties as are commonly incidental to the office of Comptroller or as may be prescribed for the Comptroller by the Board of Directors, the Executive Committee or the Chairman. The Comptroller may be required to give bond to the Company for the faithful discharge of the duties of the Comptroller in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Comptroller shall -16- report to the Chairman or such other officer as the Chairman shall direct. SECTION 9. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers, when elected or appointed, shall respectively assist the Secretary, the Treasurer and the Comptroller in the performance of the respective duties assigned to such principal officers, and in assisting such principal officer, each of such assistant officers shall for such purpose have the powers of such principal officer. In case of the absence, disability, death, resignation or removal from office of any principal officer, such principal officer's duties shall, except as otherwise ordered by the Board of Directors or the Executive Committee, temporarily devolve upon such assistant officer as shall be designated by the Chairman. SECTION 10. At least once each year, the Chairman shall report (which may be oral) to the Outside Directors (who for purposes hereof shall consist of all Directors who are not and never have been employees of the Company or any of its direct or indirect subsidiaries) on the status of a plan for succession to the office of Chairman. ARTICLE VI. INDEMNIFICATION. SECTION 1. (a) A Director of the Company shall not be personally liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (iii) under Section 8.65 of the Illinois Business Corporation Act of 1983, as amended, or (iv) for any transaction from which the Director derived an improper personal benefit. If the Illinois Business Corporation Act of 1983 is amended to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Company shall be eliminated or limited to the full extent permitted by the Illinois Business Corporation Act of 1983, as so amended. Any repeal or modification of this Section 1(a) by the shareholders of the Company shall not adversely affect any right or protection of a -17- Director of the Company existing at the time of such repeal or modification. (b) Each person who is or was or had agreed to become a Director or officer of the Company, and each person who is or was serving or who had agreed to serve at the request of the Board of Directors or an officer of the Company as an employe or agent of the Company or as a director, officer, employe, or agent, trustee or fiduciary of another corporation, partnership, joint venture, trust or other enterprise (including the heirs, executors, administrators or estate of such person), shall be indemnified by the Company to the full extent permitted by the Illinois Business Corporation Act of 1983 or any other applicable laws as presently or hereafter in effect. Without limiting the generality of the foregoing, the Company may enter into one or more agreements with any person which provide for indemnification greater or different than that provided in this Section 1(b). Any repeal or modification of this Section 1(b) shall not adversely affect any right or protection existing hereunder immediately prior to such repeal or modification. SECTION 2. The provisions of this Article shall be deemed to be a contract between the Company and each Director or officer who serves in any such capacity at any time while this Article is in effect, and any repeal or modification of this Article shall not affect any rights or obligations hereunder with respect to any state of facts then or theretofore existing or any action, suit or proceeding theretofore or thereafter brought or threatened based in whole or in part upon any such state of facts. SECTION 3. The indemnification provided or permitted by this Article shall not be deemed exclusive of any other rights to which those indemnified may be entitled by law or otherwise, and shall continue as to a person who has ceased to be a Director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such person. SECTION 4. The Company may purchase and maintain insurance on behalf of any person who is or was a Director, officer, employee or agent of the Company, or who is or was serving at the request of the Company as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, against any liability asserted -18- against such person and incurred by such person in any such capacity, or arising out of his or her status as such, whether or not the Company would have the power to indemnify such person against such liability under the laws of the State of Illinois. ARTICLE VII. MISCELLANEOUS. SECTION 1. No bills shall be paid by the Treasurer unless reviewed and approved by the Comptroller or by some other person or committee expressly authorized by the Board of Directors, the Executive Committee, the Chairman or the Comptroller to review and approve bills for payment. SECTION 2. All checks, drafts or other orders for payment of money issued in the name of the Company shall be signed by such officers, employees or agents of the Company as shall from time to time be designated by the Board of Directors, the Chairman, the chief financial officer of the Company or the Treasurer. SECTION 3. Any and all shares of stock of any corporation owned by the Company and any and all voting trust certificates owned by the Company calling for or representing shares of stock of any corporation may be voted at any meeting of the shareholders of such corporation or at any meeting of the holders of such certificates, as the case may be, by any one of the principal officers of the Company upon any question which may be presented at such meeting, and any such officer may, on behalf of the Company, waive any notice required to be given of the calling of such meeting and consent to the holding of any such meeting without notice. Any such principal officer other than the Secretary, acting together with the Secretary or an Assistant Secretary, shall have authority to give to any person a written proxy, in the name of the Company and under its corporate seal, to vote any or all shares of stock or any or all voting trust certificates owned by the Company upon any question that may be presented at any such meeting of shareholders or certificate holders, with full power to waive any notice of the calling of such meeting and consent to the holding of such meeting without notice. -19- SECTION 4. The fiscal year of the Company shall begin on the first day of January and end on the last day of December in each year. ARTICLE VIII. ALTERATION, AMENDMENT OF REPEAL OF BY-LAWS. These by-laws may be altered, amended or repealed by the shareholders or the Board of Directors. -20- EX-3.4 3 BY-LAWS OF COMMONWEALTH EDISON Exhibit (3)-4 Commonwealth Edison Company Form 10-Q File No. 1-1839 COMMONWEALTH EDISON COMPANY BY-LAWS EFFECTIVE SEPTEMBER 2, 1988 AS AMENDED THROUGH MAY 28, 1998
CONTENTS PAGE NUMBER ------ ARTICLE I. Stock........................................ 1 ARTICLE II. Meetings of Stockholders..................... 2 ARTICLE III. Board of Directors........................... 4 ARTICLE IV. Committees of the Board of Directors......... 5 ARTICLE V. Officers..................................... 9 ARTICLE VI. Miscellaneous................................ 13 ARTICLE VII. Alteration, Amendment or Repeal of By-Laws... 14
COMMONWEALTH EDISON COMPANY BY-LAWS ------------ ARTICLE I. STOCK. SECTION 1. Each holder of fully paid stock shall be entitled to a certificate or certificates of stock stating the number and class of shares, and the designation of the series, if any, which such certificate represents. All certificates of stock shall at the time of their issuance be signed either manually or by facsimile signature by the Chairman, the President or a Vice President and by the Secretary or an Assistant Secretary. All certificates of stock shall be sealed with the seal of the Company or a facsimile of such seal, shall be countersigned either manually or by facsimile signature by a Transfer Agent and shall be authenticated by manual signature and registered by a Registrar. The Board of Directors shall appoint one or more Transfer Agents, none of whom shall be officers of the Company authorized to sign certificates of stock, and one or more Registrars, each of which Registrars shall be a bank or trust company. Certificates of stock shall not be valid until countersigned by a Transfer Agent and authenticated and registered by a Registrar in the manner provided by the Board of Directors. SECTION 2. Shares of stock shall be transferable only on the books of the Company and, except as hereinafter provided or as otherwise required by law, shall be transferred only upon proper endorsement and surrender of the certificates issued therefor. If an outstanding certificate of stock shall be lost, destroyed or stolen, the holder thereof may have a new certificate upon producing evidence satisfactory to the Board of Directors of such loss, destruction or theft, and upon furnishing to the Company, the Transfer Agents and the Registrars a bond of indemnity deemed sufficient by the Board of Directors against claims under the outstanding certificate. SECTION 3. The certificates for each class or series of stock shall be numbered and issued in consecutive order and a record shall be kept of the name and address of the person to whom each certificate is issued, the number of shares represented by the certificate and the number and date of the certificate. All certificates exchanged or returned to the Company for transfer shall be canceled and filed. -2- SECTION 4. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors may fix in advance a date as the record date for any such determination for stockholders, such date in any case to be not more than sixty days and, for a meeting of stockholders, not less than ten days, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets, not less than twenty days, immediately preceding such meeting. SECTION 5. If any subscription for stock in the Company or any installment of such subscription shall be unpaid when due, as the Board of Directors shall have determined the time for payment, and shall continue unpaid for twenty days after demand for the amount due, made either in person or by written notice duly mailed to the last address, as it appears on the records of the Company, of the subscriber or other person by whom the subscription or installment shall be payable, the stock or subscription upon which payment shall be so due shall, upon the expiration of said twenty days, become and be forfeited to the Company without further action, demand or notice, and such stock or subscription may be sold at public sale, subject to payment of the amount due and unpaid, plus all costs and expenses incurred by the Company in that connection, at a time and place to be stated in a written notice to be mailed to the recorded address of the delinquent subscriber or other person in default on the subscription at least ten days prior to the time fixed for such sale; provided, that the excess of proceeds of such sale realized over the amount due and unpaid on said stock or subscription shall be paid to the delinquent subscriber or other person in default on the subscription, or to his or her legal representative; and, provided further, that no forfeiture of stock, or of any amounts paid upon a subscription therefor, shall be declared as against the estate of any decedent before distribution shall have been made of the estate. The foregoing provisions for the forfeiture and sale of stock or subscriptions shall not exclude any other remedy which may lawfully be enforceable at any time, by forfeiture of stock or of amounts theretofore paid or otherwise, against any person for nonpayment of a subscription or of any installment thereof. ARTICLE II. MEETINGS OF STOCKHOLDERS. SECTION 1. The regular annual meeting of the stockholders of the Company for the election of Directors and for the transaction of such other business as may come before the meeting shall be held on such day in April or May of each year as the Board of Directors may by resolution determine. Each such regular annual meeting and each special meeting of the stockholders shall be held at such place as may -3- be fixed by the Board of Directors and at such hour as the Board of Directors shall order. SECTION 2. Special meetings of the stockholders may be called by the Chairman, by the Board of Directors, by a majority of the Directors individually or by the holders of not less than one-fifth of the total outstanding shares of capital stock of the Company. SECTION 3. Written notice stating the place, day and hour of the meeting of the stockholders and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten nor more than sixty days before the date of the meeting, or in the case of a merger, consolidation, share exchange, dissolution or sale, lease or exchange of assets not less than twenty nor more than sixty days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman, the Secretary or the persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the stockholder at the stockholder's address as it appears upon the records of the Company, with postage thereon prepaid. SECTION 4. At all meetings of the stockholders, a majority of the outstanding shares of stock, entitled to vote on a matter, represented in person or by proxy, shall constitute a quorum for consideration of such matter, but the stockholders represented at any meeting, though less than a quorum, may adjourn the meeting to some other day or sine die. If a quorum is present, the affirmative vote of the majority of the shares of stock represented at the meeting and entitled to vote on a matter shall be the act of the stockholders, unless the vote of a greater number or voting by classes is required by law or the articles of incorporation. SECTION 5. At every meeting of the stockholders, each outstanding share of stock shall be entitled to one vote on each matter submitted for a vote. In all elections for Directors, every stockholder shall have the right to vote the number of shares owned by such stockholder for as many persons as there are Directors to be elected, or to cumulate such votes and give one candidate as many votes as shall equal the number of Directors to be elected multiplied by the number of such shares or to distribute such cumulative votes in any proportion among any number of candidates. A stockholder may vote either in person or by proxy. A stockholder may appoint a proxy to vote or otherwise act for him or her by signing an appointment form and delivering it to the person so appointed. SECTION 6. The Secretary of the Company shall make, within twenty days after the record date for a meeting of stockholders of the Company or ten days before such meeting, whichever is earlier, a complete list of the stockholders entitled to vote at such meeting, -4- arranged in alphabetical order, with the address of and the number of shares held by each, which list, for at least ten days prior to such meeting, shall be kept on file at the registered office of the Company and shall be subject to inspection by any stockholder, and to copying at such stockholder's expense, at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. SECTION 7. The Chairman and the Secretary of the Company shall, when present, act as chairman and secretary, respectively, of each meeting of the stockholders. SECTION 8. At any meeting of stockholders, the chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting, unless an inspector or inspectors shall have been previously appointed for such meeting by the Chairman. Such inspectors shall ascertain and report the number of shares of stock represented at the meeting, based upon their determination of the validity and effect of proxies, count all votes and report the results and do such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. ARTICLE III. BOARD OF DIRECTORS. SECTION 1. The business and affairs of the Company shall be managed by or under the direction of the Board of Directors. The number of Directors of the Company shall be not less than eight nor more than thirteen. The Directors shall be elected at each annual meeting of the stockholders, but if for any reason the election shall not be held at an annual meeting, it may be subsequently held at any special meeting of the stockholders called for that purpose after proper notice. The Directors so elected shall hold office until the next annual meeting and until their respective successors, willing to serve, shall have been elected and qualified. Directors need not be residents of the State of Illinois or stockholders of the Company. No person shall be eligible for nomination or renomination as a Director by the management of the Company who, prior to the date of election, shall have attained age seventy-two. No person who is an employe or a former employe of the Company or of a subsidiary of the Company shall be eligible for nomination or renomination as a Director by the management of the Company for a term commencing after such person ceases to be such an employe; provided, however that any Director in office on June 15, 1989 who is or has been such an employe may be renominated as a Director unless such person shall have attained age sixty-five on or before the date of election of Directors. -5- SECTION 2. A meeting of the Board of Directors shall be held immediately, or as soon as practicable, after the annual election of Directors in each year, provided a quorum for such meeting can be obtained. Notice of every meeting of the Board, stating the time and place at which such meeting will be held, shall be given to each Director personally, by telephone or by other means of communication at least one day, or by depositing the same in the mails properly addressed at least two days before the day of such meeting. A meeting of the Board of Directors may be called at any time by the Chairman or by any two Directors and shall be held at such place as shall be specified in the notice for such meeting. SECTION 3. A majority of the number of Directors then in office, but not less than six, shall constitute a quorum for the transaction of business at any meeting of the Board, but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn sine die. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. SECTION 4. Each member of the Board not receiving a salary from the Company or a subsidiary of the Company shall be paid such fees as the Board of Directors may from time to time, by resolution adopted by the affirmative vote of a majority of the Directors then in office, determine. SECTION 5. At the first meeting of the Board of Directors following the annual meeting of shareholders each year, the Board shall elect a Lead Director. The Lead Director shall be elected from among the Outside Directors of the Company. For purposes hereof, "Outside Directors" shall be those who are not and never have been employees of the Company or any of its direct or indirect subsidiaries. The duties of the Lead Director shall be to convene and chair meetings of the Outside Directors and to assume other responsibilities which the Outside Directors might designate from time to time. The Lead Director will consult with other Outside Directors as to appropriate items for discussion at each such meeting. ARTICLE IV. COMMITTEES OF THE BOARD OF DIRECTORS. SECTION 1. The Board of Directors may from time to time create committees, standing or special, each committee to consist of two or more Directors of the Company, and the Board shall appoint Directors to serve on such committees and confer such powers upon such committees and revoke such powers and terminate the existence of such committees, as the Board at its pleasure may determine, subject to the limitations set forth in Section 8.40(c) of the Illinois Business Corporation Act of 1983, as amended from time to time. -6- SECTION 2. Meetings of any committee of the Board may be called at any time by the Chairman, by any two Directors or by the chairman of the committee the meeting of which is being called and shall be held at such place as shall be designated in the notice of such meeting. Notice of each committee meeting stating the time and place at which such meeting will be held shall be given to each member of the committee personally, or by telecopy, or by depositing the same in the mails properly addressed, at least one day before the day of such meeting. A majority of the members of a committee shall constitute a quorum thereof but a lesser number may adjourn the meeting from time to time until a quorum is obtained, or may adjourn sine die. A majority vote of the members of a committee present at a meeting at which a quorum is present shall be necessary for committee action. SECTION 3. The Board of Directors may from time to time designate from among the Directors alternates to serve on one or more committees as occasion may require. Whenever a quorum cannot be secured for any meeting of any committee from among the regular members thereof and designated alternates, the member or members of such committee present at such meeting and not disqualified from voting thereat, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of such absent or disqualified member. SECTION 4. Every Director of the Company, or member of any committee designated by the Board of Directors pursuant to authority conferred by these By-Laws, shall, in the performance of his or her duties, be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any of the Company's officers or employees, or committees of the Board of Directors, or by any other person as to matters the Director or member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Company. SECTION 5. Unless otherwise limited by the Board of Directors and subject to the limitations set forth in the next sentence, each committee of the Board of Directors consisting of two or more Directors may exercise the authority of the Board. Notwithstanding any other provision of the By-laws, no committee of the Board of Directors shall: (1) authorize distributions; (2) approve or recommend to shareholders any act required by law to be approved by shareholders; (3) fill vacancies on the Board of Directors or on any of its committees; (4) elect or remove officers or fix the compensation of any member of the committee; (5) adopt, amend or repeal the By-laws; (6) approve a plan of merger not requiring shareholder approval; (7) authorize or approve reacquisition of stock, except according to a general formula or method prescribed by the -7- Board of Directors; (8) authorize or approve the issuance or sale, or contract for sale, of stock or determine the designation and relative rights, preferences, and limitations of a series of stock, except that a committee may fix the specific terms of the issuance or sale or contract for sale or the number of shares of stock to be allocated to particular employees under an employee benefit plan; or (9) amend, alter, repeal, or take action inconsistent with any resolution or action of the Board of Directors when the resolution or action of the Board of Directors provides by its terms that it shall not be amended, altered or repealed by action of a committee. ARTICLE V. OFFICERS. SECTION 1. There shall be elected by the Board of Directors, at its first meeting after the annual election of Directors in each year if practicable, the following principal officers of the Company, namely: a Chairman, a President, such number of Executive Vice Presidents, Senior Vice Presidents and Vice Presidents as the Board at the time may decide upon, a Secretary, a Treasurer and a Comptroller; and the Board may also provide for a Vice Chairman and such other officers, and prescribe for each of them such duties, as in its judgment may from time to time be desirable to conduct the affairs of the Company. No officer shall be elected for a term extending beyond the first day of the month following the month in which such officer attains the age of 65 years, on which date such officer shall be retired. The Chairman shall be a Director of the Company; any other officer above named may, but need not, be a Director of the Company. Any two or more offices may be held by the same person, except that one person may not at the same time hold the office of Chairman or President and the office of Secretary. All officers shall hold their respective offices until the first meeting of the Board of Directors after the next succeeding annual election of Directors and until their successors, willing to serve, shall have been elected, but any officer may be removed from office by the Board of Directors whenever in its judgment the best interests of the Company will be served thereby. Such removal, however, shall be without prejudice to the contract rights, if any, of the person so removed. Election of an officer shall not of itself create contract rights. SECTION 2. The Chairman shall be the chief executive officer of the Company and shall have general authority over all the affairs of the Company, including the power to appoint and discharge any and all officers, agents and employes of the Company not elected or appointed directly by the Board of Directors. The Chairman shall, when present, preside at all meetings of the stockholders and of the Board of Directors. The Chairman shall have authority to call special meetings of the stockholders and meetings of the Board of Directors, and of any committee of the Board of Directors and, when neither the Board of Directors nor the Executive Committee is in session, to -8- suspend the authority of any other officer or officers of the Company, subject, however, to the pleasure of the Board of Directors or of the Executive Committee at its next meeting. The Chairman, or such other officer as the Chairman may direct, shall be responsible for all internal audit functions, and internal audit personnel shall report directly to the Chairman or to such other officer. SECTION 3. If, at any time, it is brought to the attention of any Director that the Chairman has or may become absent or disabled and may thereby be unable to perform the duties of Chairman for some period of time, the Lead Director shall, as promptly as practicable upon his own initiative, or after notice from another Director, convene a meeting (in person or by telephone conference call) of the Outside Directors (who for purposes hereof shall consist of all Directors who are not and have never been employees of the Company or any of its direct or indirect subsidiaries) who shall decide whether the Chairman has become absent or disabled. Upon such determination the Outside Directors shall designate an Acting Chairman, who may be the Lead Director or any other Director of the Company, and who shall exercise the power and duties of the Chairman until the Outside Directors shall have determined that the Chairman can resume his duties as Chairman or until a new Chairman has been elected by the Board of Directors. The Acting Chairman, however, shall have no authority to make changes in the persons holding any office at the executive payroll level of the Company or to make changes in any such person's duties or responsibilities, or compensation or benefits, without prior approval of the Board of Directors. For purposes of this Section, any action of the Outside Directors shall be by majority vote of those present at a meeting of such Directors, provided that a majority of such Directors shall constitute a quorum for such a meeting. SECTION 4. Except insofar as the Board of Directors, the Executive Committee or the Chairman shall have devolved responsibilities on the other principal officers, the President shall be responsible for the general management and direction of the affairs of the Company, subject to the control of the Board of Directors, the Executive Committee and the Chairman. The President shall have such other powers and duties as usually devolve upon the President of a corporation and such further powers and duties as may be prescribed by the Board of Directors, the Executive Committee or the Chairman. The President shall report to the Chairman. SECTION 5. The Executive Vice Presidents, the Senior Vice Presidents and the Vice Presidents shall have such powers and duties as may be prescribed for them, respectively, by the Board of Directors, the Executive Committee or the Chairman. Each of such officers shall report to the Chairman or such other officer as the Chairman shall direct. -9- SECTION 6. The Secretary shall attend all meetings of the stockholders, of the Board of Directors and of each committee of the Board of Directors, shall keep a true and faithful record thereof in proper books and shall have the custody and care of the corporate seal, records, minute books and stock books of the Company and of such other books and papers as in the practical business operations of the Company shall naturally belong in the office or custody of the Secretary or as shall be placed in the Secretary's custody by order of the Board of Directors or the Executive Committee. The Secretary shall keep a suitable record of the addresses of stockholders and shall, except as may be otherwise required by statute or the by-laws, sign and issue all notices required for meetings of stockholders, of the Board of Directors and of the committees of the Board of Directors. Whenever requested by the requisite number of stockholders or Directors, the Secretary shall give notice, in the name of the stockholder or stockholders or Director or Directors making the request, of a meeting of the stockholders or of the Board of Directors or of a committee of the Board of Directors, as the case may be. The Secretary shall sign all papers to which the Secretary's signature may be necessary or appropriate, shall affix and attest the seal of the Company to all instruments requiring the seal, shall have the authority to certify the by-laws, resolutions of the stockholders and Board of Directors and committees of the Board of Directors and other documents of the Company as true and correct copies thereof and shall have such other powers and duties as are commonly incidental to the office of Secretary and as may be prescribed by the Board of Directors, the Executive Committee or the Chairman. The Secretary shall report to the Chairman or such other officer as the Chairman shall direct. SECTION 7. The Treasurer shall have charge of and be responsible for the collection, receipt, custody and disbursement of the funds of the Company. The Treasurer shall deposit the Company's funds in its name in such banks, trust companies or safe deposit vaults as the Board of Directors may direct. Such funds shall be subject to withdrawal only upon checks or drafts signed or authenticated in such manner as may be designated from time to time by resolution of the Board of Directors or of the Executive Committee. The Treasurer shall have the custody of such books and papers as in the practical business operations of the Company shall naturally belong in the office or custody of the Treasurer or as shall be placed in the Treasurer's custody by order of the Board of Directors or the Executive Committee. The Treasurer shall have such other powers and duties as are commonly incidental to the office of Treasurer or as may be prescribed for the Treasurer by the Board of Directors, the Executive Committee or the Chairman. Securities owned by the Company shall be in the custody of the Treasurer or of such other officers, agents or depositaries as may be designated by the Board of Directors or the Executive Committee. The Treasurer may be required to give bond to the Company for the faithful discharge of the duties of the Treasurer in such form and in such amount and with such surety as -10- shall be determined by the Board of Directors. The Treasurer shall report to the Chairman or such other officer as the Chairman shall direct. SECTION 8. The Comptroller shall be responsible for the executive direction of the accounting organization and shall have functional supervision over the records of all other departments pertaining to revenues, expenses, money, securities, properties, materials and supplies. The Comptroller shall prescribe the form of all vouchers, accounts and accounting procedures, and reports required by the various departments. The Comptroller shall be responsible for the preparation and interpretation of all accounting reports and financial statements as required and for the proper review and approvalof all bills received for payment. No bill or voucher shall be so approved unless the charges covered by the bill or voucher shall have been previously approved through job order, requisition or otherwise by the head of the department in which it originated, or unless the Comptroller shall otherwise be satisfied of its propriety and correctness. The Comptroller shall have such other powers and duties as are commonly incidental to the office of Comptroller or as may be prescribed for the Comptroller by the Board of Directors, the Executive Committee or the Chairman. The Comptroller may be required to give bond to the Company for the faithful discharge of the duties of the Comptroller in such form and in such amount and with such surety as shall be determined by the Board of Directors. The Comptroller shall report to the Chairman or such other officer as the Chairman shall direct. SECTION 9. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers, when elected or appointed, shall respectively assist the Secretary, the Treasurer and the Comptroller in the performance of the respective duties assigned to such principal officers, and in assisting such principal officer, each of such assistant officers shall for such purpose have the powers of such principal officer. In case of the absence, disability, death, resignation or removal from office of any principal officer, such principal officer's duties shall, except as otherwise ordered by the Board of Directors or the Executive Committee, temporarily devolve upon such assistant officer as shall be designated by the Chairman. SECTION 10. At least once each year, the Chairman shall report (which may be oral) to the Outside Directors (who for purposes hereof shall consist of all Directors who are not and never have been employees of the Company or any of its direct subsidiaries) on the status of a plan for succession to the office of Chairman. -11- ARTICLE VI. MISCELLANEOUS. SECTION 1. No bills shall be paid by the Treasurer unless reviewed and approved by the Comptroller or by some other person or committee expressly authorized by the Board of Directors, the Executive Committee, the Chairman or the Comptroller to review and approve bills for payment. SECTION 2. Any and all shares of stock of any corporation owned by the Company and any and all voting trust certificates owned by the Company calling for or representing shares of stock of any corporation may be voted at any meeting of the stockholders of such corporation or at any meeting of the holders of such certificates, as the case may be, by any one of the principal officers of the Company upon any question which may be presented at such meeting, and any such officer may, on behalf of the Company, waive any notice required to be given of the calling of such meeting and consent to the holding of any such meeting without notice. Any such principal officer other than the Secretary, acting together with the Secretary or an Assistant Secretary, shall have authority to give to any person a written proxy, in the name of the Company and under its corporate seal, to vote any or all shares of stock or any or all voting trust certificates owned by the Company upon any question that may be presented at any such meeting of stockholders or certificate holders, with full power to waive any notice of the calling of such meeting and consent to the holding of such meeting without notice. SECTION 3. The fiscal year of the Company shall begin on the first day of January and end on the last day of December in each year. SECTION 4. The Company shall indemnify the Directors, officers and employes of the Company, and shall have the power to indemnify other agents of the Company and any person acting or serving at the request of the Company as a director, officer, employe or agent of another corporation, partnership, joint venture, trust or other enterprise, in accordance with and to the extent permitted by Section 8.75 of The Business Corporation Act of 1983 of the State of Illinois, as from time to time amended and in effect. Such indemnification shall be available to any past, present or future Director, officer or employe of the Company, and may be available to any past, present or future agent of the Company and any past, present or future director, officer, employe or agent of such other corporation, partnership, joint venture, trust or other enterprise, and shall apply to actions, suits, proceedings or claims arising out of or based upon events occurring prior to, on or after the date of original adoption of this by-law. -12- ARTICLE VII. ALTERATION, AMENDMENT OR REPEAL OF BY-LAWS. These by-laws may be altered, amended or repealed by the stockholders or the Board of Directors. EX-12 4 STATEMENT OF COMPUTATION OF RATIOS Exhibit (12) Commonwealth Edison Company Form 10-Q File No. 1-1839 Commonwealth Edison Company and Subsidiary Companies Consolidated ----------------------------------------------------------------- Computation of Ratios of Earnings to Fixed Charges and Ratios of Earnings to Fixed Charges and Preferred and Preference Stock Dividend Requirements ---------------------------------------------------- (Thousands of Dollars)
Twelve Months Ended --------------------------- Line June 30, December 31, No. 1998 1997 - ---- ------------ ------------ 1 Net income (loss) before extraordinary item and cumulative effect of 2 change in accounting principle $ (90,194) $ (160,138) ------------ ------------ 3 Net provisions for income taxes and investment tax credits deferred 4 charged to- 5 Operations $ 329,824 $ 307,276 6 Other income (409,784) (405,819) ------------ ------------ 7 $ (79,960) $ (98,543) ------------ ------------ 8 Fixed charges- 9 Interest on debt $ 464,370 $ 487,749 10 Estimated interest component of nuclear fuel and 11 other lease payments, rentals and other interest 75,224 70,468 12 Amortization of debt discount, premium and expense 16,430 21,951 13 Company-obligated manadatorily redeemable preferred securities 14 dividend requirements of subsidiary trusts holding solely the 15 Company's subordinated debt securities 29,639 28,860 ------------ ------------ 16 $ 585,663 $ 609,028 ------------ ------------ 17 Preferred and preference stock dividend requirements- 18 Provisions for preferred and preference stock dividends $ 58,483 $ 60,486 19 Taxes on income required to meet provisions for 20 preferred and preference stock dividends 38,311 39,623 ------------ ------------ 21 $ 96,794 $ 100,109 ------------ ------------ 22 Fixed charges and preferred and preference stock 23 dividend requirements $ 682,457 $ 709,137 ------------ ------------ 24 Earned for fixed charges and preferred and preference stock 25 dividend requirements $ 415,509 $ 350,347 ------------ ------------ 26 Ratios of earnings to fixed charges (line 25 divided by line 16) 0.71 0.58 ==== ==== 27 Ratios of earnings to fixed charges and preferred and preference 28 stock dividend requirements (line 25 divided by line 23) 0.61 0.49 ==== ====
EX-23.1 5 CONSENT APPLICABLE TO UNICOM Exhibit (23)-1 Unicom Corporation Form 10-Q File No. 1-11375 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of our report in this Form 10-Q for the quarterly period ended June 30, 1998 (Report), into Unicom Corporation's previously filed prospectuses dated March 18, 1994, constituting part of Form S-4 Registration Statement File No. 33-52109, as amended (relating to Common Stock of Unicom Corporation), as further amended by Post-Effective Amendment No. 1 on Form S-8 (relating to Commonwealth Edison Company's Employee Savings and Investment Plan) and Post- Effective Amendment No. 2 on Form S-8 (relating to Unicom Corporation's Employee Stock Purchase Plan); Form S-8 Registration Statement File No. 33-56991 (relating to Unicom Corporation's Long-Term Incentive Plan), Form S-4 Registration Statement File No. 333-01003 (relating to Common Stock of Unicom Corporation), Form S-8 Registration Statement File No. 333-04749 (relating to Unicom Corporation's 1996 Directors' Fee Plan); Form S-8 Registration Statements File Nos. 333-10613 and 333-26779 (relating to Commonwealth Edison Company's Employee Savings and Investment Plan) and Form S-8 Registration Statement File No. 333-39677 (relating to the Unicom Corporation Management Deferred Compensation Plan). We also consent to the application of our Report to Commonwealth Edison Company and subsidiary companies' ratios of earnings to fixed charges and ratios of earnings to fixed charges and preferred and preference stock dividend requirements for each of the twelve months ended June 30, 1998 and December 31, 1997 appearing in this Form 10-Q. Arthur Andersen LLP Chicago, Illinois August 10, 1998 EX-23.2 6 CONSENT APPLICABLE TO COM ED Exhibit (23)-2 Commonwealth Edison Company Form 10-Q File No. 1-1839 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference of our report in this Form 10-Q for the quarterly period ended June 30, 1998 (Report), into Commonwealth Edison Company's (the Company) previously filed prospectuses as follows: (1) prospectus dated August 21, 1986, constituting part of Form S-3 Registration Statement File No. 33-6879, as amended (relating to the Company's Debt Securities and Common Stock); (2) prospectus dated January 7, 1994, constituting part of Form S-3 Registration Statement File No. 33-51379 (relating to the Company's Debt Securities and Cumulative Preference Stock); (3) prospectus dated September 19, 1995, constituting part of Amendment No. 1 to Form S-3 Registration Statement File No. 33-61343, as amended (relating to Company-Obligated Mandatory Redeemable Preferred Securities of ComEd Financing I); (4) prospectus dated June 13, 1997 constituting part of Form S-4 Registration Statement File No. 333-28369 (relating to Company-Obligated Mandatory Redeemable Preferred Securities of ComEd Financing II); and (5) Form S-8 Registration Statement File No. 333-33847 (relating to the Commonwealth Edison Company Excess Benefit Savings Plan. We also consent to the application of our Report to the ratios of earnings to fixed charges and the ratios of earnings to fixed charges and preferred and preference stock dividend requirements for each of the twelve months June 30, 1998 and December 31, 1997 appearing in this Form 10-Q. Arthur Andersen LLP Chicago, Illinois August 10, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE FOR UNICOM
UT This schedule contains summary financial information extracted from the Consolidated Balance Sheet and Statement of Consolidated Capitalization as of June 30, 1998 and the related Statements of Consolidated Operations, Retained Earnings (Deficit) and Cash Flows for the six months ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 0000918040 Unicom Corporation 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 13,457,795 2,400,522 1,843,511 0 4,709,101 22,410,929 4,948,032 (3,325) (60,832) 4,883,875 168,368 506,829 5,766,672 0 0 0 135,896 30,688 417,910 163,439 10,337,252 22,410,929 3,491,381 84,882 2,981,927 3,080,365 411,016 (57,989) 366,583 232,410 134,173 0 134,173 173,513 0 650,003 0.62 0.62 This item is not disclosed as a separate line item on the Consolidated Balance Sheet. Includes a deduction of $3,325 thousand for preference stock expense of ComEd. Preferred and preference stocks of ComEd. $1,034,112 thousand of notes and long-term note to bank is included in LONG-TERM-DEBT-NET. Includes $350,000 thousand of ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities. A tax benefit of $13,556 thousand related to nonoperating activities is included in INCOME-TAX-EXPENSE. A $29,009 thousand provision for preferred and preference stock dividends of ComEd and a $14,855 thousand provision for preferred securities dividends of subsidiary trusts holding solely ComEd's subordinated debt securities are included in OTHER-INCOME-NET. This item is not disclosed as a separate line item on the Statement of Consolidated Operations.
EX-27.2 8 FINANCIAL DATA SCHEDULE FOR COM ED
UT This schedule contains summary financial information extracted from the Consolidated Balance Sheet and Statement of Consolidated Capitalization as of June 30, 1998 and the related Statements of Consolidated Operations, Retained Earnings (Deficit) and Cash Flows for the six months ended June 30, 1998 and is qualified in its entirety by reference to such financial statements. 0000022606 Commonwealth Edison Company 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 PER-BOOK 13,457,795 2,209,201 1,811,320 0 4,698,218 22,176,534 2,677,942 2,207,907 (43,295) 4,842,554 168,368 506,829 5,559,783 0 0 0 133,320 30,688 417,910 163,440 10,353,642 22,176,534 3,486,585 94,834 2,967,076 3,075,466 411,119 (22,036) 402,639 226,353 176,286 29,009 147,277 171,387 0 728,257 0 0 This item is not disclosed as a separate line item on the Consolidated Balance Sheet. $827,222 thousand of notes is included in LONG-TERM-DEBT-NET. Includes $350,000 thousand of company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities. A tax benefit of $13,556 thousand related to nonoperating activities is included in INCOME-TAX-EXPENSE. Includes $14,855 thousand of provision for preferred securities dividends of subsidiary trusts holding solely the Company's subordinated debt securities. This item is not disclosed as a separate line item on the Statement of Consolidated Operations.
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