-----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, Q/G9QmkD8uR6lAwUzMZVVvRGFsEcHfU9rZ3A8xMLHwD4nL2JcAOs/hi8fULjdyPj uWCYOcpRIS0fPI6oordpAA== 0000950131-00-003375.txt : 20000515 0000950131-00-003375.hdr.sgml : 20000515 ACCESSION NUMBER: 0000950131-00-003375 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 20000512 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/A SEC ACT: SEC FILE NUMBER: 001-11375 FILM NUMBER: 629721 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/A SEC ACT: SEC FILE NUMBER: 001-01839 FILM NUMBER: 629722 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/A 1 AMENDMENT #1 TO FORM 10-Q/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A Amendment No. 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from____to____
Commission File Registrant; State of Incorporation; IRS Employer Number Address; and Telephone Number Identification No. ---------- ----------------------------------- ------------------ 1-11375 UNICOM CORPORATION 36-3961038 (an Illinois corporation) 37th Floor, 10 South Dearborn Street Post Office Box A-3005 Chicago, Illinois 60690-3005 312/394-7399 1-1839 COMMONWEALTH EDISON COMPANY 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 October 31, 1999: Unicom Corporation 217,516,983 shares Commonwealth Edison Company 213,973,242 shares - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Unicom Corporation and Commonwealth Edison Company Amended Quarterly Reports on Form 10-Q/A to the Securities and Exchange Commission for the Quarterly Period Ended September 30, 1999 This document contains the amended Quarterly Reports on Form 10-Q/A for the quarterly period ended September 30, 1999 for each of Unicom Corporation and Commonwealth Edison Company. Information contained herein relating to an individual registrant is filed by such registrant on its own behalf. Accordingly, except for its subsidiaries, Commonwealth Edison Company makes no representation as to information relating to Unicom Corporation or to any other companies affiliated with Unicom Corporation. In addition, several portions of these Quarterly Reports contain forward-looking statements; and reference is made to pages 61-62 for the location and character of such statements. INDEX
Page ----- Definitions.............................................................. 3 PART I. FINANCIAL INFORMATION Unicom Corporation and Subsidiary Companies: Financial Statements-- Report of Independent Public Accountants............................. 4 Statements of Consolidated Operations for the three months, nine months and twelve months ended September 30, 1999 and 1998.......... 5 Consolidated Balance Sheets--September 30, 1999 and December 31, 1998................................................................ 6-7 Statements of Consolidated Capitalization--September 30, 1999 and De- cember 31, 1998..................................................... 8 Statements of Consolidated Retained Earnings/(Deficit) for the three months, nine months and twelve months ended September 30, 1999 and 1998................................................................ 9 Statements of Consolidated Cash Flows for the three months, nine months and twelve months ended September 30, 1999 and 1998.......... 10 Notes to Financial Statements........................................ 11-40 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 41-62 Commonwealth Edison Company and Subsidiary Companies: Financial Statements-- Report of Independent Public Accountants............................. 63 Statements of Consolidated Operations for the three months, nine months and twelve months ended September 30, 1999 and 1998.......... 64 Consolidated Balance Sheets--September 30, 1999 and December 31, 1998................................................................ 65-66 Statements of Consolidated Capitalization--September 30, 1999 and De- cember 31, 1998..................................................... 67 Statements of Consolidated Retained Earnings/(Deficit) for the three months, nine months and twelve months ended September 30, 1999 and 1998................................................................ 68 Statements of Consolidated Cash Flows for the three months, nine months and twelve months ended September 30, 1999 and 1998.......... 69 Notes to Financial Statements........................................ 70-75 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 76 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................. 77 Item 6. Exhibits and Reports on Form 8-K............................... 78-79 SIGNATURES............................................................... 80
2 DEFINITIONS The following terms are used in this document with the following meanings:
Term Meaning ---------------------- ------------------------------------------------------- 1997 Act Illinois Electric Service Customer Choice and Rate Relief Law of 1997, as amended AFUDC Allowance for funds used during construction APB Accounting Principles Board APX Automated Power Exchange Inc., a California company ARES Alternative Retail Electric Suppliers CERCLA Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended City City of Chicago ComEd Commonwealth Edison Company, a Unicom subsidiary ComEd Funding ComEd Funding, LLC, a ComEd subsidiary ComEd Funding Trust ComEd Transitional Funding Trust, a ComEd Funding subsidiary Congress U.S. Congress Cotter Cotter Corporation, a ComEd subsidiary CTC Non-bypassable "competitive transition charge" DOE U.S. Department of Energy Edison Development Edison Development Canada Inc., a ComEd subsidiary EEI Edison Electric Institute EME Edison Mission Energy, an Edison International subsidiary EMS Energy Management System EPRI Electric Power Research Institute EPS Earnings/(Loss) per Common Share ESPP Employee Stock Purchase Plan FAC Fuel adjustment clause FASB Financial Accounting Standards Board FERC Federal Energy Regulatory Commission Fossil Plant ComEd's six coal-fired generating plants, an oil and gas-fired plant, and nine peaking unit sites GAAP Generally Accepted Accounting Principles ICC Illinois Commerce Commission IDR Illinois Department of Revenue Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd subsidiary INPO Institute of Nuclear Power Operations ISO Independent System Operator MAIN Mid-America Interconnected Network Merger Agreement Agreement and Plan of Exchange and Merger, dated September 22, 1999, among PECO, Unicom and Newco MGP Manufactured gas plant NEI Nuclear Energy Institute NEIL Nuclear Electric Insurance Limited NERC North American Electric Reliability Council Northwind Midway Northwind Midway, LLC, a UT Holdings subsidiary NPL National Priorities List NRC Nuclear Regulatory Commission O&M Operation and maintenance PECO PECO Energy Company, a Pennsylvania company RES Retail Electric Supplier SCADA Supervisory Control And Data Acquisition SEC Securities and Exchange Commission SFAS Statement of Financial Accounting Standards SPEs Special purpose entities S&P Standard & Poor's Trusts ComEd Financing I and ComEd Financing II, ComEd subsidiaries Trust Securities ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities Unicom Unicom Corporation Unicom Energy Services Unicom Energy Services Inc., a Unicom Enterprises subsidiary Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary Unicom Investment Unicom Investment Inc., a Unicom subsidiary Unicom Thermal Unicom Thermal Technologies Inc., a UT Holdings subsidiary U.S. EPA U.S. Environmental Protection Agency UT Holdings UT Holdings Inc., a Unicom Enterprises subsidiary
3 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Unicom Corporation: We have audited the accompanying consolidated balance sheets and statements of consolidated capitalization of Unicom Corporation (an Illinois corporation) and subsidiary companies as of September 30, 1999 and December 31, 1998, and the related statements of consolidated operations, retained earnings/(deficit) and cash flows for the three-month, nine-month and twelve-month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Unicom Corporation and subsidiary companies as of September 30, 1999 and December 31, 1998, and the results of their operations and their cash flows for the three-month, nine- month and twelve-month periods ended September 30, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois November 12, 1999 (except with respect to Note 1 as to which the date is May 12, 2000) 4 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months, nine months and twelve months ended September 30, 1999 and 1998 reflect the results of past operations and are not intended as any representation as to results of operations for any future period. Future operations will necessarily be affected by various and diverse factors and developments, including changes in electric prices, regulation, population, business activity, asset dispositions, competition, taxes, environmental control, energy use, fuel, cost of labor, purchased power and other matters, the nature and effect of which cannot now be determined.
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ---------------------- ---------------------- ----------------------- 1999 1998 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ----------- (Thousands Except Per Share Data) Operating Revenues...... $2,084,454 $2,095,699 $5,307,972 $5,539,742 $6,871,640 $ 7,179,643 ---------- ---------- ---------- ---------- ---------- ----------- Operating Expenses and Taxes: Fuel................... $ 302,181 $ 340,317 $ 796,654 $ 804,483 $1,049,699 $ 1,062,539 Purchased power........ 249,375 193,637 419,358 646,388 520,987 751,325 Operation and maintenance........... 581,937 568,815 1,787,435 1,703,409 2,369,062 2,353,968 Depreciation and amortization.......... 202,109 232,461 700,388 713,944 929,731 963,524 Taxes (except income).. 144,791 179,385 407,286 571,873 535,247 757,692 Income taxes........... 181,654 187,787 305,265 303,878 354,131 339,241 Investment tax credits deferred--net ........ (7,021) (6,889) (21,063) (20,937) (27,856) (28,588) ---------- ---------- ---------- ---------- ---------- ----------- $1,655,026 $1,695,513 $4,395,323 $4,723,038 $5,731,001 $ 6,199,701 ---------- ---------- ---------- ---------- ---------- ----------- Operating Income........ $ 429,428 $ 400,186 $ 912,649 $ 816,704 $1,140,639 $ 979,942 ---------- ---------- ---------- ---------- ---------- ----------- Other Income and (Deductions): Interest on long-term debt, net of interest capitalized........... $ (134,622) $ (111,535) $ (413,132) $ (334,929) $ (522,526) $ (454,260) Interest on notes payable............... (5,282) (6,170) (13,003) (15,186) (17,377) (15,817) Allowance for funds used during construction.......... 6,581 4,467 15,982 12,325 20,121 24,217 Income taxes applicable to nonoperating activities............ 2,080 1,671 (1,169) 18,946 (17,418) 31,151 Provisions for dividends and redemption premiums-- Preferred and preference stocks of ComEd............... (1,830) (14,053) (20,170) (43,062) (33,991) (57,635) ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities..... (7,428) (7,428) (22,283) (22,283) (29,710) (29,710) Loss on nuclear plant closure............... -- -- -- -- -- (885,611) Income tax effects of nuclear plant closure............... -- -- -- -- -- 362,952 Miscellaneous--net..... (9,175) (2,316) 37,492 (33,520) 67,816 (106,960) ---------- ---------- ---------- ---------- ---------- ----------- $ (149,676) $ (135,364) $ (416,283) $ (417,709) $ (533,085) $(1,131,673) ---------- ---------- ---------- ---------- ---------- ----------- Net Income/(Loss) before Extraordinary Items.... $ 279,752 $ 264,822 $ 496,366 $ 398,995 $ 607,554 $ (151,731) Extraordinary Losses, less Applicable Income Taxes.................. -- -- (27,579) -- (27,579) (810,335) ---------- ---------- ---------- ---------- ---------- ----------- Net Income/(Loss)....... $ 279,752 $ 264,822 $ 468,787 $ 398,995 $ 579,975 $ (962,066) ========== ========== ========== ========== ========== =========== Earnings/(loss) per common share before extraordinary items-- Basic.................. $ 1.29 $ 1.22 $ 2.29 $ 1.84 $ 2.80 $ (0.69) Diluted................ $ 1.28 $ 1.22 $ 2.28 $ 1.83 $ 2.79 $ (0.69) Extraordinary losses, less applicable income taxes (basic and diluted)............... -- -- (0.13) -- (0.13) (3.75) Earnings/(loss) per common share-- Basic.................. $ 1.29 $ 1.22 $ 2.16 $ 1.84 $ 2.67 $ (4.44) Diluted................ $ 1.28 $ 1.22 $ 2.15 $ 1.83 $ 2.66 $ (4.44) Cash Dividends Declared per Common Share....... $ 0.40 $ 0.40 $ 1.20 $ 1.20 $ 1.60 $ 1.60
The accompanying Notes to Financial Statements are an integral part of the above statements. 5 UNICOM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, ASSETS 1999 1998 ------ ------------- ------------ (Thousands of Dollars) Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $959 million and $858 million, respectively)....................... $28,501,029 $27,801,246 Less--Accumulated provision for depreciation....... 15,749,560 15,234,320 ----------- ----------- $12,751,469 $12,566,926 Nuclear fuel, at amortized cost.................... 864,229 874,979 ----------- ----------- $13,615,698 $13,441,905 ----------- ----------- Investments and Other Property: Nuclear decommissioning funds...................... $ 2,340,005 $ 2,267,317 Subsidiary companies............................... 42,908 41,150 Other, at cost..................................... 310,030 275,794 ----------- ----------- $ 2,692,943 $ 2,584,261 ----------- ----------- Current Assets: Cash............................................... $ 43,300 $ 28,893 Temporary cash investments......................... 38,229 26,935 Cash held for redemption of securities............. 606,822 3,062,816 Special deposits................................... 382 271 Receivables-- Customers........................................ 1,307,554 1,369,701 Forward share repurchase contract................ 678,016 -- Other............................................ 148,933 136,701 Provisions for uncollectible accounts............ (62,718) (48,645) Coal and fuel oil, at average cost................. 131,272 135,415 Materials and supplies, at average cost............ 242,342 232,246 Deferred income taxes related to current assets and liabilities....................................... 30,872 24,339 Prepayments and other.............................. 37,976 20,301 ----------- ----------- $ 3,202,980 $ 4,988,973 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Regulatory assets.................................. $ 4,473,652 $ 4,578,427 Other.............................................. 113,031 96,907 ----------- ----------- $ 4,586,683 $ 4,675,334 ----------- ----------- $24,098,304 $25,690,473 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 6 UNICOM CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, CAPITALIZATION AND LIABILITIES 1999 1998 ------------------------------ ----------- ------------ (Thousands of Dollars) Capitalization (see accompanying statements): Common stock equity................................. $ 5,296,088 $ 5,099,444 Preferred and preference stocks of ComEd-- Without mandatory redemption requirements......... 1,829 74,488 Subject to mandatory redemption requirements...... -- 69,475 ComEd-obligated mandatorily redeemable preferred se- curities of subsidiary trusts holding solely ComEd's subordinated debt securities*.............. 350,000 350,000 Long-term debt...................................... 7,195,732 7,792,502 ----------- ----------- $12,843,649 $13,385,909 ----------- ----------- Current Liabilities: Notes payable....................................... $ 448,750 $ 292,963 Current portion of long-term debt, redeemable preference stock and capitalized lease obligations of subsidiary companies............................ 1,292,606 2,314,443 Accounts payable.................................... 499,405 604,936 Accrued interest.................................... 131,174 180,674 Accrued taxes....................................... 274,210 134,976 Dividends payable................................... 90,859 105,133 Customer deposits................................... 62,211 56,954 Accrued plant closing costs......................... 15,198 78,430 Other............................................... 137,476 155,262 ----------- ----------- $ 2,951,889 $ 3,923,771 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes............................... $ 3,719,866 $ 3,805,460 Nuclear decommissioning liability for retired plants............................................. 1,266,900 1,215,400 Accumulated deferred investment tax credits......... 535,089 562,285 Accrued spent nuclear fuel disposal fee and related interest........................................... 753,926 728,413 Obligations under capital leases of subsidiary com- panies............................................. 213,736 333,653 Regulatory liabilities.............................. 599,739 595,005 Other............................................... 1,213,510 1,140,577 ----------- ----------- $ 8,302,766 $ 8,380,793 ----------- ----------- Commitments and Contingent Liabilities (Note 21) $24,098,304 $25,690,473 =========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. The accompanying Notes to Financial Statements are an integral part of the above statements. 7 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CAPITALIZATION
September 30, December 31, 1999 1998 ----------- ------------ (Thousands of Dollars) Common Stock Equity: Common stock, without par value-- Outstanding--217,443,205 shares and 217,094,560 shares, respectively.............................. $ 4,958,853 $ 4,966,630 Preference stock expense of ComEd................... (72) (3,199) Retained earnings................................... 347,402 142,813 Treasury stock--264,406 shares and 178,982 shares, respectively....................................... (10,095) (6,800) ----------- ----------- $ 5,296,088 $ 5,099,444 ----------- ----------- Preferred and Preference Stocks of ComEd-- Without Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--No shares and 13,499,549 shares, respectively.................................... $ -- $ 504,957 Current redemption requirements for preference stock included in current liabilities............ -- (432,320) $1.425 convertible preferred stock, cumulative, without par value-- Outstanding--57,526 shares and 58,211 shares, respectively.................................... 1,829 1,851 Prior preferred stock, cumulative, $100 par value per share-- No shares outstanding................ -- -- ----------- ----------- $ 1,829 $ 74,488 ----------- ----------- Subject to Mandatory Redemption Requirements: Preference stock, cumulative, without par value-- Outstanding--700,000 shares and 1,720,345 shares, respectively ................................... $ 69,475 $ 171,348 Current redemption requirements for preference stock included in current liabilities............ (69,475) (101,873) ----------- ----------- $ -- $ 69,475 ----------- ----------- ComEd-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities................. $ 350,000 $ 350,000 ----------- ----------- Long-Term Debt: First mortgage bonds: Maturing 1999 through 2003--6 3/8% to 9 3/8%...... $ 672,245 $ 1,080,000 Maturing 2004 through 2013--4.40% to 8 3/8%....... 1,305,400 1,485,400 Maturing 2014 through 2023--5.85% to 9 7/8%....... 1,609,443 1,981,000 ----------- ----------- $ 3,587,088 $ 4,546,400 Transitional trust notes, due 2000 through 2008-- 5.29% to 5.74%..................................... 3,162,955 3,400,000 Sinking fund debentures, due 1999 through 2011--2 3/4% to 7 5/8%..................................... 31,383 94,159 Pollution control obligations, due 2007 through 2014--3.75% to 5 7/8%.............................. 139,200 140,700 Other long-term debt................................ 1,390,738 1,259,204 Current maturities of long-term debt included in current liabilities................................ (1,064,841) (1,585,281) Unamortized net debt discount and premium........... (50,791) (62,680) ----------- ----------- $ 7,195,732 $ 7,792,502 ----------- ----------- $12,843,649 $13,385,909 =========== ===========
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 Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- -------- ---------- (Thousands of Dollars) Balance at Beginning of Period................. $ 156,743 $ (60,832) $142,813 $(21,184) $117,109 $1,426,479 Add--Net income/(loss).. 279,752 264,822 468,787 398,995 579,975 (962,066) --------- --------- -------- -------- -------- ---------- $ 436,495 $ 203,990 $611,600 $377,811 $697,084 $ 464,413 --------- --------- -------- -------- -------- ---------- Deduct-- Cash dividends declared on common stock........ $ 86,979 $ 86,842 $260,760 $260,355 $347,566 $ 346,965 Other capital stock transactions--net... 2,114 39 3,438 347 2,116 339 --------- --------- -------- -------- -------- ---------- $ 89,093 $ 86,881 $264,198 $260,702 $349,682 $ 347,304 --------- --------- -------- -------- -------- ---------- Balance at End of Period (Includes $702 million and $470 million of appropriated retained earnings at September 30, 1999 and 1998, respectively).......... $ 347,402 $ 117,109 $347,402 $117,109 $347,402 $ 117,109 ========= ========= ======== ======== ======== ==========
The accompanying Notes to Financial Statements are an integral part of the above statements. 9 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ---------------------- ------------------------ 1999 1998 1999 1998 1999 1998 --------- --------- ----------- --------- ----------- ----------- (Thousands of Dollars) Cash Flow from Operating Activities: Net income/(loss)...... $ 279,752 $ 264,822 $ 468,787 $ 398,995 $ 579,975 $ (962,066) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization........ 210,648 246,815 742,432 755,593 976,815 1,018,754 Deferred income taxes and investment tax credits--net........ (10,983) (10,773) (109,303) (4,647) (35,026) (348,512) Extraordinary loss related to write-off of certain net regulatory assets... -- -- -- -- -- 810,335 Loss on nuclear plant closure............. -- -- -- -- -- 885,611 Provisions/(payments) for revenue refunds--net........ (2,439) -- (22,297) (45,470) 306 -- Equity component of allowance for funds used during construction........ (2,243) (1,814) (5,999) (5,358) (7,600) (12,570) Provisions/(payments) for liability for separation costs-- net................. (1,746) (9,853) (11,544) (2,817) 1,029 (11,779) Net effect on cash flows of changes in: Receivables........ 15,208 (292,026) 48,085 (435,280) 13,931 (509,733) Coal and fuel oil.. 14,753 52,848 4,143 (31,660) 21,052 (7,878) Materials and supplies.......... (2,829) 13,452 (10,096) 1,559 8,150 42,996 Accounts payable excluding nuclear fuel lease principal payments and separation costs--net........ 10,016 (124,957) (92,907) (23,915) 26,894 67,779 Accrued interest and taxes......... 3,198 100,645 107,785 183,672 (123,605) 42,009 Other changes in certain current assets and liabilities....... 37,883 29,731 89,881 83,382 152,030 188,004 Other--net........... (10,811) 31,410 111,496 76,249 58,954 104,423 --------- --------- ----------- --------- ----------- ----------- $ 540,407 $ 300,300 $ 1,320,463 $ 950,303 $ 1,672,905 $ 1,307,373 --------- --------- ----------- --------- ----------- ----------- Cash Flow from Investing Activities: Construction expenditures.......... $(271,921) $(202,930) $ (752,614) $(635,668) $(1,042,735) $ (983,117) Nuclear fuel expenditures.......... (90,926) (28,616) (204,873) (123,583) (247,458) (151,686) Sales of generating plants................ -- -- -- 177,454 -- 238,245 Equity component of allowance for funds used during construction.......... 2,243 1,814 5,999 5,358 7,600 12,570 Contributions to nuclear decommissioning funds................. -- -- (39,426) (80,077) (96,120) (114,721) Other investments and special deposits...... (26,644) $ (6,001) (39,345) (10,863) (47,603) 10,083 --------- --------- ----------- --------- ----------- ----------- $(387,248) $(235,733) $(1,030,259) $(667,379) $(1,426,316) $ (988,626) --------- --------- ----------- --------- ----------- ----------- Cash Flow from Financing Activities: Issuance of securities-- Transitional trust notes................ $ -- $ -- $ -- $ -- $ 3,382,629 $ -- Other long-term debt.. 98,025 347,068 161,155 382,068 161,357 387,068 Capital stock......... 3,763 4,141 8,175 10,908 13,912 17,246 Retirement and redemption of securities-- Transitional trust notes................ (97,045) -- (237,045) -- (237,045) -- Other long-term debt.. (28,017) (151,008) (1,089,027) (525,656) (1,179,228) (585,660) Capital stock......... (75,034) (24,270) (639,298) (30,495) (649,669) (34,066) Deposits and securities held for retirement and redemption of securities............ -- 995 -- -- -- -- Prepayment of forward share repurchase contract.............. -- -- (662,113) -- (662,113) -- Cash dividends paid on common stock.......... (86,915) (86,763) (260,585) (260,111) (347,428) (346,678) Proceeds from sale/leaseback of nuclear fuel.......... -- 39,612 -- 101,038 -- 146,768 Nuclear fuel lease principal payments.... (55,610) (43,321) (157,546) (204,330) (208,820) (246,681) Increase/(decrease) in short-term borrowings............ 36,900 (81,200) 155,787 250,496 40,104 365,896 --------- --------- ----------- --------- ----------- ----------- $(203,933) $ 5,254 $(2,720,497) $(276,082) $ 313,699 $ (296,107) --------- --------- ----------- --------- ----------- ----------- Change in Net Cash Balance................ $ (50,774) $ 69,821 $(2,430,293) $ 6,842 $ 560,288 $ 22,640 Cash, Temporary Cash Investments and Cash Held for Redemption of Securities: Balance at Beginning of Period........... 739,125 58,242 3,118,644 121,221 128,063 105,423 --------- --------- ----------- --------- ----------- ----------- Balance at End of Period.............. $ 688,351 $ 128,063 $ 688,351 $ 128,063 $ 688,351 $ 128,063 ========= ========= =========== ========= =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 10 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies. Corporate Structure and Basis of Presentation. Unicom is the parent holding company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility, is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated subsidiary of Unicom and is engaged, through its subsidiaries, in energy service activities. The consolidated financial statements include the accounts of Unicom, ComEd, Indiana Company, Edison Development, the Trusts, ComEd Funding, ComEd Funding Trust and Unicom's unregulated subsidiaries. All significant intercompany transactions have been eliminated. Although the accounts of ComEd Funding and ComEd Funding Trust, which are SPEs, are included in the consolidated financial statements, as required by GAAP, ComEd Funding and ComEd Funding Trust are legally separated from Unicom and ComEd. The assets of the SPEs are not available to creditors of Unicom or ComEd and the transitional property held by the SPEs are not assets of Unicom or ComEd. Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Due to the transition to a new customer information and billing system, a larger portion of customer revenues and net receivables has been based on estimates since July 1998 than in previous periods. Regulation. ComEd is subject to regulation as to accounting and ratemaking policies and practices by the ICC and FERC. ComEd's accounting policies and the accompanying consolidated financial statements conform to GAAP applicable to rate-regulated enterprises for the non-generation portion of its business, including the effects of the ratemaking process in accordance with SFAS No. 71, Accounting for the Effects of Certain Types of Regulation. Such effects on the non-generation portion of its business concern mainly the time at which various items enter into the determination of operating results in order to follow the principle of matching costs with the applicable revenues collected from or returned to customers through future rates. See Note 3 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, not subject to cost-based rate regulation, including construction work in progress and nuclear fuel, and excluding the decommissioning costs included in the accumulated provision for depreciation was $9.2 billion as of September 30, 1999 and December 31, 1998. See "Regulatory Assets and Liabilities" below regarding the plant impairment recorded by ComEd in the second quarter of 1998. 11 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Regulatory Assets and Liabilities. Regulatory assets are incurred costs which have been deferred and are amortized for ratemaking and accounting purposes. Regulatory liabilities represent amounts to be settled with customers through future rates. Regulatory assets and liabilities reflected on the Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 were as follows:
September 30, December 31, 1999 1998 ------------- ------------ (Thousands of Dollars) Regulatory assets: Impaired production plant.......................... $2,856,254 $2,955,154 Deferred income taxes (1).......................... 678,583 680,356 Nuclear decommissioning costs--Dresden Unit 1...... 206,803 255,031 Nuclear decommissioning costs--Zion Units 1 and 2.. 514,052 443,130 Coal reserves...................................... 178,038 197,975 Unamortized loss on reacquired debt (2)............ 39,922 46,781 ---------- ---------- $4,473,652 $4,578,427 ========== ========== Regulatory liabilities: Deferred income taxes (1).......................... $ 599,739 $ 595,005 ========== ==========
- -------- (1) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for non-generation related temporary differences. (2) Amortized over the remaining lives of the non-generation related long-term debt issued to finance the reacquisition. See "Loss on Reacquired Debt" below for additional information. ComEd performed a SFAS No. 121 impairment analysis in 1998 which concluded that future revenues, excluding the collection of the CTC expected to be recovered from electric supply services, would be insufficient to cover the costs of certain of its generating assets. Because future regulated cash flows, which include the CTC, tariff revenues and gains from the disposition of assets, are expected to provide recovery of the impaired plant assets, a regulatory asset was recorded for the same amount. This regulatory asset is currently being amortized as it is recovered through regulated cash flows and, along with the coal reserves regulatory asset, is expected to be substantially recovered at the completion of the fossil plant sale. See Note 3 for additional information regarding amortization of regulatory assets with respect to limits on ComEd's earnings due to statutory sharing provisions. See Note 4 for additional information regarding the fossil plant sale. Recovery of the regulatory asset for Dresden Unit 1 and Zion Units 1 and 2 represents unrecovered nuclear decommissioning costs, which are expected to be recovered over the periods 1999-2011 and 1999-2013, respectively, through a separate rate recovery rider provided for by the 1997 Act. See "Depreciation, Amortization of Regulatory Assets and Decommissioning" below for additional information. Depreciation, Amortization of Regulatory Assets and Decommissioning. Depreciation, amortization of regulatory assets and decommissioning for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Depreciation expense.... $180,598 $ 178,788 $538,623 $612,161 $ 714,518 $ 830,767 Amortization of regulatory assets...... 556 32,718 98,900 32,718 131,393 36,536 --------- --------- -------- -------- --------- --------- $ 181,154 $ 211,506 $637,523 $644,879 $ 845,911 $ 867,303 Decommissioning expense................ 20,955 20,955 62,865 69,065 83,820 96,221 --------- --------- -------- -------- --------- --------- $ 202,109 $ 232,461 $700,388 $713,944 $ 929,731 $ 963,524 ========= ========= ======== ======== ========= =========
12 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Provisions for depreciation, including nuclear plant, were at average annual rates of average depreciable utility plant and equipment for the three months, nine months and twelve months ended September 30, 1999 and 1998 as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ -------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- Average annual depreciation rates..... 2.65% 2.74% 2.65% 3.12% 2.67% 3.18%
Depreciation is provided on a straight-line basis by amortizing the cost of depreciable plant and equipment over estimated service lives for each class of plant. The decrease in the average depreciation rates for the periods in 1999, compared to 1998, relates primarily to a reduction in nuclear depreciation rates due to the partial impairment of production plant, which was recorded as a component of accumulated depreciation, partially offset by shortened depreciable lives for certain nuclear stations. See "Regulatory Assets and Liabilities" above for additional information on the partial impairment of production plant. 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--Depreciation, Amortization and 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 decommissioning costs. Dismantling is expected to occur relatively soon after the end of the current NRC license life of each generating station currently operating. The accrual for decommissioning is based on the prompt removal method authorized by NRC guidelines. ComEd's ten operating units have remaining current NRC license lives ranging from 7 to 28 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 2011, respectively, which is consistent with the regulatory treatment for the related decommissioning costs. Based on ComEd's most recent study, decommissioning costs are estimated to be $5.4 billion in current-year (1999) dollars, including a contingency allowance. This estimate includes $588 million of non-radiological costs, which are included in ComEd's proposed rider for recovery, as discussed below. ComEd's decommissioning cost expenditures at the end of the units' operating lives are estimated to total approximately $13.8 billion. These expenditures will occur primarily during the period from 2007 through 2034. All such costs are expected to be funded by the external decommissioning trusts, which ComEd established in compliance with Illinois law and into which ComEd has been making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of or changes to NRC regulations, as well as changes in the assumptions used in making such estimates, including changes in technology, available alternatives for the disposal of nuclear waste and inflation. Since 1995, ComEd has collected decommissioning costs from its ratepayers in conjunction with a rider to its tariffs. The rider allows annual adjustments to decommissioning cost collections outside the context of a traditional rate proceeding and will continue under the 1997 Act. The current estimated decommissioning costs include a contingency allowance, but, except at Dresden Unit 1, exclude 13 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued amounts for alternative spent fuel storage installations, which may be necessary to store spent fuel during the period beginning at the end of the NRC license lives of the plants to the date when the DOE accepts the spent fuel for permanent storage. Contingency allowances used in decommissioning cost estimates provide for currently unspecifiable costs that are likely to occur after decommissioning begins and generally range from 20% to 25% of the currently specifiable costs. In February 1998, the ICC authorized a reduction in the annual decommissioning cost accrual from $109 million to $84 million. The reduction primarily reflected stronger than expected after-tax returns on the external trust funds and lower than expected escalation in low-level waste disposal costs, partially offset by the higher current-year cost estimates, including a contingency allowance. Under its most recent annual rider, filed with the ICC on February 26, 1999, ComEd has proposed to increase its estimated annual decommissioning cost accrual from $84 million to $130 million. The proposed increase primarily reflects an increase in low-level waste disposal cost escalation, the inclusion of $209 million in current-year (1999) dollars for safety-related costs of maintaining Zion Station in a mothballed condition until dismantlement begins, and the inclusion of non-radiological costs in the decommissioning cost estimates for recovery under the rider. The proposed annual decommissioning cost accrual of $130 million was determined using the following assumptions: the decommissioning cost estimate of $5.4 billion in current-year (1999) dollars, after-tax earnings on the tax- qualified and nontax-qualified decommissioning funds of 7.49% and 6.83%, respectively, and an escalation rate for future decommissioning costs of 4.84%. The proposed annual accrual provided over the current NRC license lives of the nuclear plants, coupled with the expected fund earnings and amounts previously recovered in rates, is expected to aggregate to approximately $13.8 billion. For the ten operating nuclear units, decommissioning cost accruals are recorded as portions of depreciation expense and accumulated provision for depreciation on the Statements of Consolidated Operations and the Consolidated Balance Sheets, respectively, as such costs are recovered through rates. As of September 30, 1999, the total decommissioning costs included in the accumulated provision for depreciation were $1,938 million. For ComEd's retired nuclear units, the total estimated liability for nuclear decommissioning in current-year (1999) dollars is recorded as a noncurrent liability. The unrecovered portion of the liability is recorded as a regulatory asset. The nuclear decommissioning liability for retired plants as of September 30, 1999 was as follows:
Zion Dresden Units Unit 1 1 and 2 Total -------- -------- ---------- (Thousands of Dollars) Amounts recovered through rates and investment fund earnings.................................... $118,497 $427,548 $ 546,045 Unrecovered portion of the liability.............. 206,803 514,052 720,855 -------- -------- ---------- Nuclear decommissioning liability for retired plants.......................................... $325,300 $941,600 $1,266,900 ======== ======== ==========
Under Illinois law, decommissioning cost collections are required to be deposited into external trusts. Consequently, such collections do not add to the cash flows available for general corporate purposes. The ICC has approved ComEd's funding plan, which provides for annual contributions of current accruals and ratable contributions of past accruals over the remaining current NRC license lives of the nuclear plants. The fair value of funds accumulated in the external trusts at September 30, 14 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 1999 was $2,340 million, which includes pre-tax unrealized appreciation of $573 million. The earnings on the external trusts for operating plants accumulate in the fund balance and accumulated provision for depreciation. Nuclear decommissioning funding as of September 30, 1999 was as follows:
(Thousands of Dollars) Amounts recovered through rates and investment fund earnings for operating plants (included in the accumu- lated provision for depreciation)...................... $1,937,533 Amounts recovered through rates and investment fund earnings for retired plants............................ 546,045 Less past accruals not yet contributed to the trusts.... 143,573 ---------- Fair value of external trust funds..................... $2,340,005 ==========
Customer Receivables and Revenues. ComEd is engaged principally in the production, purchase, transmission, distribution and sale of electricity to a diverse base of residential, commercial, industrial and wholesale customers. ComEd's electric service territory has an area of approximately 11,300 square miles and an estimated population of approximately eight million as of September 30, 1999. It includes the City, an area of about 225 square miles with an estimated population of approximately three million from which ComEd derived approximately 30 percent of its ultimate consumer revenues for the three months, nine months and twelve months ended September 30, 1999. ComEd had approximately 3.5 million electric customers at September 30, 1999. As a result of the implementation of a new customer billing and information system in July 1998, billing and collection delays have temporarily increased accounts receivable from customers. Accounts receivable from customers as of September 30, 1999 and December 31, 1998 include $211 million and $331 million, respectively, in estimated unbilled revenue for service that has been provided to customers, but for which bill issuance was delayed beyond the normal date of issuance. ComEd has recorded increased provisions for uncollectible accounts to recognize the estimated portion of receivables that are not expected to be recoverable, primarily based on an aging analysis of outstanding accounts receivable. Such provisions increased O&M expenses by $25 million for the nine months ended September 30, 1999 and $35 million for the twelve months ended September 30, 1999, compared to normally expected levels. Receivables from customers as of September 30, 1999 and December 31, 1998 also include $311 million and $266 million, respectively, for estimated unbilled revenues for electric service that has been provided to customers subsequent to the normal billing date and prior to the end of the reporting period. See Notes 3 and 18 for additional information. Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on the quantity of heat produced using the unit of production method. As authorized by the ICC, provisions for spent nuclear fuel disposal costs have been recorded at a level required to recover the fee payable on the current nuclear-generated and sold electricity and the current interest accrual on the one-time fee payable to the DOE for nuclear generation prior to April 7, 1983. The one-time fee and interest thereon have been recovered and the current fee and interest on the one-time fee are presently being recovered through base rates. See Note 13 for additional information concerning the disposal of spent nuclear fuel, one-time fee and interest accrual on the one-time fee. Nuclear fuel expenses, including leased fuel costs and provisions for spent nuclear fuel disposal costs, were $107 million and $92 million for the three months ended September 30, 1999 and 1998, respectively, $288 million and $233 million for the nine months ended September 30, 1999 and 1998, respectively, and $372 million and $301 million for the twelve months ended September 30, 1999 and 1998, respectively. 15 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Income Taxes. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book/tax temporary differences reverse. Prior years' deferred investment tax credits are amortized through credits to income generally over the lives of the related property. Income tax credits resulting from interest charges applicable to nonoperating activities, principally construction, are classified as other income. AFUDC and Interest Capitalized. In accordance with the uniform systems of accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC, compounded semiannually, which represents the estimated cost of funds used to finance its construction program for the non-generation portion of its business. The equity component of AFUDC is recorded on an after-tax basis and the borrowed funds component of AFUDC is recorded on a pre-tax basis. The average annual capitalization rates were 7.87% and 8.18% for the three months ended September 30, 1999 and 1998, respectively, 7.85% and 8.41% for the nine months ended September 30, 1999 and 1998, respectively, and 7.92% and 8.76% for the twelve months ended September 30, 1999 and 1998, respectively. ComEd discontinued SFAS No. 71 regulatory accounting practices in December 1997 for the generation portion of its business, and as a result began capitalizing interest in 1998. ComEd capitalized $4 million and $6 million for the three months ended September 30, 1999 and 1998, respectively, $16 million and $14 million for the nine months ended September 30, 1999 and 1998, respectively, and $31 million and $14 million for the twelve months ended September 30, 1999 and 1998, respectively, in interest costs on its generation-related construction work in progress and nuclear fuel in process. AFUDC and interest capitalized do not contribute to the current cash flow of Unicom or ComEd. Interest. Total interest costs incurred on debt, leases and other obligations were $160 million and $135 million for the three months ended September 30, 1999 and 1998, respectively, $484 million and $412 million for the nine months ended September 30, 1999 and 1998, respectively, and $611 million and $557 million for the twelve months ended September 30, 1999 and 1998, respectively. Debt Discount, Premium and Expense. Discount, premium and expense on long- term debt of ComEd are being amortized over the lives of the respective issues. Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss from ComEd's reacquisition, in connection with the refinancing of first mortgage bonds, sinking fund debentures and pollution control obligations prior to their scheduled maturity dates, is deferred and amortized over the lives of the long-term debt issued to finance the reacquisition for non- generation related financings. See "Regulatory Assets and Liabilities" above and Note 3 for additional information. Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure purposes only. Unicom accounts for its stock option awards and ESPP under APB Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 for additional information. 16 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Average Common Shares Outstanding. Under the provisions of SFAS No. 128, Earnings per Share, Unicom has presented basic and diluted EPS on the Statements of Consolidated Operations for the three months, nine months and twelve months ended September 30, 1999 and 1998. The number of average outstanding common shares used to compute basic and diluted EPS for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- (Thousands of Shares) Average Number of Common Shares Outstanding: Average Number of Com- mon Shares--Basic..... 217,375 217,024 217,231 216,876 217,208 216,779 Potentially Dilutive Common Shares--Trea- sury Method: Stock Options........ 801 647 777 583 777 529 Other Convertible Securities.......... 89 90 89 90 89 90 --------- --------- -------- -------- --------- --------- Average Number of Com- mon Shares--Diluted... 218,265 217,761 218,097 217,549 218,074 217,398 ========= ========= ======== ======== ========= =========
Energy Risk Management Contracts. In the normal course of business ComEd utilizes contracts for the forward sale and purchase of energy to manage effectively the utilization of its available generating capability. ComEd also utilizes put and call option contracts and energy swap arrangements to limit the market price risk associated with the forward commodity contracts. As ComEd does not currently utilize financial or commodity instruments for trading or speculative purposes, any gains or losses on forward commodity contracts are recognized when the underlying transactions affect earnings. Revenues and expenses associated with market price risk management contracts are amortized over the terms of such contracts. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, which establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded on the Consolidated Balance Sheets as either an asset or liability measured at its fair value. 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. The effective date of SFAS No. 133 has been delayed for one year, to fiscal years beginning after June 15, 2000. SFAS No. 133 may be implemented prior to June 15, 2000, but such implementation cannot be applied retroactively. SFAS No. 133 must be applied to (i) derivative instruments and (ii) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after January 1, 1998 or January 1, 1999 at the Company's election. Unicom and ComEd have not yet quantified the effects on their financial statements of adopting SFAS No. 133 and have not determined the timing or method of 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. 17 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Cash Held for Redemption of Securities. As of September 30, 1999, the cash held for redemption of securities reported on the Consolidated Balance Sheets includes $536 million in unused cash proceeds from the issuance of the transitional trust notes and $71 million of escrowed cash and pending instrument funding charges collected from ComEd customers to be applied to the principal and interest payment on the transitional trust notes. See Note 3 for additional information. 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, nine months and twelve months ended September 30, 1999 and 1998 was as follows:
Three Months Twelve Months Ended Nine Months Ended Ended September 30 September 30 September 30 ---------------- ----------------- ----------------- 1999 1998 1999 1998 1999 1998 -------- ------- -------- -------- -------- -------- (Thousands of Dollars) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized).. $158,363 $98,722 $485,881 $352,057 $572,934 $451,027 Income taxes (net of refunds)............. $140,915 $23,040 $225,022 $ 23,546 $484,873 $206,663 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obligations incurred by subsidiary companies.............. $ 189 $40,954 $ 1,625 $104,933 $ 3,062 $152,812
(2) Merger Agreement. On September 22, 1999, Unicom and PECO, along with a wholly-owned subsidiary of PECO, Newco, entered into a definitive Merger Agreement providing for a merger of equals. The Merger Agreement has been unanimously approved by Unicom and PECO's Boards of Directors. The merger is conditioned, among other things, upon the approvals of the shareholders of both companies and is subject to approval by various regulatory bodies. Under the Merger Agreement, PECO and ComEd will become the principal utility subsidiaries of Newco. This result will be achieved by a mandatory exchange of the outstanding common stock of PECO for common stock of Newco or cash, subject to proration, and a merger of Unicom with and into Newco wherein holders of Unicom common stock will exchange their shares for Newco common stock or cash, subject to proration. The merger transaction will be accounted for as a purchase of Unicom by PECO. (3) Accounting Effects Related to the 1997 Act. In December 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act was amended in June 1999. As a result of the 1997 Act and FERC rules, prices for the supply of electric energy are expected to transition from cost-based, regulated rates to rates determined by competitive market forces. Accordingly, the 1997 Act provides for, among other things, gradual customer access to other electric suppliers or a power purchase option which allows the purchase of electric energy from ComEd at market based prices, and the collection of a CTC from customers who choose to purchase electric energy from a RES or elect the power purchase option during a transition period that extends through 2006. Effective October 1, 1999, the CTC was established in accordance with a formula defined in the 18 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 1997 Act. The CTC, which will be applied on a cents per kilowatthour basis, considers the revenue which would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. The CTC allows ComEd to recover some of its costs which might otherwise be unrecoverable under market- based rates. Nonetheless, ComEd will need to take steps to address the portion of such costs which are not recoverable through the CTC. Such steps may include cost control efforts, developing new sources of revenue and asset dispositions. See Note 4 for additional information. Access for non-residential customers will occur over a period from October 1999 to December 31, 2000, and access for residential customers will occur after May 1, 2002. On October 1, 1999, more than 41,000 non-residential customers became eligible to choose their electric supplier or elect the purchase power option. As of November 1, 1999, over 2,250 non-residential customers, representing approximately five percent of ComEd's 1998 retail kilowatthour sales, elected to receive their electric energy from a RES or chose the purchase power option. As a result of the collection of CTC's from customers who choose to receive their electric energy from a RES or elect the purchase power option, ComEd does not expect these elections to have a material effect on its results of operations in the near term. Utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select a RES can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based, regulated rates. The ICC issued orders in August and September approving, with modifications, ComEd's delivery service tariffs. The 1997 Act also provides for a 15% residential base rate reduction which became effective August 1, 1998 and an additional 5% residential base rate reduction in October 2001. Notwithstanding the rate reductions and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. During this period, utilities may reorganize, sell or assign assets, retire or remove plants from service, and accelerate depreciation or amortization of assets with limited ICC regulatory review. A utility may request a rate increase during the rate freeze period only when necessary to ensure the utility's financial viability, but not before January 1, 2000. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity is based on the 30-Year Treasury Bond rate, plus 5.5% in the years 1998 and 1999, and plus 8.5% in the years 2000 through 2004. The utility's earned return on common equity and the threshold return on common equity are each calculated on a two-year average basis. The earnings sharing provision is applicable only to utility earnings. Increased amortization of regulatory assets may be recorded, thereby reducing the earned return on common equity, if earnings otherwise would have exceeded the maximum allowable rate of return. The potential for earnings sharing or increased amortization of regulatory assets could limit earnings in future periods. The 1997 Act also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a SPE. The proceeds, net of transaction costs, from 19 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. The proceeds from the transitional trust notes, net of transaction costs, were, as required, used to redeem $1,021 million of long-term debt and $607 million of preference stock in 1999 and reduce $500 million of ComEd's outstanding short-term debt. During the first nine months of 1999, ComEd recorded an extraordinary loss related to the early redemptions of such long-term debt, which reduced net income on common stock by approximately $28 million (after-tax), or $0.13 per common share (diluted). ComEd also recorded $10 million (after-tax), or $0.04 per common share (diluted), for premiums paid in connection with the redemption of such preference stock. The preference stock premiums were included in the provision for dividends for preference stocks of ComEd on the Statements of Consolidated Operations. In addition, Unicom has announced plans to repurchase approximately $750 million of Unicom common stock using the proceeds it will receive from ComEd's repurchase of its common stock held by Unicom. The remaining proceeds from the issuance of the transitional trust notes will be used for the payment of fees and additional debt and equity redemptions and repurchases. See Note 6 for additional information regarding Unicom's share repurchase plans. Because the 1997 Act is expected ultimately to lead to market-based pricing of electric generation services, ComEd discontinued SFAS No. 71 regulatory accounting practices for the generation portion of its business in December 1997. ComEd evaluated the regulatory assets and liabilities related to the generation portion of its business and determined that it was not probable that such costs would be recovered through the cash flows from the regulated portion of its business. Accordingly, 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 (diluted). The fourth quarter of 1997 also reflected charges totaling $44 million (after-tax), or $0.20 per common share (diluted), as a result of ComEd's elimination of its FAC pursuant to an option in the 1997 Act, and a charge of $60 million (after-tax), or $0.28 per common share (diluted), for a write down of ComEd's investment in uranium-related properties to realizable value. Projections of the market price for uranium indicated that the expected incremental costs of mining and milling uranium at the properties would exceed the expected market price for uranium and such costs are not expected to be recoverable in a competitive market. The 1997 Act also requires utilities to establish or join an ISO that will independently manage and control utility transmission systems. Additionally, the 1997 Act includes the leveling of certain regulatory requirements to permit operational flexibility, the leveling of certain regulatory and tax provisions as applied to various electric suppliers and a new, more stringent, liability standard applicable to ComEd in the event of a major outage. (4) Closure and Sale of Plants. In January 1998, the Boards of Directors of Unicom and ComEd authorized the permanent cessation of nuclear generation operations and retirement of facilities at ComEd's 2,080 megawatt Zion nuclear generating station. Such retirement resulted in a charge in the fourth quarter of 1997 of $523 million (after-tax), or $2.42 per common share (diluted). The write-off included a liability for estimated future closing costs associated with the retirement of Zion Station, excluding severance costs, resulting in a charge of $117 million (after-tax). ComEd has 20 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued recorded reductions to the expected liability for future closing costs of $14 million (after-tax), or $0.07 per common share (diluted), and $15 million (after-tax), or $0.07 per common share (diluted), during the first nine months of 1999 and in the year 1998, respectively, to reflect employees being reassigned or removed from the payroll sooner than anticipated, and lower support costs and use of contractors. See Note 16 for information regarding costs of voluntary employee separation plans. ComEd completed the sale of its State Line and Kincaid coal-fired generating stations (representing 1,598 megawatts of generating capacity) 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 has entered into 15-year purchased power agreements for the output of the stations. On March 22, 1999, ComEd entered into an Asset Sale Agreement providing for the sale of substantially all of its fossil generating assets to EME for a cash purchase price of $4.813 billion. The fossil generating assets represent an aggregate generating capacity of approximately 9,772 megawatts. Completion of the sale is subject to certain regulatory filings and approvals and is expected to occur during the fourth quarter of 1999. The ICC approved the fossil plant sale on August 3, 1999, and FERC issued its approval on November 8, 1999. Just prior to the consummation of the fossil plant sale, ComEd expects to transfer these assets to an affiliate, Unicom Investment. In consideration for the transferred assets, Unicom Investment will pay ComEd consideration totaling $4.813 billion in the form of a Demand Note in the amount of approximately $2.350 billion and an interest-bearing Note with a maturity of twelve years. Unicom Investment will immediately sell the fossil plant assets to EME, in consideration of which Unicom Investment will receive $4.813 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment will pay the $2.350 billion aggregate principal due to ComEd under the Demand Note. Unicom Investment will use the remainder of the cash received from EME to fund other business opportunities, including the merger with PECO. Of the cash received by ComEd, $1.680 billion is expected to be used to pay the costs and taxes associated with the fossil plant sale. The remainder of the Demand Note proceeds will be available to ComEd to fund, among other things, transmission and distribution projects, nuclear generation station projects, and environmental and other initiatives. The sale is expected to produce an after-tax gain of approximately $1.6 billion, after settling commitments associated with certain coal contracts, recognizing employee-related costs and funding certain environmental initiatives. The gain on the sale will be utilized to substantially recover certain regulatory assets and as a result, the sale is not expected to have a significant impact on net income in 1999. See Note 1, under "Regulatory Assets and Liabilities," for additional information. As part of the sale transaction, ComEd will enter into transitional power purchase agreements with the buyer. The agreement regarding the coal-fired units would cover a declining number of generating units over a five-year term, subject to an option in favor of ComEd to restore some or all of the units in later years of the agreement. The agreements regarding the oil and gas-fired plant and the peaking units cover the entire capacity of such generating units for a five-year term, subject to ComEd's option commencing in year three to terminate the agreements as to some or all of the generating units. The options will provide some flexibility to ComEd to adjust its power purchase needs to match its obligations to its customers during the transition period to open access for customers. Each of the agreements provides for a monthly capacity charge, based upon the capacity of the generating units under contract and subject to adjustment based upon the availability of those generating units, as well as charges for delivered energy. 21 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (5) Authorized Shares, Voting Rights and Stock Rights of Capital Stock. At September 30, 1999, Unicom's authorized shares consisted of 400,000,000 shares of common stock. The authorized shares of ComEd preferred and preference stocks at September 30, 1999 were: preference stock--7,510,451 shares; $1.425 convertible preferred stock--57,526 shares; and prior preferred stock--850,000 shares. The preference and prior preferred stocks are issuable in series and may be issued with or without mandatory redemption requirements. Holders of outstanding Unicom shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders; and holders of outstanding ComEd shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders. All such shares have the right to cumulate votes in elections for the directors of the corporation which issued the shares. Pursuant to a plan adopted by the Unicom Board of Directors on February 2, 1998, each share of Unicom's common stock carries the right (referred to herein as a "Right") to purchase one-thousandth of one share of Unicom's common stock at a purchase price of $100 per whole share of common stock, subject to adjustment. The plan was amended on September 22, 1999 to render the Rights inapplicable to the transactions contemplated by the Merger Agreement. The Rights are tradable only with Unicom's common stock until they become exercisable. The Rights become exercisable upon the earlier of ten days following a public announcement that a person (an "Acquiring Person") has acquired 15% or more of Unicom's outstanding common stock or ten business days (or such later date as may be determined by action of the Board of Directors) following the commencement of a tender or exchange offer which, if consummated, would result in a person or group becoming an Acquiring Person. The Rights are subject to redemption by Unicom at a price of $0.01 per Right, subject to certain limitations, and will expire on February 2, 2008. If a person or group becomes an Acquiring 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. (6) Common Equity. In the fourth quarter of 1998, Unicom entered into a forward purchase arrangement for the repurchase of $200 million of its common stock. This contract, which was accounted for as an equity instrument as of December 31, 1998, was settled on a net cash basis in February 1999, resulting in a $16 million reduction to common stock equity on the Consolidated Balance Sheets. In February 1999, Unicom also entered into a prepaid forward purchase agreement with a financial institution for the repurchase of approximately 15 million shares of Unicom common stock. This forward purchase arrangement was amended to also include the repurchase of approximately 5.1 million shares for a total of 20.1 million shares, subsequent to the net cash settlement of the $200 million repurchase program, as described above. The repurchase arrangement, as amended, provides for final settlement no later than February 2000, on either a physical (share) basis, or a net cash basis. The amount at which the arrangement can be settled is dependent principally upon the average market price at which the financial institution purchases such shares, compared to the forward price per share. The share repurchases will not reduce shares outstanding for purposes of EPS calculations or reduce common stock equity, and resulting return on common equity calculations, until the date of physical settlement. Unicom does not currently anticipate that settlement will occur in 1999. The repurchase 22 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued arrangement has been recorded as a receivable on the Consolidated Balance Sheets and has been adjusted at the end of each reporting period to reflect the aggregate market value of the shares deliverable under the arrangement. Consequently, the arrangement has increased earnings volatility in 1999. An unrealized loss of $18 million (after-tax), or $0.08 per common share (diluted), for the three months ended September 30, 1999 and net unrealized gains of $16 million (after-tax), or $0.07 per common share (diluted), for the nine and twelve months ended September 30, 1999 have been recorded related to the arrangement. At September 30, 1999, shares of Unicom common stock were reserved for the following purposes: Long-Term Incentive Plan........................................ 2,295,078 Employee Stock Purchase Plan.................................... 368,171 Shareholder Rights Plan......................................... 400,000 Exchange for ComEd common stock not held by Unicom.............. 88,526 1996 Directors' Fee Plan........................................ 163,893 --------- 3,315,668 =========
Common stock issued for the three months, nine months and twelve months ended September 30, 1999 and 1998 was as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------- ------------------- -------------------- 1999 1998 1999 1998 1999 1998 --------- --------- --------- -------- ---------- --------- Shares of Common Stock Issued: Long-Term Incentive Plan.................. 154,971 167,847 388,186 371,638 510,850 534,598 Employee Stock Purchase Plan.................. -- -- 45,126 52,512 86,884 133,551 Exchange for ComEd com- mon stock not held by Unicom................ -- 1,160 (3,330) 7,700 1,727 7,816 1996 Directors' Fee Plan.................. 739 3,055 4,087 9,732 7,088 13,084 --------- --------- --------- -------- ---------- --------- 155,710 172,062 434,069 441,582 606,549 689,049 ========= ========= ========= ======== ========== ========= Changes in Common Stock Accounts: Total shares issued.... $ 3,756 $ 4,162 $ 8,533 $ 10,918 $ 14,463 $ 17,260 Net cash settlement of forward share repur- chase contract........ -- -- (16,454) -- (16,454) -- Shares held by trustee for Unicom Stock Bonus Deferral Plan......... -- 1,295 -- (652) 7,428 (697) Other.................. 7 (22) 144 (10) (51) (14) --------- --------- --------- -------- ---------- --------- $ 3,763 $ 5,435 $ (7,777) $ 10,256 $ 5,386 $ 16,549 ========= ========= ========= ======== ========== =========
As of September 30, 1999 and December 31, 1998, 264,406 and 178,982 shares, respectively, of Unicom common stock were reacquired and held as treasury stock at a cost of $10 million and $7 million, respectively. At September 30, 1999 and December 31, 1998, 75,791 and 76,079, respectively, of ComEd common stock purchase warrants were outstanding. The warrants entitle the holders to convert such warrants into common stock of ComEd at a conversion rate of one share of common stock for three warrants. 23 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued As of September 30, 1999 and December 31, 1998, $702 million and $494 million, respectively, of retained earnings had been appropriated for future dividend payments. (7) Stock Option Awards/Employee Stock Purchase Plan. Unicom has a nonqualified stock option awards program under its Long-Term Incentive Plan. The stock option awards program was adopted by Unicom in July 1996 to reward valued employees responsible for, or contributing to, the management, growth and profitability of Unicom and its subsidiaries. The stock options granted expire ten years from their grant date. One-third of the shares subject to the options vest on each of the first three anniversaries of the option grant date. In addition, the stock options will become fully vested immediately if the holder dies, retires, is terminated by the Company, other than for cause, or qualifies for long-term disability. Options granted before July 22, 1998 also vest in full upon a change in control, while options granted on or after July 22, 1998 vest in full if the option holder is terminated within 24 months after a change of control. Stock option transactions through September 30, 1999 are summarized as follows:
Number of Weighted Average Options Exercise Price --------- ---------------- Outstanding as of January 1, 1997.................. 1,188,000 $25.500 Granted during the year............................ 1,339,350 22.313 Exercised during the year.......................... (23,423) 25.500 Expired/cancelled during the year.................. (212,549) 23.632 --------- Outstanding as of December 31, 1997................ 2,291,378 23.810 Granted during the year............................ 1,379,525 35.234 Exercised during the year.......................... (404,082) 24.244 Expired/cancelled during the year.................. (123,928) 25.715 --------- Outstanding as of December 31, 1998................ 3,142,893 28.694 Granted during the nine months ended September 30, 1999.............................................. 1,781,050 35.750 Exercised during the nine months ended September 30, 1999.......................................... (264,916) 24.192 Expired/cancelled during the nine months ended Sep- tember 30, 1999................................... (127,048) 33.408 --------- Outstanding as of September 30, 1999............... 4,531,979 31.598 =========
Of the stock options outstanding at September 30, 1999, 1,667,025 had vested with a weighted average exercise price of $27. The fair value of each stock option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:
Stock Option Grant Date ----------------------- 1999 1998 1997 ------- ------- ------- Expected option life.................................. 7 years 7 years 7 years Dividend yield........................................ 4.50% 4.54% 7.20% Expected volatility................................... 23.02% 21.95% 22.29% Risk-free interest rate............................... 4.83% 5.58% 6.25%
The estimated weighted average fair value for each stock option granted in 1999, 1998 and 1997 was $6.48, $6.62 and $2.79, respectively. The ESPP allows employees to purchase Unicom common stock at a ten percent discount from market value. Substantially all of the employees of Unicom, ComEd and their subsidiaries are eligible to participate in the ESPP. Unicom issued 86,884 and 133,551 shares of common stock during the twelve months ended September 30, 1999 and 1998, respectively, under the ESPP at a weighted average annual purchase price of $34.34 and $25.55, respectively. 24 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 $4 million (after-tax), or $0.02 per common share (diluted), and $2 million (after-tax), or $0.01 per common share (diluted), for the twelve months ended September 30, 1999 and 1998, respectively. (8) ComEd Preferred and Preference Stocks Without Mandatory Redemption Requirements. During the twelve months ended September 30, 1999, 13,499,549 shares of preferred or preference stock without mandatory redemption requirements were redeemed and no shares were issued. No shares of ComEd preferred or preference stocks without mandatory redemption requirements were issued or redeemed during the twelve months ended September 30, 1998. ComEd redeemed $73 million of preference stock without mandatory redemption requirements on August 1, 1999. Accordingly, all series other than Series $1.425 have been redeemed. The outstanding shares of ComEd's $1.425 convertible preferred stock are convertible at the option of the holders thereof, at any time, into common stock of ComEd at the rate of 1.02 shares of common stock for each share of convertible preferred stock, subject to future adjustment. The convertible preferred stock may be redeemed by ComEd at $42 per share, plus accrued and unpaid dividends, if any. The involuntary liquidation price of the $1.425 convertible preferred stock is $31.80 per share, plus accrued and unpaid dividends, if any. (9) ComEd Preference Stock Subject to Mandatory Redemption Requirements. During the twelve months ended September 30, 1999 and 1998, no shares of ComEd preference stock subject to mandatory redemption requirements were issued. During the twelve months ended September 30, 1999 and 1998, 1,056,060 and 338,215 shares, respectively, of ComEd preference stock subject to mandatory redemption requirements were reacquired to meet sinking fund requirements or were part of the early redemption in 1999. There were 700,000 shares of Series $6.875 preference stock outstanding at September 30, 1999, at an aggregate stated value of $69 million. This series is non-callable and is required to be redeemed on May 1, 2000. The sinking fund price is $100 and the involuntary liquidation price is $99.25 per share, plus accrued and unpaid dividends, if any. The $69 million is included in current liabilities. (10) ComEd-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities. In September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd, issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred securities. The sole asset of ComEd Financing I is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust of ComEd, issued 150,000 of its 8.50% ComEd-obligated mandatorily redeemable capital securities. The sole asset of ComEd Financing II is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. There is a full and unconditional guarantee by ComEd of the Trusts' obligations under the securities issued by the Trusts. However, ComEd's obligations are subordinate and junior in right of payment to certain other indebtedness of ComEd. ComEd has the right to defer payments of interest on the subordinated deferrable interest notes by extending the interest payment period, at any time, for up to 20 consecutive quarters. Similarly, ComEd has the right to defer payments of interest on the subordinated deferrable interest debentures by extending the interest payment period, at any 25 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued time, for up to ten consecutive semi-annual periods. If interest payments on the subordinated deferrable interest notes or debentures are so deferred, distributions on the preferred securities will also be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, ComEd may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock. The subordinated deferrable interest notes are redeemable by ComEd, in whole or in part, from time to time, on or after September 30, 2000, and with respect to the subordinated deferrable interest debentures, on or after January 15, 2007, or at any time in the event of certain income tax circumstances. If the subordinated deferrable interest notes or debentures are redeemed, the Trusts must redeem preferred securities having an aggregate liquidation amount equal to the aggregate principal amount of the subordinated deferrable interest notes or debentures so redeemed. In the event of the dissolution, winding up or termination of the Trusts, the holders of the preferred securities will be entitled to receive, for each preferred security, a liquidation amount of $25 for the securities of ComEd Financing I and $1,000 for the securities of ComEd Financing II, plus accrued and unpaid distributions thereon, including interest thereon, to the date of payment, unless in connection with the dissolution, the subordinated deferrable interest notes or debentures are distributed to the holders of the preferred securities. (11) Long-Term Debt. ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust, in the fourth quarter of 1998. The current amount outstanding is as follows:
Series Principal Amount ------------------------ ---------------------- (Thousands of Dollars) 5.38% due March 25, 2000........................... $ 187,922 5.29% due June 25, 2001............................ 425,033 5.34% due March 25, 2002........................... 258,861 5.39% due June 25, 2003............................ 421,139 5.44% due March 25, 2005........................... 598,511 5.63% due June 25, 2007............................ 761,489 5.74% due December 25, 2008........................ 510,000 ---------- $3,162,955 ==========
For accounting purposes, the liabilities of ComEd Funding Trust for the transitional trust notes are reflected as long-term debt on the Consolidated Balance Sheets of Unicom and ComEd. The proceeds, net of transaction costs, from the transitional trust notes have been used, as required, to redeem debt and equity. During the first nine months of 1999, ComEd redeemed or reacquired $1,021 million of long-term debt. Sinking fund requirements and scheduled maturities remaining through 2003 for ComEd's first mortgage bonds, transitional trust notes, sinking fund debentures and other long-term debt outstanding at September 30, 1999, after deducting deposits made for the retirement of sinking fund debentures, are summarized as follows: 1999--$237 million; 2000--$727 million; 2001--$346 million; 2002--$645 million; and 2003--$445 million. Unicom Enterprises' note payable to bank of $185 million will mature in 1999. 26 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued At September 30, 1999, ComEd's outstanding first mortgage bonds maturing through 2003 were as follows:
Series Principal Amount ------ ---------------------- (Thousands of Dollars) 9 3/8% due February 15, 2000....................... $ 42,245 6 1/2% due April 15, 2000.......................... 230,000 6 3/8% due July 15, 2000........................... 100,000 7 3/8% due September 15, 2002...................... 200,000 6 5/8% due July 15, 2003........................... 100,000 -------- $672,245 ========
Other long-term debt outstanding at September 30, 1999 is summarized as follows:
Principal Debt Security Amount Interest Rate - ----------------------------------------- ---------- ------------------------------------------------------- (Thousands of Dollars) Unicom-- Loans Payable: Loan due January 1, 2003 $ 5,519 Interest rate of 8.31% Loan due January 1, 2004 6,371 Interest rate of 8.44% Loan due January 15, 2009 6,025 Interest rate of 8.30% ---------- $ 17,915 ---------- 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 January 15, 2004 150,000 Interest rate of 7.375% Notes due October 15, 2005 235,000 Interest rate of 6.40% Notes due January 15, 2007 150,000 Interest rate of 7.625% Notes due July 15, 2018 225,000 Interest rate of 6.95% ---------- $1,056,000 ---------- Purchase Contract Obligation due April 30, 2005 $ 301 Interest rate of 3.00% ---------- Total ComEd $1,056,301 ---------- Unicom Enterprises-- Notes: Long-Term Note Payable to Bank due November 15, 1999 $ 185,000 Prevailing interest rate of 6.37% at September 30, 1999 Unicom Thermal Guaranteed Senior Note due May 30, 2012 120,000 Interest rate of 7.38% Northwind Midway Guaranteed Senior Notes due June 30, 2023 11,522 Interest rate of 7.68% ---------- Total Unicom Enterprises $ 316,522 ---------- Total Unicom $1,390,738 ==========
Long-term debt maturing within one year has been included in current liabilities. ComEd's outstanding first mortgage bonds are secured by a lien on substantially all property and franchises, other than expressly excepted property, owned by ComEd. In July 1998, Unicom Thermal issued a $120 million 7.38% unsecured guaranteed senior Note due May 2012, the proceeds of which were used to refinance existing debt. The Note is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Thermal's operations. 27 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Such covenants include, among other things, (i) a requirement that Unicom and its consolidated subsidiaries maintain a tangible net worth at least $10 million greater than that of ComEd and its consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the indebtedness for borrowed money that Unicom Thermal may incur, and (iv) a requirement that Unicom own, directly or indirectly, 51% of the outstanding stock of Unicom Thermal and at least 80% of the outstanding stock of ComEd. In June 1999, Northwind Midway issued $12 million of 7.68% guaranteed senior Notes due June 2023, the proceeds of which will be used primarily to finance certain project construction costs. The Notes are guaranteed by Unicom and include certain covenants with respect to Unicom and Northwind Midway's operations. Such covenants include, among other things, a requirement that Unicom and its consolidated subsidiaries own no less than 65% of the voting membership interest of Northwind Midway. (12) Lines of Credit. ComEd has a bank line of credit of $500 million, all of which was unused at September 30, 1999. The line of credit expires on January 31, 2000. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread which is dependent upon the credit rating of ComEd's outstanding first mortgage bonds or on a prime interest rate. ComEd is obligated to pay commitment and facility fees with respect to the line of credit. Unicom Enterprises has a $200 million credit facility which has been extended to December 17, 1999, of which $15 million was unused as of September 30, 1999. The credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including UT Holdings and Unicom Energy Services, and for general corporate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Enterprises' operations. Such covenants include, among other things, (i) a requirement that Unicom and its consolidated subsidiaries maintain a tangible net worth at least $10 million over that of ComEd and its consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt to consolidated capitalization not exceed 0.65 to 1, (iii) restrictions on the indebtedness for borrowed money that Unicom (excluding ComEd) and Unicom Enterprises may incur, and (iv) a requirement that Unicom own 100% of the outstanding stock of Unicom Enterprises and at least 80% of the outstanding stock of ComEd; and provide that Unicom may not declare or pay dividends during the continuance of an event of default. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime interest rate or a floating rate bank index plus a spread which varies with the credit rating of ComEd's outstanding first mortgage bonds. Unicom Enterprises is obligated to pay commitment fees with respect to the unused portion of such lines of credit. (13) Disposal of Spent Nuclear Fuel. Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. ComEd, as required by that Act, has entered into a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste from ComEd's nuclear generating stations. The contract with the DOE requires ComEd to pay the DOE a one-time fee applicable to nuclear generation through April 6, 1983 of $277 million, with interest to date of payment, and a fee payable quarterly equal to one mill per kilowatthour of nuclear-generated and sold electricity after April 6, 1983. Pursuant to the contract, ComEd has elected to pay the one-time fee, with interest, just prior to the first delivery of spent nuclear fuel to the DOE. The liability for the 28 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued one-time fee and the related interest is reflected on the Consolidated Balance Sheets. The contract also provided for acceptance by the DOE of such materials to begin in January 1998; however, that date was not met by the DOE and is expected to be delayed significantly. The DOE's current estimate for opening a facility to accept such waste is 2010. This extended delay in spent nuclear fuel acceptance by the DOE has led to ComEd's consideration of additional dry storage alternatives. On July 30, 1998, ComEd filed a complaint against the United States in the United States Court of Federal Claims seeking to recover damages caused by the DOE's failure to honor its contractual obligation to begin disposing of spent nuclear fuel in January 1998. (14) Fair Value of Financial Instruments. The following methods and assumptions were used to estimate the fair value of financial instruments either held, or issued and outstanding. The disclosure of such information does not purport to be a market valuation of Unicom and subsidiary companies as a whole. The impact of any realized or unrealized gains or losses related to such financial instruments on the financial position or results of operations of Unicom and subsidiary companies is primarily dependent on the treatment authorized under future ComEd ratemaking proceedings. Investments. Securities included in the nuclear decommissioning funds have been classified and accounted for as "available for sale" securities. The estimated fair value of the nuclear decommissioning funds, as determined by the trustee and based on published market data, as of September 30, 1999 and December 31, 1998 was as follows:
September 30, 1999 December 31, 1998 -------------------------------- -------------------------------- Unrealized Gains/ Unrealized Cost Basis (Losses) Fair Value Cost Basis Gains Fair Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Short-term investments.. $ 51,582 $ 101 $ 51,683 $ 40,907 $ 42 $ 40,949 U.S. Government and Agency issues.......... 246,613 3,430 250,043 197,240 20,213 217,453 Municipal bonds......... 392,883 1,096 393,979 416,121 24,124 440,245 Corporate bonds......... 200,538 (3,072) 197,466 241,111 8,790 249,901 Common stock............ 762,246 568,151 1,330,397 740,956 565,630 1,306,586 Other................... 112,978 3,459 116,437 11,345 838 12,183 ---------- -------- ---------- ---------- -------- ---------- $1,766,840 $573,165 $2,340,005 $1,647,680 $619,637 $2,267,317 ========== ======== ========== ========== ======== ==========
At September 30, 1999, the debt securities held by the nuclear decommissioning funds had the following maturities:
Cost Basis Fair Value ----------- ----------- (Thousands of Dollars) Within 1 year................................... $ 50,418 $ 50,874 1 through 5 years............................... 267,931 270,322 5 through 10 years.............................. 249,139 251,628 Over 10 years................................... 385,658 381,688
29 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The net earnings of the nuclear decommissioning funds, which are recorded in the accumulated provision for depreciation, for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ---------------------- --------------------- 1999 1998 1999 1998 1999 1998 --------- --------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Gross proceeds from sales of securities.... $ 399,024 $ 451,896 $1,241,887 $1,400,360 $1,637,011 $1,892,110 Less cost based on spe- cific identification... 386,970 441,379 1,205,155 1,334,763 1,598,484 1,802,350 --------- --------- ---------- ---------- ---------- ---------- Realized gains on sales of securities.......... $ 12,054 $ 10,517 $ 36,732 $ 65,597 $ 38,527 $ 89,760 Other realized fund earnings, net of expenses............... 12,186 10,545 43,002 23,393 59,983 30,255 --------- --------- ---------- ---------- ---------- ---------- Total realized net earn- ings of the funds...... $ 24,240 $ 21,062 $ 79,734 $ 88,990 $ 98,510 $ 120,015 Unrealized gains/(losses)......... (135,210) (112,678) (46,472) 1,884 142,147 (1,122) --------- --------- ---------- ---------- ---------- ---------- Total net earnings/(losses) of the funds............. $(110,970) $ (91,616) $ 33,262 $ 90,874 $ 240,657 $ 118,893 ========= ========= ========== ========== ========== ==========
Current Assets. Cash, temporary cash investments, cash held for redemption of securities and other cash investments, which include U.S. Government obligations and other short-term marketable securities, and special deposits, which primarily includes cash deposited for the redemption, refund or discharge of debt securities, are stated at cost, which approximates their fair value because of the short maturity of these instruments. The securities included in these categories have been classified as "available for sale" securities. Capitalization. The estimated fair values of ComEd preferred and preference stocks, ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities, transitional trust notes and long-term debt were obtained from an independent consultant. The estimated fair values, which include the current portions of redeemable preference stock and long-term debt but exclude accrued interest and dividends, as of September 30, 1999 and December 31, 1998 were as follows:
September 30, 1999 December 31, 1998 --------------------------------- -------------------------------- Unrealized Carrying Losses/ Carrying Unrealized Fair Value (Gains) Fair Value Value Losses Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) ComEd preferred and preference stocks...... $ 71,304 $ 208 71,512 $ 678,156 $ 11,500 $ 689,656 ComEd-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely ComEd's subordinated debt securities............. $ 350,000 $ (1,234) $ 348,766 $ 350,000 $ 20,678 $ 370,678 Transitional trust notes.................. $3,162,955 $(116,799) $3,046,156 $3,382,821 $ 67,168 $3,449,989 Long-term debt.......... $4,896,727 $ 126,586 $5,023,313 $5,911,757 $451,240 $6,362,997
Long-term notes payable, which are not included in the above table, amounted to $214 million and $100 million as of September 30, 1999 and December 31, 1998, respectively. Such notes, for which interest is paid at fixed and prevailing rates, are included in the consolidated financial statements at cost, which approximates their fair value. Current Liabilities. The carrying value of notes payable, which consists of commercial paper and bank loans maturing within one year, approximates the fair value because of the short maturity of these 30 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued instruments. See "Capitalization" above for a discussion of the fair value of the current portion of long-term debt and redeemable preference stock. Other Noncurrent Liabilities. The carrying value of accrued spent nuclear fuel disposal fee and related interest represents the settlement value as of September 30, 1999 and December 31, 1998; therefore, the carrying value is equal to the fair value. (15) Pension and Postretirement Benefits. As of September 30, 1999, ComEd had a qualified non-contributory defined benefit pension plan which covers all regular employees of ComEd and certain of Unicom's subsidiaries. Benefits under this plan reflect each employee's compensation, years of service and age at retirement. Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended. The September 30, 1999 and December 31, 1998 pension liabilities and related data were determined using the January 1, 1998 actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental retirement plan which covers any excess pension benefits that would be payable to management employees under the qualified plan but which are limited by the Internal Revenue Code. In 1998, Indiana Company's qualified defined benefit pension plan was merged into ComEd's pension plan as a result of the sale of Indiana Company's State Line Station and the transfer of its remaining employees to ComEd. ComEd and certain of Unicom's subsidiaries provide certain postretirement medical, dental and vision care, and life insurance for retirees and their dependents and for the surviving dependents of eligible employees and retirees. Generally, the employees become eligible for postretirement benefits if they retire no earlier than age 55 with ten years of service. The liability for postretirement benefits is funded through trust funds based upon actuarially determined contributions that take into account the amount deductible for income tax purposes. The health care plans are contributory, funded jointly by the companies and the participating retirees. The September 30, 1999 and December 31, 1998 postretirement benefit liabilities and related data were determined using the January 1, 1998 actuarial valuations. 31 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Reconciliations of the beginning and ending balances of the projected pension benefit obligation and the accumulated postretirement benefit obligation, and the funded status of these plans for the nine months ended September 30, 1999 and the twelve months ended December 31, 1998 were as follows:
Nine Months Ended Twelve Months Ended September 30, 1999 December 31, 1998 -------------------------- -------------------------- Other Other Pension Postretirement Pension Postretirement Benefits Benefits Benefits Benefits ---------- -------------- ---------- -------------- (Thousands of Dollars) Change in benefit obligation - ----------------- Benefit obligation at beginning of period.... $4,327,000 $1,249,000 $4,010,000 $1,139,000 Service cost............ 94,000 31,000 115,000 38,000 Interest cost........... 213,000 62,000 273,000 78,000 Plan participants' con- tributions............. -- 3,000 -- 3,000 Actuarial loss.......... 11,000 -- 166,000 38,000 Benefits paid........... (181,000) (37,000) (237,000) (47,000) ---------- ---------- ---------- ---------- Benefit obligation at end of period......... $4,464,000 $1,308,000 $4,327,000 $1,249,000 ---------- ---------- ---------- ---------- Change in plan assets - --------------------- Fair value of plan as- sets at beginning of period................. $4,015,000 $ 865,000 $3,706,000 $ 767,000 Actual return on plan assets................. 128,000 26,000 535,000 122,000 Employer contribution... 2,000 -- 11,000 20,000 Plan participants' con- tributions............. -- 3,000 -- 3,000 Benefits paid........... (181,000) (37,000) (237,000) (47,000) ---------- ---------- ---------- ---------- Fair value of plan assets at end of period................ $3,964,000 $ 857,000 $4,015,000 $ 865,000 ---------- ---------- ---------- ---------- Plan assets less than benefit obligation..... $ (500,000) $ (451,000) $ (312,000) $ (384,000) Unrecognized net actuar- ial loss/(gain)........ 188,000 (319,000) 37,000 (358,000) Unrecognized prior serv- ice cost/(asset)....... (57,000) 45,000 (60,000) 48,000 Unrecognized transition obligation/(asset)..... (92,000) 306,000 (101,000) 323,000 ---------- ---------- ---------- ---------- Accrued liability for benefits.............. $ (461,000) $ (419,000) $ (436,000) $ (371,000) ========== ========== ========== ==========
The assumed discount rate used to determine the benefit obligation as of September 30, 1999 and December 31, 1998 was 6.75%. The fair value of pension plan assets excludes $22 million and $21 million held in grantor trust as of September 30, 1999 and December 31, 1998, respectively, for the payment of benefits under the supplemental plan. 32 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued The components of pension and other postretirement benefit costs, portions of which were recorded as components of construction costs, for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- -------------------- -------------------- 1999 1998 1999 1998 1999 1998 Pension Benefit Costs --------- --------- --------- --------- --------- --------- - --------------------- (Thousands of Dollars) Service cost............ $ 31,000 $ 31,000 $ 94,000 $ 93,000 $ 116,000 $ 118,000 Interest cost on pro- jected benefit obliga- tion................... 71,000 69,000 213,000 208,000 278,000 274,000 Expected return on plan assets................. (90,000) (86,000) (271,000) (257,000) (356,000) (335,000) Amortization of transi- tion asset............. (3,000) (3,000) (9,000) (9,000) (12,000) (13,000) Amortization of prior service asset.......... (1,000) (1,000) (3,000) (3,000) (4,000) (4,000) Recognized loss......... 1,000 1,000 3,000 1,000 4,000 2,000 Curtailment gain........ -- -- -- -- -- (5,000) --------- --------- --------- --------- --------- --------- Net periodic benefit cost.................. $ 9,000 $ 11,000 $ 27,000 $ 33,000 $ 26,000 $ 37,000 ========= ========= ========= ========= ========= ========= Other Postretirement Benefit Costs - -------------------- Service cost............ $ 10,000 $ 9,000 $ 31,000 $ 27,000 $ 42,000 $ 36,000 Interest cost on accumu- lated benefit obligation............. 21,000 19,000 62,000 56,000 84,000 75,000 Expected return on plan assets................. (19,000) (18,000) (56,000) (52,000) (73,000) (68,000) Amortization of transi- tion obligation........ 6,000 6,000 17,000 17,000 22,000 22,000 Amortization of prior service cost........... 1,000 1,000 3,000 3,000 4,000 4,000 Recognized gain......... (3,000) (5,000) (9,000) (14,000) (9,000) (17,000) Severance plan cost..... -- -- 1,000 2,000 5,000 4,000 --------- --------- --------- --------- --------- --------- Net periodic benefit cost.................. $16,000 $ 12,000 $ 49,000 $ 39,000 $ 75,000 $ 56,000 ========= ========= ========= ========= ========= =========
In accounting for the pension costs and other postretirement benefit costs under the plans, the following weighted average actuarial assumptions were used for the periods during 1999, 1998 and 1997:
Other Pension Benefits Postretirement Benefits ----------------- ----------------------- 1999 1998 1997 1999 1998 1997 ----- ----- ----- ------- ------- ------- Annual discount rate................. 6.75% 7.00% 7.50% 6.75% 7.00% 7.50% Annual long-term rate of return on plan assets......................... 9.25% 9.50% 9.75% 8.97% 9.20% 9.40% Annual rate of increase in future compensation levels................. 4.00% 4.00% 4.00% -- -- --
The pension curtailment gain in December 1997 represents the recognition of prior service costs, the transition asset and the decrease in the projected benefit obligation related to the reduction in the number of employees due to Indiana Company's sale of State Line Station. The health care cost trend rates used to measure the expected cost of the postretirement medical benefits are assumed to be 8.5% for pre-Medicare recipients and 6.5% for Medicare recipients for 1998. Those rates are assumed to decrease in 0.5% annual increments to 5% for the years 2005 and 2001, respectively, and to remain level thereafter. The health care cost trend rates, used to measure the expected cost of postretirement dental and vision benefits, are a level 3.5% and 2.0% per year, respectively. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care cost trend rates would have the following effects:
1 Percentage 1 Percentage Point Increase Point Decrease -------------- -------------- (Thousands of Dollars) Effect on total annual service and interest cost components...................................... $ 27,000 $ (21,000) Effect on postretirement benefit obligation...... 232,000 (182,000)
33 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 $9 million for each of the three months ended September 30, 1999 and 1998, $24 million for each of the nine months ended September 30, 1999 and 1998, and $32 million and $33 million for the twelve months ended September 30, 1999 and 1998, respectively. (16) Separation Plan Costs. O&M expenses included $2 million and $9 million for the three months ended September 30, 1999 and 1998, respectively, $7 million and $33 million for the nine months ended September 30, 1999 and 1998, respectively, and $23 million and $38 million for the twelve months ended September 30, 1999 and 1998, respectively, for costs related to voluntary separation offers to certain employees of ComEd and Indiana Company, as well as certain other employee-related costs. Such costs resulted in charges of $1 million (after-tax), or $0.01 per common share (diluted), and $6 million (after-tax), or $0.03 per common share (diluted), for the three months ended September 30, 1999 and 1998, respectively, $4 million (after-tax), or $0.02 per common share (diluted), and $20 million (after-tax), or $0.09 per common share (diluted), for the nine months ended September 30, 1999 and 1998, respectively, and $14 million (after-tax), or $0.06 per common share (diluted), and $23 million (after-tax), or $0.11 per common share (diluted), for the twelve months ended September 30, 1999 and 1998, respectively. (17) Income Taxes. The components of the net deferred income tax liability at September 30, 1999 and December 31, 1998 were as follows:
September 30, December 31, 1999 1998 ------------- ------------ (Thousands of Dollars) Deferred income tax liabilities: Accelerated cost recovery and liberalized deprecia- tion, net of removal costs........................ $3,992,558 $4,028,351 Overheads capitalized.............................. 136,193 140,922 Repair allowance................................... 225,100 233,861 Regulatory assets recoverable through future rates. 678,583 680,356 Deferred income tax assets: Postretirement benefits............................ (360,450) (331,651) Unamortized investment tax credits................. (181,467) (191,135) Regulatory liabilities to be settled through future rates............................................. (599,739) (595,005) Nuclear plant closure.............................. (13,238) (38,354) Other--net......................................... (188,546) (146,224) ---------- ---------- Net deferred income tax liability................... $3,688,994 $3,781,121 ========== ==========
The $92 million decrease in the net deferred income tax liability from December 31, 1998 to September 30, 1999 is comprised of an $86 million credit to net deferred income tax expense and a $6 million decrease in regulatory assets net of regulatory liabilities pertaining to income taxes for the period. The amount of accelerated cost recovery and liberalized depreciation included in deferred income tax liabilities for both periods includes amounts related to the regulatory asset for impaired production plant. The amount of regulatory assets included in deferred income tax liabilities primarily relates to the equity component of AFUDC which is recorded on an after-tax basis, the borrowed funds component of AFUDC which was previously recorded net of tax and other temporary differences for which the related tax effects were not previously recorded. The amount of other regulatory liabilities included in deferred income tax assets primarily relates to deferred income taxes provided at rates in excess of the current statutory rate. 34 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, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------- --------------------- 1999 1998 1999 1998 1999 1998 --------- --------- --------- -------- --------- ---------- (Thousands of Dollars) Operating income: Current income taxes... $ 193,103 $ 191,998 $ 405,482 $327,911 $ 380,183 $ 316,337 Deferred income taxes.. (11,449) (4,211) (100,217) (24,033) (26,052) 22,904 Investment tax credits deferred--net......... (7,021) (6,889) (21,063) (20,937) (27,856) (28,588) Other (income) and deductions: Current income taxes... (5,809) (1,802) (4,057) (59,016) 5,160 (58,661) Deferred income taxes.. 6,159 364 12,238 47,908 23,787 (337,039) Investment tax credits.. (2,153) -- (6,133) (7,472) (10,768) (29,997) --------- --------- --------- -------- --------- ---------- Net income taxes charged/(credited) to continuing operations.. $ 172,830 $179,460 $ 286,250 $264,361 $ 344,454 $ (115,044) ========= ========= ========= ======== ========= ==========
Provisions for current and deferred federal and state income taxes and amortization of investment tax credits resulted in the following effective income tax rates for the three months, nine months and twelve months ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ --------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- ---------- (Thousands of Dollars) Net income/(loss) before extraordi- nary items........................ $ 279,755 $264,822 $496,366 $398,995 $607,554 $ (151,731) Net income taxes charged/(credited) to continuing operations.......... 172,830 179,460 286,250 264,361 344,454 (115,044) Provision for dividends on ComEd preferred and preference stocks... 1,830 14,053 20,170 43,062 33,991 57,635 --------- --------- -------- -------- --------- ---------- Pre-tax income/(loss) before extraordinary items and provision for dividends..................... $ 454,415 $458,335 $802,786 $706,418 $ 985,999 $ (209,140) ========= ========= ======== ======== ========= ========== Effective income tax rate.......... 38.0% 39.2% 35.7% 37.4% 34.9% 55.0% ========= ========= ======== ======== ========= ==========
35 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued 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, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Twelve Three Months Ended Nine Months Ended Months Ended September 30 September 30 September 30 -------------------- ------------------ ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- -------- --------- (Thousands of Dollars) Federal income taxes computed at statutory rate................... $159,045 $160,417 $280,975 $247,246 $345,100 $ (73,199) Equity component of AFUDC which was excluded from taxable income................. (126) (102) (336) (300) (426) (2,824) Amortization of investment tax credits, net of deferred income taxes.................. (5,907) (4,517) (17,525) (18,246) (24,782) (40,221) State income taxes, net of federal income taxes.................. 21,958 21,040 37,394 33,693 44,566 (3,510) Unrealized loss/(gain) on forward share repurchase contract.... 6,130 -- (5,566) -- (5,566) -- Earnings on nontax- qualified decommissioning fund... (951) -- (3,719) -- (3,719) -- Differences between book and tax accounting, primarily property- related deductions..... (7,319) 2,622 (4,973) 1,968 (10,719) 4,710 --------- --------- -------- -------- -------- --------- Net income taxes charged/(credited) to continuing operations.. $ 172,830 $179,460 $286,250 $264,361 $344,454 $(115,044) ========= ========= ======== ======== ======== =========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes, for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Illinois public utility revenue................ $ (601) $ 5,983 $ 1,296 $107,911 $ 8,365 $ 161,257 Illinois invested capi- tal.................... -- -- -- -- -- 21,229 Illinois electricity distribution tax....... 32,942 29,950 87,615 81,580 116,061 81,580 Municipal utility gross receipts............... 29,832 53,001 80,418 134,108 98,811 171,506 Real estate............. 33,801 34,559 97,034 99,638 122,916 140,401 Municipal compensation.. 23,714 26,819 60,515 70,904 78,821 88,382 Energy assistance and renewable energy charge................. 8,117 8,273 25,562 24,545 33,753 24,545 Other--net.............. 16,986 20,800 54,846 53,187 76,520 68,792 --------- --------- -------- -------- --------- --------- $ 144,791 $ 179,385 $407,286 $571,873 $ 535,247 $ 757,692 ========= ========= ======== ======== ========= =========
Effective January 1, 1998, the Illinois invested capital tax was repealed and the Illinois electricity distribution tax was enacted as a replacement. The new tax is based on the kilowatthours delivered to ultimate consumers. Effective August 1, 1998, as provided for by the 1997 Act, the Illinois electricity excise tax, replacing the Illinois public utility revenue tax, and certain municipal utility taxes are recorded as liabilities. Previously, similar taxes were presented on the Statements of Consolidated Operations as revenue and expense. The net reduction in operating revenues and taxes, except income taxes, due to the change in presentation for such taxes was approximately $30 million, $160 million and $226 million for the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods in 1998. This change in the presentation for such taxes did not have an effect on results of operations. 36 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued See Note 21 for additional information regarding Illinois invested capital taxes. (19) Lease Obligations of Subsidiary Companies. Under its nuclear fuel lease arrangement, ComEd may sell and lease back nuclear fuel from a lessor who may borrow an aggregate of $627 million, consisting of $300 million of commercial paper/bank borrowings and $327 million of intermediate term notes, to finance the transactions. The commercial paper/bank borrowing portion will expire on November 23, 1999. ComEd does not currently intend to renew the commercial paper/bank borrowing portion. With respect to the intermediate term notes, $60 million expires on November 23, 1999, and an additional portion each November 23 thereafter through November 23, 2003. At September 30, 1999, ComEd's obligation to the lessor for leased nuclear fuel amounted to approximately $329 million. ComEd has agreed to make lease payments which cover the amortization of the nuclear fuel used in ComEd's reactors plus the lessor's related financing costs. ComEd has an obligation for spent nuclear fuel disposal costs of leased nuclear fuel. As of September 30, 1999, future minimum rental payments, net of executory costs, for capital leases are estimated to aggregate to $406 million, including $105 million in 1999, $113 million in 2000, $104 million in 2001, $51 million in 2002, $24 million in 2003 and $9 million in 2004-2006. The estimated interest component of such rental payments aggregates $40 million. The estimated portions of obligations due within one year under capital leases of $158 million and $195 million at September 30, 1999 and December 31, 1998, respectively, were included in current liabilities on the Consolidated Balance Sheets. Future minimum rental payments at September 30, 1999 for operating leases are estimated to aggregate to $415 million, including $10 million in 1999, $41 million in 2000, $33 million in 2001, $33 million in 2002, $30 million in 2003 and $268 million in 2004-2043. (20) Joint Plant Ownership. ComEd has a 75% undivided ownership interest in the Quad Cities nuclear generating station. Further, ComEd is responsible for 75% of all costs which are charged to appropriate investment and O&M accounts, and provides its own financing. ComEd's net plant investment, including construction work in progress, in Quad Cities Station on the Consolidated Balance Sheets was $14 million at September 30, 1999, after reflecting the accounting impairment recorded in the second quarter of 1998. See Note 1, under "Regulatory Assets and Liabilities," for additional information. (21) Commitments and Contingent Liabilities. Purchase commitments, principally related to construction and nuclear fuel, approximated $511 million at September 30, 1999, comprised of $468 million for ComEd, $38 million for UT Holdings and $5 million for Unicom Energy Services. In addition, ComEd has substantial commitments for the purchase of coal. Upon completion of the transactions contemplated in the Asset Sale Agreement with EME, ComEd expects to enter into arrangements to assign or settle a substantial portion of the coal purchase commitments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction Program," for additional information regarding ComEd's purchase commitments. ComEd is a member of NEIL which provides insurance coverage against property damage and associated replacement power costs occurring at members' nuclear generating facilities. All companies insured with NEIL are subject to retrospective premium adjustments if losses exceed accumulated reserve funds. Capital has been accumulated in the reserve funds such that ComEd would not be liable for any single incident. However, ComEd could be subject to assessments in any policy year for 37 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued each of three types of coverage provided. The maximum assessments are approximately $53 million for primary property damage, $73 million for excess property damage and $22 million for replacement power. The NRC's indemnity for public liability coverage under the Price-Anderson Act is supported by a mandatory industry-wide program under which owners of nuclear generating facilities could be assessed in the event of nuclear incidents. Based on the number of nuclear reactors with operating licenses, ComEd would currently be subject to a maximum assessment of $1,145 million in the event of an incident, limited to a maximum of $130 million in any calendar year. In addition, ComEd participates in the American Nuclear Insurers Master Worker Program, which provides coverage for worker tort claims filed for bodily injury caused by the nuclear energy hazard. This program was modified, effective January 1, 1998, to provide coverage to all workers whose "nuclear- related employment" began on or after the commencement date of reactor operations. ComEd will not be liable for a retrospective assessment under this new policy. However, ComEd is still subject to a maximum retroactive assessment of up to $36 million in the event losses incurred under the small number of policies in the old program exceed accumulated reserves. Three of ComEd's wholesale municipal customers filed a complaint and request for refund with the FERC alleging that ComEd failed to properly adjust their rates, as provided for under the terms of their electric service contracts, to track certain refunds made to ComEd's retail customers in the years 1992 through 1994. In the third quarter of 1998, the FERC granted the complaint and directed that refunds be made, with interest. ComEd filed and was granted a request for rehearing for purposes of reconsideration with the FERC. If the order is upheld, ComEd must make refunds within 15 days of the resolution for rehearing. ComEd's management believes an adequate reserve has been established in connection with this case. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects. With respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts against Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions have been settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v. Cotter (United States District Court for the District of Colorado, Civil Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991 cases. The verdict against Cotter and in favor of the plaintiff, after an amended judgement was issued March 11, 1999, totaled approximately $6 million, including compensatory and punitive damages, interest, and medical monitoring. The matter is currently on appeal. Oral argument was heard in the Tenth Circuit Court of Appeals on September 23, 1999. A decision is expected before the end of the year. A case involving the next group of plaintiffs is set for trial in federal district court in Denver on October 2, 2000. 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. In August 1999, three class action lawsuits were filed against ComEd related to a series of service interruptions during the summer of 1999. The combined effect of these events resulted in over 100,000 customers losing service. On August 12, 1999, service was interrupted to ComEd customers on the near north and near west side of the City's central business district. While major commercial customers 38 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued were affected, all service was restored on the same date. The class action complaints have been consolidated and seek to recover damages for personal injuries and property damage, as well as economic loss for these events. Further, ComEd initiated expedited claim settlements for those with primarily food spoilage claims. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. The lawsuits are pending in the Circuit Court of Cook County where the next status hearing is scheduled for November 15, 1999. ComEd's management believes adequate reserves have been established in connection with these cases. Following the above-referenced series of service interruptions, the ICC opened a three-phase investigation of the design and reliability of ComEd's transmission and distribution system. At the conclusion of each phase of the investigation, the ICC will issue a report that will include specific recommendations for ComEd and a timetable for executing the recommendations. The final phase of the investigation is expected to conclude in early 2001. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. ComEd generally did not operate MGPs as a corporate entity but did, however, acquire MGP sites as part of the absorption of smaller utilities. Approximately half of these sites were transferred to Northern Illinois Gas Company as part of a general conveyance in 1954. ComEd also acquired former MGP sites as vacant real estate on which ComEd facilities have been constructed. To date, ComEd has identified 44 former MGP sites for which it may be liable for remediation. ComEd presently estimates that its costs of former MGP site investigation and remediation will aggregate from $25 million to $150 million in current-year (1999) dollars. It is expected that the costs associated with investigation and remediation of former MGP sites will be incurred over a period not to exceed 30 years. Because ComEd is not able to determine the most probable liability for such MGP costs, in accordance with accounting standards, a reserve of $25 million has been included in other noncurrent liabilities on the Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998, which reflects the low end of the range of ComEd's estimate of the liability associated with former MGP sites. In addition, as of September 30, 1999 and December 31, 1998, a reserve of $8 million has been included in other noncurrent liabilities on the Consolidated Balance Sheets, representing ComEd's estimate of the liability associated with cleanup costs of remediation sites other than former MGP sites. Approximately half of this reserve relates to anticipated cleanup costs associated with a property formerly used as a tannery which was purchased by ComEd in 1973. 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. ComEd is currently re-evaluating its environmental remediation strategies. The final results of this re-evaluation cannot be determined at this time, but could result in an increase to the estimated liability. The IDR has issued Notices of Tax Liability to ComEd alleging deficiencies in Illinois invested capital tax payments for the years 1988 through 1997. The alleged deficiencies, including interest and penalties, totaled approximately $51 million as of September 30, 1999. ComEd has protested the notices, and the matter is currently pending before the IDR's Office of Administrative Hearings. Interest will continue to accumulate on the alleged tax deficiencies. 39 UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Concluded On March 22, 1999, ComEd reached a settlement agreement with the City to end the arbitration proceeding between ComEd and the City regarding the January 1, 1992 franchise agreement and a supplemental agreement between them. Under the terms of the settlement agreement, the pending arbitration is to be dismissed with prejudice and the City is to release ComEd from all claims the City may have under the supplemental agreement. The settlement agreement was approved by the City Council on May 12, 1999. As part of the settlement agreement, ComEd and the City have agreed to a revised combination of ongoing work under the franchise agreement and new initiatives that will result in defined transmission and distribution expenditures by ComEd to improve electric service in the City. The settlement agreement provides that ComEd will be subject to liquidated damages if the projects are not completed by various dates, unless it is prevented from doing so by events beyond its reasonable control. ComEd's current construction budget considers these projects, and therefore, no changes to that budget are expected. In addition, ComEd and the City established an Energy Reliability and Capacity Account, into which ComEd deposited $25 million following the effectiveness of the settlement agreement and ComEd has conditionally agreed to deposit up to $25 million at the end of each of the years 2000, 2001 and 2002, to help ensure an adequate and reliable electric supply for the City. The 1997 Act also committed ComEd to spend at least $2 billion through 2004 on transmission and distribution facilities outside of the City and $250 million in environmental funding initiatives, pending the close of the fossil plant sale. 40 UNICOM CORPORATION AND SUBSIDIARY COMPANIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in the Electric Utility Industry Unicom and its predominant business, electric energy generation, transmission and distribution, are in a period of fundamental change. These changes are attributable to changes in technology and regulation. Federal law and regulations have been amended to provide for open transmission system access, and various states, including Illinois, are considering, or have adopted, new regulatory structures to allow access by some or all customers to energy suppliers, in addition to the local utility. Electric Utility Industry. The electric utility industry historically has consisted of vertically integrated companies which combine generation, transmission and distribution assets; serve customers within relatively defined service territories; and operate under extensive regulation with respect to rates, operations and other matters. Utilities have operated under a regulatory compact with the state, with a statutory obligation to serve all of the electricity needs within their service territory in a nondiscriminatory manner. Historically, investment and operating decisions have been made based upon the utilities' respective assessment of the current and projected needs of their customers. In view of this obligation, regulation has focused on investment and operating costs, and rates have been based on recovery of some or all of such prudently incurred costs plus a return on invested capital. Such rate regulation, and the ability of utilities to recover investment and other costs through rates, have provided the basis for recording certain costs as regulatory assets. These assets represent costs which are allocated over future periods reflecting related regulatory treatment, rather than expensed in the current period. Federal Regulation. The Federal Energy Policy Act of 1992, among other things, empowered the FERC to introduce a greater level of competition into the wholesale marketplace for electric energy. Under FERC Order No. 888, utilities are required to file open access tariffs with regard to their transmission systems. These tariffs set forth the terms, including prices, under which other parties and the utility's wholesale marketing function may use the utility's transmission system. ComEd has an approved open access tariff with the FERC. A companion FERC rule, Order No. 889, requires the separation of the transmission operations and wholesale marketing functions so as to ensure that unaffiliated third parties have access to the same information as to system availability and other requirements. The FERC Order further requires utilities to operate an electronic bulletin board to make transmission price and access data available to all potential users. A key feature of FERC Order No. 888 is that it contemplates full recovery of a utility's costs "stranded" by competition. These costs are "stranded" or "strandable" to the extent market-based rates would be insufficient to allow for their full recovery. To recover stranded costs, the utility must show that it had a reasonable expectation that it would continue to serve the customer in question under its regulatory compact. In addition, some governmental entities, such as cities, may elect to "municipalize" a utility's distribution facilities through condemnation proceedings. Such municipalities would then be able to purchase electric power on a wholesale basis and resell it to customers over the newly acquired facilities. The FERC Order provides for the recovery of a utility's investment stranded by municipalization. The 1997 Act. In December 1997, the Governor of Illinois signed into law the 1997 Act, which established a phased process to introduce competition into the electric industry in Illinois under a less regulated structure. The 1997 Act was amended in June 1999. As a result of the 1997 Act and FERC rules, prices for the supply of electric energy are expected to change from cost-based, regulated rates to rates determined by competitive market forces. Accordingly, the 1997 Act provides for, among other things, gradual customer access to other electric 41 suppliers or a power purchase option which allows the purchase of electric energy from ComEd at market based prices, and the collection of a CTC from customers who choose to purchase electric energy from a RES or elect the power purchase option during a transition period that extends through 2006. Effective October 1, 1999, the CTC was established in accordance with a formula defined in the 1997 Act. The CTC, which will be applied on a cents per kilowatthour basis, considers the revenue which would have been collected from a customer under tariffed rates, reduced by the revenue the utility will receive for providing delivery services to the customer, the market price for electricity and a defined mitigation factor, which represents the utility's opportunity to develop new revenue sources and achieve cost savings. The CTC allows ComEd to recover some of its costs which might otherwise be unrecoverable under market-based rates. Nonetheless, ComEd will need to take steps to address the portion of such costs which are not recoverable through the CTC. Such steps may include cost control efforts, developing new sources of revenue and asset dispositions. See "Response to Regulatory Changes" and "Fossil Plant Sale" below for additional information. Access for non-residential customers will occur over a period from October 1999 to December 31, 2000, and access for residential customers will occur after May 1, 2002. On October 1, 1999, more than 41,000 non-residential customers became eligible to choose their electric supplier or elect the purchase power option. As of November 1, 1999, over 2,250 non-residential customers, representing approximately five percent of ComEd's 1998 retail kilowatthour sales, elected to receive their electric energy from a RES or chose the purchase power option. As a result of the collection of CTC's from customers who choose to receive their electric energy from a RES or elect the purchase power option, ComEd does not expect these elections to have a material effect on its results of operations in the near term. Utilities are required to continue to offer delivery services, including the transmission and distribution of electric energy, such that customers who select a RES can receive electric energy from that supplier using existing transmission and distribution facilities. Such services will continue to be offered under cost-based, regulated rates. The ICC issued orders in August and September approving, with modifications, ComEd's delivery service tariffs. The 1997 Act committed ComEd to spend at least $2 billion through 2004 on transmission and distribution facilities outside of the City and $250 million in environmental funding initiatives, pending the close of the fossil plant sale. The 1997 Act also provides for a 15% residential base rate reduction which became effective August 1, 1998 and an additional 5% residential base rate reduction in October 2001. ComEd's operating revenues were reduced by approximately $170 million in 1998 due to the 15% residential base rate reduction. ComEd expects that the 15% rate reduction will further reduce ComEd's operating revenues by approximately $210 million in 1999, compared to 1998 rate levels. Notwithstanding the rate reductions and subject to certain earnings tests, a rate freeze will generally be in effect until at least January 1, 2005. During this period, utilities may reorganize, sell or assign assets, retire or remove plants from service, and accelerate depreciation or amortization of assets with limited ICC regulatory review. A utility may request a rate increase during the rate freeze period only when necessary to ensure the utility's financial viability, but not before January 1, 2000. Under the earnings provision of the 1997 Act, if the earned return on common equity of a utility during this period exceeds an established threshold, one-half of the excess earnings must be refunded to customers. The threshold rate of return on common equity is based on the 30-Year Treasury Bond rate, plus 5.5% in the years 1998 and 1999, and plus 8.5% in the years 2000 through 2004. The utility's earned return on common equity and the threshold return on common equity are each calculated on a two-year average basis. The earnings sharing provision is applicable only to utility earnings. Increased amortization of regulatory assets may be recorded, thereby reducing the earned return on common equity, if earnings otherwise would have exceeded the maximum allowable rate of 42 return. The potential for earnings sharing or increased amortization of regulatory assets could limit earnings in future periods. The 1997 Act also allows a portion of ComEd's future revenues to be segregated and used to support the issuance of securities by ComEd or a SPE. The proceeds, net of transaction costs, from such security issuances must be used to refinance outstanding debt or equity or for certain other limited purposes. The total amount of such securities that may be issued is approximately $6.8 billion. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Capital Resources" below, and Notes 3 and 6 of Notes to Financial Statements, for additional information regarding the redemptions and repurchases of debt and equity. The 1997 Act also requires utilities to establish or join an ISO that will independently manage and control utility transmission systems. Additionally, the 1997 Act includes the leveling of certain regulatory requirements to permit operational flexibility, the leveling of certain regulatory and tax provisions as applied to various electric suppliers and a new, more stringent, liability standard applicable to ComEd in the event of a major outage. See "Response to Regulatory Changes" below for additional information. See Notes 1, under "Regulatory Assets and Liabilities," and 3 of Notes to Financial Statements for the accounting effects related to the 1997 Act. Response to Regulatory Changes. Unicom has announced several business and operational objectives designed to focus efforts in responding to the energy market changes that are expected to develop from the 1997 Act. Among other things, these strategic objectives call for a focus on operations to: (i) provide a reliable supply of electricity as the competitive marketplace evolves, (ii) become a top quartile operator of competitive nuclear plants, (iii) consummate the fossil plant sale by the end of 1999, (iv) deliver competitive earnings while restructuring the balance sheet to reflect the realities of the marketplace, (v) expand the offering of energy-related products and services, and (vi) transform the corporate culture of Unicom. See Unicom and ComEd's Current Report on Form 8-K dated July 1, 1999 for more information regarding the objectives announced by Unicom. Under the 1997 Act, the role of electric utilities in the supply and delivery of energy is expected to change. Utilities, such as ComEd, traditionally have been responsible for providing both adequate supply and reliable delivery of electricity to customers within their service areas. In the future, ComEd will continue to be obligated to provide a reliable delivery system. However, ComEd will be obligated to supply electricity only to those customers that it continues to serve under tariffs for electricity, but not for those customers who choose to rely on the marketplace. Nonetheless, during the transition period to a competitive supply marketplace, ComEd must provide both an adequate supply and reliable delivery of electricity. Given the tight capacity situation in ComEd's market, ComEd will be working to restore and maintain its available capacity, as well as working to assist in the development of a competitive supply marketplace in Illinois. ComEd has a significant commitment to, and investment in, nuclear generating capacity. ComEd has installed a management team responsible for improving nuclear operations. Such improvements are aimed at increasing levels of energy generation, or capacity factors, at ComEd's nuclear generating units while simultaneously improving ComEd's record of meeting NRC requirements and INPO performance standards. Increased capacity factors generally result in lower unit production costs and an improved opportunity to generate and sell electricity in a competitive marketplace. Efforts are also being made to control capital and operating costs through increased efficiencies, such as the reduction of downtime and expenses associated with generating unit maintenance and refueling outages. 43 ComEd also evaluated the recoverability of its generating plant investment in 1998 as a result of the 1997 Act. See Note 1 of Notes to Financial Statements, under "Regulatory Assets and Liabilities," for additional information. Notwithstanding these efforts, there continues to be an ongoing analysis of the ability of ComEd's various nuclear plants to generate and deliver electric energy safely at competitive prices in the competitive market for energy. Although short-term system reliability and capacity constraints are likely to support the continued operation of ComEd's nuclear units in the near term, expected longer term developments are likely to make decision- making a function of economic considerations. In the absence of short-term reliability and capacity constraints, if a generating plant cannot produce power safely at a cost below the competitive market price, it will be disposed of or closed. Plant impairment adjustments have reduced the carrying value of nuclear plants, and depreciation rates reflecting shortened estimated useful lives for certain stations will reduce the carrying value further during the next several years. However, closure of a plant could involve additional charges associated with the write-off of its then-current carrying value. In January 1998, Unicom and ComEd announced its decision to permanently cease nuclear generating operations at ComEd's Zion Station. The related retirement resulted in a charge in 1997 of $523 million (after-tax), or $2.42 per common share (diluted), reflecting both a write down of the plant's carrying value and a liability for future closing costs. A portion of Zion Station is used to provide voltage support in the transmission system that serves ComEd's northern region. See Note 4 of Notes to Financial Statements for additional information. In response to customer expectations and more stringent reliability standards provided for by the 1997 Act, ComEd's Board of Directors approved $352 million of additional capital expenditures for its transmission and distribution systems over the next three years. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Construction Program" below, for additional information regarding capital spending for the transmission and distribution systems. ComEd joined with other Midwestern utilities to design a regional Midwest ISO in January 1998. These utilities have agreed to place their transmission systems under the control of the Midwest ISO as soon as it achieves operational status in 2001. 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 foster increased competition. The Midwest ISO will control the transmission system and will have authority to require modification in the operation of generators connected to that system during system emergencies. ComEd, like other utilities, will retain ownership of its transmission lines. The formation of the Midwest ISO was approved by the FERC in September 1998, subject to certain conditions. In the absence of an ISO-related power exchange, ComEd has also agreed to cooperate with APX in the creation of the first electronic energy exchange in Illinois. Initial products may include hourly, daily and weekly electricity delivered to and from interconnection points on ComEd's transmission system, and a standard system of credit and trading interfaces. Unicom has made a $3 million venture capital investment in APX in order to help finance its expansion in Midwest. But neither ComEd nor Unicom will receive any voting rights. The power exchange will be independently owned and managed by APX and will allow wholesale and retail market participants to trade electricity anonymously through an internet-based computerized system. ComEd will be treated like any other market participant and plans to be an active participant when the power exchange opens in Illinois in the fourth quarter of 1999. Merger Agreement. On September 22, 1999, Unicom and PECO, along with a wholly-owned subsidiary of PECO, Newco, entered into a definitive Merger Agreement providing for a merger of equals. The Merger Agreement has been unanimously approved by Unicom and PECO's Boards of Directors. The merger is conditioned, among other things, upon the approvals of the shareholders of both companies and is subject to approval by various regulatory bodies. 44 Under the Merger Agreement, PECO and ComEd will become the principal utility subsidiaries of Newco. This result will be achieved by a mandatory exchange of the outstanding common stock of PECO for common stock of Newco or cash, subject to proration, and a merger of Unicom with and into Newco wherein holders of Unicom common stock will have the opportunity to elect to receive for each Unicom share either 0.95 Newco common share or $42.75 in cash, subject to proration; the cash election is limited to 17,543,859 Unicom shares or $750 million. Each shareholder of PECO will have the opportunity to elect to receive for each PECO share either one Newco common share or $45.00 in cash, subject to proration; the cash election is limited to 16,666,666 PECO shares or $750 million. The merger transaction will be accounted for as a purchase of Unicom by PECO. The merger transaction requires Unicom to purchase approximately 26.1 million shares of Unicom common stock prior to the closing of that transaction. Unicom expects to meet this requirement through a currently existing prepaid forward purchase arrangement for the purchase of 20.1 million shares and the purchase of approximately six million additional shares from available funds. Unicom anticipates that the $750 million cash consideration to be paid to its shareholders in the merger transaction will be provided from available funds, including funds resulting from the fossil plant sale. The Merger Agreement and an amendment to Unicom's stock rights plan were filed on September 29, 1999 by Unicom with the SEC as exhibits to a Form 8-K, and reference to that filing is made for more detailed information. Fossil Plant Sale. On March 22, 1999, ComEd entered into an Asset Sale Agreement providing for the sale of substantially all of its fossil generating assets to EME for a cash purchase price of $4.813 billion. The fossil plant assets represent an aggregate generating capacity of approximately 9,772 megawatts. Completion of the sale is subject to certain regulatory filings and approvals and is expected to occur during the fourth quarter of 1999. The ICC approved the fossil plant sale on August 3, 1999, and FERC issued its approval on November 8, 1999. Just prior to the consummation of the fossil plant sale, ComEd expects to transfer these assets to an affiliate, Unicom Investment. In consideration for the transferred assets, Unicom Investment will pay ComEd consideration totaling $4.813 billion in the form of a Demand Note in the amount of approximately $2.350 billion and an interest-bearing Note with a maturity of twelve years. Unicom Investment will immediately sell the fossil plant assets to EME, in consideration of which Unicom Investment will receive $4.813 billion in cash from EME. Immediately after its receipt of the cash payment from EME, Unicom Investment will pay the $2.350 billion aggregate principal due to ComEd under the Demand Note. Unicom Investment will use the remainder of the cash received from EME to fund other business opportunities, including the merger with PECO. Of the cash received by ComEd, $1.680 billion is expected to be used to pay the costs and taxes associated with the fossil plant sale. The remainder of the Demand Note proceeds will be available to ComEd to fund, among other things, transmission and distribution projects, nuclear generation station projects, and environmental and other initiatives. The sale is expected to produce an after-tax gain of approximately $1.6 billion, after settling commitments associated with certain coal contracts, recognizing employee-related costs and funding certain environmental initiatives. The gain on the sale will be utilized to substantially recover certain regulatory assets and as a result, the sale is not expected to have a significant impact on net income in 1999. See Note 1, under "Regulatory Assets and Liabilities" of Notes to Financial Statements for additional information. As part of the sale transaction, ComEd will enter into transitional power purchase agreements with the buyer. The agreement regarding the coal-fired units will cover a declining number of generating units over a five-year term, subject to an option in favor of ComEd to restore some or all of the units in later years of the agreement. The agreements regarding the oil and gas-fired plant and the peaking units cover the entire capacity of such generating units for a five-year term, subject to ComEd's option 45 commencing in year three to terminate the agreements as to some or all of the generating units. The options will provide some flexibility to ComEd to adjust its power purchase needs to match its obligations to its customers during the transition period to open access for customers. Each of the agreements provides for a monthly capacity charge, based upon the capacity of the generating units under contract and subject to adjustment based upon the availability of those generating units, as well as charges for delivered energy. Such charges will increase ComEd's purchased power costs. However, the disposition of the fossil generation business will reduce ComEd's O&M and fuel expenditures, and its depreciation charges. Liquidity and Capital Resources UTILITY OPERATIONS ------------------ Construction Program. ComEd has a construction program for the years 1999- 2001, which consists principally of improvements to its existing nuclear and fossil production, transmission and distribution facilities. The program, as currently approved by ComEd, includes the following estimated expenditures (excluding nuclear fuel expenditures of approximately $676 million).
1999 2000 2001 Total ------ ---- ---- ------ (Millions of Dollars) Nuclear............................................. $ 265 $158 $167 $ 590 Fossil.............................................. 155 106 66 327 Transmission and Distribution....................... 560 527 529 1,616 General............................................. 109 83 80 272 ------ ---- ---- ------ $1,089 $874 $842 $2,805 ====== ==== ==== ======
The above fossil construction expenditures will not be required after the fossil plant sale is completed. In response to several outages in the summer of 1999, ComEd conducted an extensive evaluation of the reliability of its transmission and distribution systems. The 1999 construction program above includes an increase of $45 million in capital expenditures for improvements to ComEd's transmission and distribution systems identified as a result of the evaluation. The $45 million increase is in addition to the $307 million increase in capital expenditures previously planned to be spent on these systems during 1999 through 2001. ComEd is currently evaluating its construction program for the years 2000 through 2002. The final results of this planning process cannot be determined at this time, but could result in an increase to the above construction expenditures for 2000 and 2001. ComEd's forecasts of peak load for its traditional service territory indicate a need for additional resources to meet demand, through generating capacity, equivalent purchased power and/or the development of additional demand-side management resources, in 1999 and each year thereafter for the foreseeable future. ComEd believes that adequate resources, including cost-effective demand-side management resources, non-utility generation resources, other- utility power purchases and generation resources from ARES, can be obtained in sufficient quantities to meet such forecasted needs. See "Unregulated Operations," subcaption "Construction Program" below, for additional information. Purchase commitments for ComEd, principally related to construction and nuclear fuel, approximated $468 million at September 30, 1999. In addition, ComEd's estimated commitments for the purchase of coal were as follows:
Contract Period Commitment(1) -------- --------- ------------- Black Butte Coal Co. ............................. 1999-2000 $256 Decker Coal Co. .................................. 1999-2012 436 Other commitments................................. 1999 8 ---- $700 ====
-------- (1) In millions of dollars, excluding transportation costs. No estimate of future cost escalation has been made. 46 Upon completion of the Asset Sale Agreement, ComEd expects to enter into arrangements to assign or settle a substantial portion of the coal purchase commitments. See "Changes in the Electric Utility Industry," subcaptions "The 1997 Act" and "Fossil Plant Sale" above, for additional information. Capital Resources. In December 1998, ComEd initiated the issuance of $3.4 billion of transitional trust notes through its SPEs, ComEd Funding and ComEd Funding Trust. The proceeds from the transitional trust notes, net of transaction costs, were, as required, used to redeem $1,021 million of long- term debt and $607 million of preference stock in 1999 and reduce $500 million of ComEd's outstanding short-term debt. During the first nine months of 1999, ComEd recorded an extraordinary loss related to the early redemptions of such long-term debt, which reduced net income on common stock by approximately $28 million (after-tax), or $0.13 per common share (diluted). ComEd also recorded $10 million (after-tax), or $0.04 per common share (diluted), for premiums paid in connection with the redemption of such preference stock. As more fully described below, Unicom has announced plans to repurchase approximately $750 million of Unicom common stock using the proceeds it will receive from ComEd's repurchase of its common stock held by Unicom. The remaining proceeds from the issuance of the transitional trust notes will be used for the payment of fees and additional debt and equity redemptions and repurchases. In the fourth quarter of 1998, Unicom entered into a forward purchase arrangement for the repurchase of $200 million of its common stock. This contract, which was accounted for as an equity instrument as of December 31, 1998, was settled on a net cash basis in February 1999. In February 1999, Unicom also entered into a prepaid forward purchase agreement with a financial institution for the repurchase of approximately 15 million shares of Unicom common stock. This forward purchase arrangement was amended to also include the repurchase of approximately 5.1 million shares for a total of 20.1 million shares, subsequent to the net cash settlement of the $200 million repurchase program, as described above. The repurchase arrangement, as amended, provides for final settlement no later than February 2000, on either a physical (share) basis, or a net cash basis. The amount at which the arrangement can be settled is dependent principally upon the average market price at which the financial institution purchases such shares, compared to the forward price per share. The share repurchases will not reduce shares outstanding for purposes of EPS calculations or reduce common stock equity, and resulting return on common equity calculations, until the date of physical settlement. Unicom does not currently anticipate that settlement will occur in 1999. The repurchase arrangement has been recorded as a receivable on the Consolidated Balance Sheets and has been adjusted at the end of each reporting period to reflect the aggregate market value of the shares deliverable under the arrangement. Consequently, the arrangement has increased earnings volatility in 1999. See Notes 3 and 6 of Notes to Financial Statements for additional information regarding the redemptions and repurchases of debt and equity. ComEd forecasts that internal sources will provide approximately three- fourths of the funds required for ComEd's 1999-2001 construction program and other capital requirements, including nuclear fuel expenditures, contributions to nuclear decommissioning funds, sinking fund obligations and scheduled debt maturities, and excluding the effects of the fossil plant sale. See Notes 9 and 11 of Notes to Financial Statements for the summaries of the annual sinking fund requirements and scheduled maturities for ComEd preference stock and long-term debt, respectively. The forecast takes into consideration the effects of the 1997 Act, and the issuance by ComEd Funding Trust of $3.4 billion of transitional trust notes in 1998 to refinance debt and equity, as discussed above. See "Changes in the Electric Utility Industry," subcaption "Fossil Plant Sale" above, for a description of ComEd's planned uses of the fossil plant sale proceeds. 47 The type and amount of external financing will depend on financial market conditions and the needs and capital structure of ComEd at the time of such financing. ComEd has $500 million of unused bank lines of credit at September 30, 1999, which may be borrowed at various interest rates. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread, which is dependent upon the credit ratings of ComEd's outstanding first mortgage bonds or on a prime interest rate. See Note 12 of Notes to Financial Statements for additional information concerning lines of credit. See the Statements of Consolidated Cash Flows for the construction expenditures and cash flow from operating activities for the three months, nine months and twelve months ended September 30, 1999. Cash flows from operating activities increased temporarily for the three, nine and twelve months ended September 30, 1999, compared to the same periods ended September 30, 1998, as a result of a decrease in net customer receivables due to the collection of delayed billings related to the transition to a new customer information and billing system in July 1998. See Note 1 of Notes to Financial Statements, under "Customer Receivables and Revenues", for additional information. As of November 15, 1999, ComEd has an effective "shelf" registration statement with the SEC for the future sale of up to an additional $280 million of debt securities and cumulative preference stock for general corporate purposes of ComEd, including the discharge or refund of other outstanding securities. ComEd's securities and other securities guaranteed by ComEd are currently rated by three principal securities rating agencies as follows:
Standard Duff & Moody's & Poor's Phelps ------- -------- ------ First mortgage and secured pollution control bonds..... Baa1 BBB+ BBB+ Publicly-held debentures and unsecured pollution con- trol obligations...................................... Baa2 BBB BBB Convertible preferred stock............................ baa3 BBB- BBB- Preference stock....................................... Baa2 BBB- BBB- Trust Securities....................................... baa3 BBB- BBB- Commercial paper....................................... P-2 A-2 D-2
ComEd Funding Trust's securities are currently rated by three principal securities rating agencies as follows:
Standard Duff & Moody's & Poor's Phelps ------- -------- ------ Transitional trust notes.......................... Aaa AAA AAA
On September 15, 1999, Moody's upgraded the long-term securities of ComEd. S&P raised its ratings for ComEd in June 1999. In July 1999, Duff & Phelps upgraded ComEd's ratings for secured and unsecured debt, and announced that ComEd's securities remain on "Rating Watch-Up." On September 23, 1999 in response to the announced Unicom and PECO Merger Agreement, Moody's and Duff & Phelps confirmed their ratings, and S&P placed ComEd on credit watch with positive implications. Capital Structure. ComEd's ratio of long-term debt to total capitalization has decreased to 55.6% at September 30, 1999 from 58.0% at December 31, 1998. As of September 30, 1999 and December 31, 1998, $702 million and $494 million, respectively, of retained earnings had been appropriated for Unicom's future dividend payments. As of September 30, 1999 and December 31, 1998, $827 million and $580 million, respectively, of retained earnings had been appropriated for ComEd's future dividend payments. 48 Year 2000 Conversion. Unicom, including ComEd, uses various software applications and embedded systems throughout its businesses that will be affected by the so-called "Year 2000 issues." These issues may prevent an application or system from correctly processing dates up to the year 2000 and beyond. A failure to correct any critical Year 2000 processing problems prior to January 1, 2000 could have material adverse operational and financial consequences if the affected systems either cease to function or produce erroneous data. At this time, Unicom believes the major risks associated with the inability of systems and software to process Year 2000 data correctly are a system failure or miscalculation causing disruption of operations, including among other things, an inability to operate ComEd's nuclear or fossil generating plants, disruption in the operation of its transmission and distribution systems or an inability to access interconnections with the systems of neighboring utilities. Such failures could materially and adversely affect Unicom's results of operations, financial position and cash flows. As of June 30, 1999, Unicom declared all of its systems and applications "Year 2000 ready" in accordance with goals and criteria recommended by the NERC. Even though Unicom has achieved Year 2000 ready status, the remainder of 1999 will be used to continue quality reviews, contingency planning efforts and internal as well as external readiness drills; specifically, the focus of the project has moved from "find it-fix it" activities to "increase certainty, strengthen readiness-demonstration" activities. Key accomplishments of the Unicom Year 2000 project included the following: . All nuclear stations are Year 2000 ready . All fossil stations are Year 2000 ready . Transmission and distribution systems and computers are Year 2000 ready . Distributed operations (LAN, WAN and related systems) are Year 2000 ready . All office facilities are Year 2000 ready . Mission critical products and services of supply chain are Year 2000 ready . Completed independent verification and validation of the corporate project . The NRC conducted a Year 2000 readiness audit of the Braidwood Nuclear Station and reviewed the contingency plans for nuclear operations . Implemented "Clean Management" procedures to ensure newly renovated applications and inventory remain Year 2000 ready . Unicom Contingency Plan/Operating Plan is Year 2000 ready--submitted final version of plans to MAIN The Unicom Year 2000 readiness program included the detailed review of more than 15 million lines of code and 30,000 embedded systems. At the height of the project, which began in mid-1996, more than 300 people were assigned to the company-wide Year 2000 team representing every business segment with many others assisting the core team. The Unicom Year 2000 team focused on three elements that were integral to the project: business continuity, project management and risk management. Business continuity involved the continuation of reliable electric supply and service in a safe, cost-effective manner. Project management involved defining and meeting the project scope, schedule and budget. Risk management involved customer communications, contingency planning and legal issues. Unicom's Year 2000 project focused on those facets of its business that are required to deliver reliable electric service. The project encompasses the computer systems that support core business functions, such as customer information and billing, finance, procurement, supply and personnel, as well as the components of metering, transmission, distribution and generation support. The project also focuses on embedded systems, instrumentation and control systems in facilities and plants. In accordance with business plans, Unicom has replaced certain of its financial, human resources and 49 payroll and customer service and billing software with new software that is Year 2000 ready and that addresses Unicom's strategic needs as it enters a less regulated environment. A Year 2000 Moratorium is in effect from July 1, 1999 to March 31, 2000 and during this time there is a company-wide freeze on configuration changes or additions to existing information systems to ensure hardware, software and embedded systems remain Year 2000 ready. In addition to its internal efforts, Unicom has been working and will continue to work with various industry groups, including NERC, EPRI and EEI to coordinate electric utility industry Year 2000 efforts with the Clinton Administration's Year 2000 Conversion Council, the DOE and Congress. The DOE has asked NERC to report on the integrity of the transmission system for North America and to coordinate and assess the preparation of the electric systems in North America for the Year 2000. NERC submitted its initial status report and coordination plan to the DOE in September 1998 and a second report in January 1999. On August 3, 1999, NERC presented to the DOE its final status report and a letter of assurance that the electric systems of North America are ready to operate into the Year 2000 and beyond. Additionally, Unicom participated in two industry-wide NERC readiness drills that provided an opportunity to test personnel and processes in advance of the roll-over. The first drill conducted on April 9, 1999 simulated the partial loss of voice and data communications and tested Unicom's ability to maintain bulk power system operations in the event of a loss of microwave communication with partial EMS/SCADA functionality. The successful completion of the drill demonstrated Unicom's ability to continue its bulk power operations in the event this data is not available through normal means during the Year 2000 rollover period. The second drill, that involved approximately 338 people and was conducted at various times between September 7-9, 1999, was comprised of three phases and tested the team's ability to respond in certain conditions. The phases of the drill included varying load conditions on the ComEd transmission and distribution system, a partial loss of voice and data communications and a full rehearsal of the transition to the Year 2000. The drill also tested the team's internal and external communications processes. The results were used to refine the plans and processes the team has already assembled for the roll-over to 2000. The drill did not affect normal electric operations and was seamless to customers and employees that were not a part of the drill. In addition to completing the drill, Unicom successfully transitioned through an important Year 2000 date without incident with the change from 9/8/99 to 9/9/99. Other key Year 2000 dates that Unicom has completed without Year 2000 problems are 1/1/99, 4/9/99 (99th day of 1999) and 8/21/99 (Global Positioning System roll-over). Unicom also depends upon third parties, including customers, suppliers, government agencies and financial institutions, to reliably deliver its products and services. Unicom completed additional initiatives to assess the degree to which third parties with whom it has business relationships are addressing Year 2000 issues. These initiatives included analysis of the Year 2000 readiness programs of Unicom's critical vendors and obtaining Year 2000 warranties in certain new contracts and licenses. Unicom also has introduced protocols for assuring that software and embedded systems remain Year 2000 ready on a continuing basis. Unicom's contingency planning addressed mechanisms for preventing or mitigating interruption caused by its suppliers. Unicom has an outreach program in place for communicating Year 2000 project information to residential and business customers and this activity will continue for the remainder of 1999. As of October 31, 1999, approximately $36 million has been expended for external labor, hardware and software costs, and for the costs of Unicom employees who are dedicated full-time to the Year 2000 project. All of such costs are expensed as incurred. The foregoing amounts do not include the cost of new software applications installed as a result of strategic replacement projects described earlier. Such replacement projects were not accelerated because of Year 2000 issues. 50 Unicom has existing contingency plans in place for events such as extreme heat, storms, equipment failures and accidents. Unicom prepared its Year 2000 contingency plans based on the framework of existing emergency management system preparation and scenario development to address the possibility that applications and systems may not be Year 2000 ready at the end of the five step remediation process. Unicom developed contingency plans that identify key risks and address the most reasonably likely worst case scenarios that could occur in the event that various Year 2000 issues were not resolved in a timely manner. Unicom used an approach in its contingency planning process that has been recognized by NERC and NEI. Key risks identified in Unicom's contingency plans include: uncharacteristic load patterns, human behavior, availability of key personnel, loss of critical business systems, readiness of supply base, loss of EMS/SCADA functionality, readiness of neighboring utilities, loss of critical voice and data communications, security, constrained fuel supplies and increased risk of generator trips/unit availability. Unicom submitted its Year 2000 contingency plans to MAIN in June 1999. Contingency planning is an ongoing process and will continue through the fourth quarter of 1999. Unicom also performed activities beyond contingency planning to further increase certainty and strengthen readiness. An independent consultant was engaged and performed an assessment of the process used to address the Year 2000 issue. Based on Unicom's current status with regard to Year 2000 tasks, it believes that its planning was adequate to secure Year 2000 readiness of its critical, medium priority and low priority systems. Nevertheless, achieving Year 2000 readiness is subject to various risks and uncertainties, many of which are described above. Unicom is not able to predict all the factors that could cause actual results to differ materially from its current expectations as to its Year 2000 readiness. However, if Unicom or third parties, with whom it has significant business relationships, fail to achieve Year 2000 readiness with respect to critical systems, there could be a material adverse effect on Unicom's results of operations, financial position and cash flows. Market Risks. ComEd is exposed to market risk due to changes in interest rates and the market price for electricity. Exposure for interest rate changes relates to its long-term debt and preferred equity obligations. Exposure to electricity market price risk relates to forward activities taken to manage effectively the supply of, and demand for, the electric generation capability of ComEd's generating plants. ComEd has implemented an integrated risk management framework to manage such risks. A corporate Risk Management Committee defines the Company's risk tolerance and establishes appropriate position limits, and corporate policies and procedures have been implemented to minimize the exposure to market risk. ComEd does not currently utilize derivative commodity or financial instruments for trading or speculative purposes. The estimated fair value of the forward energy contracts, including options at September 30, 1999, was approximately $(35) million. The estimated fair value is based on the estimated net settlement value of the contracts derived from forward price curves and market quotes, discounted at a ten percent rate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources-- Interest Rate Exposure" and "--Market Price Exposure," in Unicom and ComEd's Current Reports on Form 8-K dated February 19, 1999. There has not been a material change in ComEd's exposure to interest rate or market price risk since December 31, 1998. See "Energy Risk Management Contracts" in Note 1 of Notes to Financial Statements regarding the accounting for energy risk management contracts. UNREGULATED OPERATIONS ---------------------- Unicom Enterprises is engaged, through subsidiaries, in energy service activities which are not subject to utility regulation by federal or state agencies. One of these subsidiaries, UT Holdings, provides district cooling and related services to offices and other buildings in the central business 51 district of the City and in other cities in North America, generally working with local utilities. District cooling involves, in essence, the production of chilled water at one or more central locations and its circulation to customers' buildings through a closed circuit of supply and return piping. Such water is circulated through customers' premises primarily for air conditioning. This process is used by customers in lieu of self-generated cooling. Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged in providing energy services, including gas services, performance contracting, distributed energy and energy management systems. Through an alliance with AlliedSignal Power Systems, Inc., a subsidiary of AlliedSignal Inc., Unicom Energy Services is an exclusive distributor for the Parallon 75(TM) TurboGenerator system, which was developed by AlliedSignal to provide customers with on-site electricity production. Unicom Energy Services' exclusive territory for distributing the Parallon 75(TM) system encompasses 12 Midwest states, Ontario, Canada and Puerto Rico. Unicom Power Holdings, another subsidiary of Unicom Enterprises, is developing certain generation and cogeneration projects. Unicom Energy Inc. and Unicom Gas Services, LLC, also subsidiaries of Unicom Enterprises, are currently engaged in providing retail gas services to commercial and industrial customers in the Midwest region. Unicom Energy Inc. provides retail electric services as an unregulated retail energy supplier. On August 30, 1999, UMS Acquisition Corp., a subsidiary of Unicom Enterprises, acquired all of the capital stock of KHB Inc., MMSD, Inc. and MMCD, Inc. These three companies, which conduct business under the name "Midwest Mechanical", design, install and service heating, ventilation and air conditioning facilities for commercial and industrial customers in the City and the surrounding area. The final price did not have a material impact on Unicom's cash flows related to investing activities. Construction Program. Unicom has approved capital expenditures for 1999 of approximately $40 million for UT Holdings, primarily related to an expansion of its Chicago district cooling facilities and the related distribution piping and plants in other cities. As of September 30, 1999, UT Holdings' purchase commitments, principally related to construction, were approximately $38 million. Unicom has approved capital expenditures for 1999 of approximately $47 million for Unicom Energy Services. As of September 30, 1999, Unicom Energy Services had purchase commitments of approximately $5 million. Unicom Power Holdings intends to purchase and install up to 600 megawatts of additional combustion turbine generators prior to the summer of 2000. Such generators have a fast-start generating capability and would be used to assist in meeting peak demand for electricity. Unicom Power Holdings expects to spend approximately $165 million to purchase such generators, and it will incur significant additional costs for related equipment and to site and install such generators. Unicom Power Holdings is evaluating the amount of such additional costs. Capital Resources. Unicom expects to obtain funds to invest in its unregulated subsidiaries principally from the fossil plant sale proceeds to be received by Unicom Investment, although it may also obtain funds from dividends received on its ComEd common stock and from borrowings. The availability of ComEd's dividends to Unicom is dependent on ComEd's financial performance and cash position, as well as legal restrictions on the payment of dividends by public utilities. Other forms of financing by ComEd to Unicom or the unregulated subsidiaries of Unicom, such as additional loans or additional equity investments, which are not expected, would be subject to prior approval by the ICC. The fossil plant sale proceeds received by Unicom Investment, after the payment of the Demand Note to ComEd, will be used to invest in business opportunities. 52 Unicom Enterprises has a $200 million credit facility which has been extended to December 17, 1999, of which $15 million was unused as of September 30, 1999. The credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including UT Holdings and Unicom Energy Services, and for general corporate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Enterprises' operations. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime interest rate or a floating rate bank index plus a spread which varies with the credit rating of ComEd's outstanding first mortgage bonds. The credit facility is expected to be refinanced by Unicom Enterprises in the fourth quarter of 1999. See Note 12 of Notes to Financial Statements for additional information regarding certain covenants with respect to Unicom and Unicom Enterprises' operations. In July 1998, Unicom Thermal issued a $120 million 7.38% unsecured guaranteed senior Note due May 2012, the proceeds of which were used to refinance existing debt. The Note is guaranteed by Unicom and includes certain covenants with respect to Unicom and Unicom Thermal's operations. In June 1999, Northwind Midway issued $12 million of 7.68% guaranteed senior Notes due June 2023, the proceeds of which will be used primarily to finance certain project construction costs. The Notes are guaranteed by Unicom and include certain covenants with respect to Unicom and Northwind Midway's operations. On November 5, 1999, Duff & Phelps assigned an initial implied senior unsecured debt rating of BBB- to Unicom, and placed the rating on "Rating Watch-Up." S&P's current corporate credit rating for Unicom is BBB. On September 23, 1999, in response to the announced Unicom and PECO merger agreement, S&P placed Unicom on credit watch with positive implications, and Moody's confirmed the first-time issuer rating of Baa3 it had assigned to Unicom on September 15, 1999. Regulation ComEd and Indiana Company are subject to federal and state regulation in the conduct of their respective businesses, including the operations of Cotter. Such regulation includes rates, securities issuance, nuclear operations, environmental and other matters. Particularly in the cases of nuclear operations and environmental matters, such regulation can and does affect operational and capital expenditures. Rate Matters. See "Changes in the Electric Utility Industry," subcaption "The 1997 Act" above, for information regarding the effect of the 1997 Act on rate matters. Nuclear Matters. Nuclear operations have been, and remain, an important focus of ComEd. ComEd operates five nuclear plants--Braidwood, Byron, Dresden, LaSalle and Quad Cities Stations, and is committed to safe, reliable and efficient operation. See "Changes in the Electric Utility Industry," subcaption "Response to Regulatory Changes" above, for information regarding ComEd's permanent cessation of nuclear generation operations at its Zion Station. On May 6, 1999, ComEd's LaSalle Station was officially removed from the NRC's listing of plants that require increased regulatory scrutiny. LaSalle Station had been on this list since January 1997. Concurrent with the LaSalle Station action, the NRC announced the formal removal of the Quad Cities Station from its list of plants with declining performance trends. Quad Cities Station had been on the declining trend list since January 1998. With these actions, all of ComEd's nuclear plants are now placed in the NRC's "routine oversight" category. This represents the first time since 1990 that none of ComEd's nuclear generating units are under special NRC oversight. 53 The NRC and representatives of ComEd's management have met, and will continue to meet periodically as part of the NRC's normal oversight process, to discuss the overall performance of the ComEd nuclear program. Based on ComEd's most recent study, decommissioning costs are estimated to be $5.4 billion in current-year (1999) dollars, including a contingency allowance. This estimate includes $588 million of non-radiological costs, which are included in ComEd's proposed rider for recovery, as discussed below. ComEd's decommissioning cost expenditures at the end of the units' operating lives are estimated to total approximately $13.8 billion. These expenditures will occur primarily during the period from 2007 through 2034. All such costs are expected to be funded by the external decommissioning trusts, which ComEd established in compliance with Illinois law and into which ComEd has been making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of or changes to NRC regulations, as well as changes in the assumptions used in making such estimates, including changes in technology, available alternatives for the disposal of nuclear waste and inflation. Since 1995, ComEd has collected decommissioning costs from its ratepayers in conjunction with a rider to its tariffs. The rider allows annual adjustments to decommissioning cost collections outside the context of a traditional rate proceeding and will continue under the 1997 Act. The current estimated decommissioning costs include a contingency allowance, but, except at Dresden Unit 1, exclude amounts for alternative spent fuel storage installations, which may be necessary to store spent fuel during the period beginning at the end of the NRC license lives of the plants to the date when the DOE accepts the spent fuel for permanent storage. Contingency allowances used in decommissioning cost estimates provide for currently unspecifiable costs that are likely to occur after decommissioning begins and generally range from 20% to 25% of the currently specifiable costs. Under its most recent annual rider, filed with the ICC on February 26, 1999, ComEd has proposed to increase its estimated annual decommissioning cost accrual from $84 million to $130 million. The proposed increase primarily reflects an increase in low-level waste disposal cost escalation, the inclusion of $209 million in current-year (1999) dollars for safety-related costs of maintaining Zion Station in a mothballed condition until dismantlement begins, and the inclusion of non- radiological costs in the decommissioning cost estimates for recovery under the rider. See Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Decommissioning," for additional information regarding decommissioning costs. Environmental Matters. ComEd is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. See Note 21 of Notes to Financial Statements for additional information. Results of Operations Unicom's basic and diluted earnings/(loss) per common share for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- Basic Earnings/(Loss) per Common Share............... $1.29 $1.22 $2.16 $1.84 $2.67 $(4.44) ===== ===== ===== ===== ===== ====== Diluted Earnings/(Loss) per Common Share........... $1.28 $1.22 $2.15 $1.83 $2.66 $(4.44) ===== ===== ===== ===== ===== ======
54 Substantially all of the results of operations for Unicom are the results of operations for ComEd. The results of Unicom's unregulated subsidiaries currently are not material to the results of Unicom and subsidiary companies as a whole. As such, the following section discusses the effect of ComEd's operations on Unicom's financial results. All EPS computations shown below reflect the impact on Unicom's diluted EPS. Net Income for the Three Months Ended September 30, 1999. The increase in ComEd's net income in the recent three-month period reflects, among other factors, increased energy sales, lower regulatory asset amortization charges, lower-than-expected closing costs for Zion nuclear station and outstanding nuclear performance. Kilowatthour sales increased 11% for the third quarter of 1999, compared to the same period in 1998. Both periods benefited from warmer than normal weather. The increase in kilowatthour sales included a 42% increase in kilowatthour sales to other utilities, which represented a $22 million (after- tax), or $0.10 per common share, increase in earnings helping to offset the 15% residential base rate reduction. See "Operating Revenues" below for additional information. Fuel and purchased power costs increased 3% in the third quarter of 1999, compared to the same period in 1998, reflecting increased kilowatthour sales. See "Fuel Costs" and "Purchased Power" below for additional information. O&M expenses decreased 1% for the third quarter of 1999, compared to the third quarter of 1998, as discussed in "Operation and Maintenance Expenses" below. Earnings for the third quarter of 1999 were positively impacted by lower regulatory asset amortization expense of $19 million (after-tax), or $0.09 per common share. A reduction in the estimated liability for closing costs related to the Zion Station also increased earnings by $8 million (after-tax), or $0.04 per common share. Partially offsetting the increases to earnings was an unrealized loss of $18 million (after-tax), or $0.08 per common share, related to a forward share repurchase arrangement. Net Income for the Nine Months Ended September 30, 1999. The increase in ComEd's net income in the recent nine-month period reflects, among other factors, the continued improvement of ComEd's nuclear fleet, which reduced energy costs. The reduction in energy costs helped to offset the reduction in revenues due to the 15% residential base rate reduction and increased O&M expenditures. Kilowatthour sales increased 10% for the nine months ended September 30, 1999, compared to the same period in 1998, which included a 57% increase in kilowatthour sales to other utilities, representing a $71 million (after-tax), or $0.33 per common share, increase in earnings during the nine months ended September 30, of 1999, as well as continued economic growth in ComEd's service territory. See "Operating Revenues" below for additional information. Fuel and purchased power costs decreased 16% during the nine months ended September 30, 1999, compared to the same period in 1998, reflecting the effects of improvement of ComEd's nuclear fleet. See "Fuel Costs" and "Purchased Power" below for additional information. O&M expenses increased 3% for the nine months ended September 30, 1999, compared to the same period in 1998, as discussed in "Operation and Maintenance Expenses" below. Earnings for the nine months ended September 30, 1999 were also positively impacted by a net unrealized gain of $16 million (after-tax), or $0.07 per common share, recorded related to a forward share repurchase arrangement. A reduction in the estimated liability for closing costs related to the 55 Zion Station also increased earnings by $14 million (after-tax), or $0.07 per common share. Partially offsetting the increases in earnings were charges totaling $38 million (after-tax), or $0.17 per common share, related to the early redemption of long-term debt, sinking fund debentures and preference stock completed in 1999. Net Income for the Twelve Months Ended September 30, 1999. The increase in ComEd's net income in the recent twelve-month period was primarily due to the continued improvement of the nuclear fleet, which reduced energy costs. Also increasing operating results were lower O&M expenses, lower depreciation and amortization expense, gains from certain asset sales and a reduction in the estimated liability for Zion Station closing costs. The twelve months ended September 30, 1998 included write downs associated with the discontinuation of regulatory accounting practices for the generation portion of its business and other charges recorded in response to the 1997 Act. The twelve months ended September 30, 1998 also included a write-off in connection with the closure of Zion Station. ComEd's kilowatthour sales increased 9% for the twelve months ended September 30, 1999, compared to the same period last year, as discussed in "Operating Revenues" below. O&M expenses decreased 1% during the same period, as discussed in "Operation and Maintenance Expenses" below. Fuel and purchased power costs decreased 13% for the twelve months ended September 30, 1999, compared to the same period last year, due to overall improved performance at ComEd's nuclear stations, which helped to reduce purchased power requirements. See "Fuel Costs" and "Purchased Power" below for additional information. The twelve months ended September 30, 1999 also included a 4% reduction in depreciation and amortization expense, see "Depreciation, Amortization and Decommissioning" below, and a $20 million (after-tax), or $0.09 per common share, reduction in the estimated liability for closing costs related to the Zion Station, both of which increased operating results. Also, the twelve months ended September 30, 1999 reflected gains on the sales of certain assets of $20 million (after-tax), or $0.09 per common share, consisting principally of surplus inventory of emission allowances. In addition, operating results increased for the recent period due to a net unrealized gain of $16 million (after-tax), or $0.07 per common share, recorded during 1999 related to the forward share repurchase arrangement. Partially offsetting the increases in earnings were charges totaling $38 million (after-tax), or $0.17 per common share, related to the early redemption of long-term debt, sinking fund debentures and preference stock completed during 1999. ComEd discontinued regulatory accounting practices for the generation portion of its business in the fourth quarter of 1997 due to the expected transition of electric generation services to market-based pricing as a result of the 1997 Act. Accordingly, ComEd's generation-related net regulatory assets, which represent assets and liabilities properly recorded under regulatory accounting practices but which would not be recorded under GAAP for non-regulated entities, were written off resulting in an extraordinary charge for the twelve months ended June 30, 1998 of $810 million (after-tax), or $3.75 per common share. Also, the twelve months ended September 30, 1998 operating results included the write down of ComEd's investment in uranium-related properties to reflect costs which are not expected to be recovered in a competitive market. The write down resulted in a charge of $60 million (after-tax), or $0.28 per common share. In addition, as permitted under the 1997 Act, ComEd elected to eliminate its FAC in December 1997, which resulted in a charge for the twelve months ended September 30, 1998 of $44 million (after-tax), or $0.20 per common share. 56 The twelve months ended September 30, 1998 also included a charge of $523 million (after-tax), or $2.42 per common share, reflecting the write-off of the unrecoverable portion of the cost of ComEd's Zion Station plant and inventories, and a liability for future closing costs, resulting from the decision in January 1998 to permanently cease nuclear generation operations at Zion Station. Operating Revenues. ComEd's electric operating revenues reflect revenues from sales to ultimate consumers (including residential, commercial and industrial customers within its service territory) and revenues from sales for resale (i.e., sales to wholesale customers, principally other electric utilities). Operating revenues are affected by kilowatthour sales and rate levels. Kilowatthour 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. See Note 1 of Notes to Financial Statements, under "Use of Estimates" and "Customer Receivables and Revenues", for additional information. Operating revenues decreased $26 million in the three months ended September 30, 1999, compared to the three months ended September 30, 1998, due in part to the approximately $46 million impact of the 15% residential base rate reduction that took effect August 1, 1998. Kilowatthour sales increased 11%, primarily due to sales to other utilities. Operating revenues decreased approximately $257 million in the nine months ended September 30, 1999, compared to the nine months ended September 30, 1998, primarily due to the approximately $226 million impact of the 15% residential base rate reduction that took effect August 1, 1998. Kilowatthour sales increased 10%, compared to the same period in 1998, primarily due to sales to other utilities. Operating revenues decreased $332 million in the twelve months ended September 30, 1999, compared to the same period in 1998, primarily due to the approximately $318 million impact of the 15% residential base rate reduction that took effect August 1, 1998. Kilowatthour sales increased 9%, compared to the same period last year, primarily due to sales to other utilities. In addition, due to a change in presentation for certain state and municipal taxes, operating revenues reflected a net reduction of approximately $30 million, $160 million and $226 million for the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods in 1998. Fuel Costs. Changes in fuel expense for the three months, nine months and twelve months ended September 30, 1999, compared to the same periods ended September 30, 1998, primarily resulted from changes in the average cost of fuel consumed, changes in the mix of fuel sources of electric energy generated and changes in net generation of electric energy. Fuel mix is determined primarily by system load, the costs of fuel consumed and the availability of nuclear generating units. The cost of fuel consumed, net generation of electric energy and fuel sources of kilowatthour generation were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ -------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- Cost of fuel consumed (per million Btu): Nuclear..................................... $0.50 $0.54 $0.50 $0.58 $0.50 $0.59 Coal........................................ $2.09 $2.59 $2.20 $2.35 $2.26 $2.28 Oil......................................... $5.01 $3.71 $4.37 $3.49 $4.17 $3.56 Natural gas................................. $2.14 $2.27 $2.22 $2.38 $2.25 $2.53 Average all fuels........................... $0.99 $1.29 $0.99 $1.28 $1.00 $1.31 Net generation of electric energy (millions of kilowatthours)............................... 28,630 25,110 76,319 60,600 99,021 80,770 Fuel sources of kilowatthour generation: Nuclear..................................... 70% 63% 72% 62% 72% 59% Coal........................................ 26 31 25 31 25 34 Oil......................................... -- -- -- 1 -- 1 Natural gas................................. 4 6 3 6 3 6 --------- --------- -------- -------- --------- --------- 100% 100% 100% 100% 100% 100% ========= ========= ======== ======== ========= =========
57 The increases in net generation of electric energy and nuclear generation for the periods ended September 30, 1999, compared to the prior periods, are primarily due to significant improvement in ComEd's nuclear fleet. The overall nuclear capacity factor was 97% for the third quarter of 1999, compared to 77% for the third quarter of 1998. See "Regulation," subcaption "Nuclear Matters" above, for information regarding ComEd's nuclear generating stations. Fuel Supply. Compared to other utilities, ComEd has relatively low average fuel costs as a result of its reliance predominantly on lower cost nuclear generation. ComEd's coal costs, however, are high compared to those of other utilities. ComEd's western coal contracts and its rail contracts for delivery of the western coal provide for the purchase of certain coal at prices substantially above currently prevailing market prices, and ComEd has significant purchase commitments under its contracts. For additional information concerning ComEd's coal purchase commitments see "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Construction Program," above and Note 21 of Notes to Financial Statements. 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 $56 million for the three months ended September 30, 1999, compared to the same period ended September 30, 1998. The increase in purchased power is primarily due to the record-breaking heat wave which occurred in July 1999 when ComEd set a new peak energy demand. Purchased power decreased $227 million and $230 million for the nine and twelve months ended September 30, 1999, respectively, compared to the same period ended September 30, 1998, primarily due to increased output from ComEd's nuclear fleet, which reduced purchased power requirements. See "Regulation," subcaption "Nuclear Matters" above, for information regarding ComEd's nuclear generating stations. The number and average cost of kilowatthours purchased were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ------------------------ ---------------------- ------------------------ 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- Kilowatthours (millions)............. 3,222 4,025 7,215 18,474 9,445 23,158 Cost per kilowatthour... 7.74cent 4.81cent 5.81cent 3.76cent 5.52cent 3.52cent
The market price for electricity is subject to price volatility associated with changes in supply and demand in the electric supply markets. ComEd utilizes energy put and call option contracts and energy swap arrangements to limit market price risk associated with forward commodity contracts. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Market Risks" above, for additional information. Operation and Maintenance Expenses. O&M expenses include the expenses associated with operating and maintaining ComEd's generation, transmission and distribution assets, as well as administrative overhead and support. Given the variety of expense categories covered, there are a number of factors which affect the level of such expenses within any given period. Two major components of such expenses, however, are the costs associated with operating and maintaining ComEd's nuclear and fossil generating facilities. Generating station expenses are affected by the cost of materials, regulatory requirements and expectations, the age of facilities and cost control efforts. During the three months and twelve months ended September 30, 1999, the aggregate level of O&M expenses decreased 1%, compared to the same periods ended September 30, 1998. O&M expenses for the nine months ended September 30, 1999 increased 3%, compared to the same period last year. 58 O&M expenses associated with nuclear generating stations decreased $18 million, $37 million and $45 million during the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods ended September 30, 1998. The decreases in the recent periods were due to shorter refueling outages and fewer forced outages. The nuclear O&M decrease in the recent twelve-month period was also due to the permanent cessation of nuclear generation operations at Zion Station in December 1997. See "Changes in the Electric Utility Industry," subcaption "Response to Regulatory Changes" above, regarding the permanent cessation of nuclear operations at Zion Station. During the three months, nine months and twelve months ended September 30, 1999, O&M expenses associated with fossil generating stations decreased $2 million, $14 million and $8 million, respectively, compared to the same periods ended September 30, 1998. The decreases in the recent periods for the fossil generating stations were primarily due to reductions in general plant maintenance costs. Also, the twelve months ended September 30, 1999 fossil O&M expenses were lower due to the sales of State Line and Kincaid Stations in December 1997 and February 1998, respectively. O&M expenses associated with ComEd's transmission and distribution system increased $22 million, $58 million and $74 million during the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods last year. The increases in the recent three- month, nine-month and twelve-month periods reflect higher maintenance costs, which include an increase in tree trimming expenses and the costs associated with ComEd's extensive evaluation of the reliability of its transmission and distribution system following outages which occurred during the summer of 1999. The increase also reflects restoration and other outage-related costs associated with the summer heat wave. O&M expenses associated with customer- related activities increased $9 million, $27 million and $31 million for the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods ended September 30, 1998, primarily due to the implementation of a new customer information and billing system. O&M expenses also include employee benefits expenses. Since 1995, ComEd has reduced the size of its workforce by offering incentives for employees to leave the company voluntarily. Such incentives included both current payments and earlier eligibility for postretirement health care benefits, in addition to certain other employee-related costs, resulting in charges of $2 million and $9 million for the three months ended September 30, 1999 and 1998, respectively, $7 million and $33 million for the nine months ended September 30, 1999 and 1998, respectively, and $23 million and $38 million for the twelve months ended September 30, 1999 and 1998, respectively. Other employee benefits expenses, excluding the effects of employee separation plans and certain other employee-related costs decreased $11 million and increased $22 million and $26 million for the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods ended September 30, 1998. The decrease for the recent three-month period was primarily due to lower accruals for incentive compensation. The increases in the recent nine-month and twelve-month periods were primarily due to higher medical costs for active and retired employees and accruals for incentive compensation. O&M expenses included a $25 million charge for the nine months and twelve months ended September 30, 1999 as a result of a settlement agreement with the City during the first quarter of 1999. O&M expenses for the twelve months ended September 30, 1999 also reflect a reduction of $34 million in certain nuclear maintenance costs due to technological improvements, compared to the same period last year. In addition, O&M expenses for the twelve months ended September 30, 1998 included $25 million for the additional write-off of obsolete materials and supplies. O&M expenses associated with certain administrative and general costs increased $2 million and decreased $13 million and $53 million for the three months, nine months and twelve months ended 59 September 30, 1999, respectively, compared to the same periods ended September 30, 1998. The decrease in the recent nine-month and twelve-month periods was due to reductions in nuclear insurance, partially offset by increased charges for uncollectible accounts of $25 million and $35 million in the nine months and twelve months ended September 30, 1999, respectively, resulting from billing and collection delays experienced following the ongoing implementation of a new customer information system and the temporary suspension of credit activities in the last half of 1998 and early 1999. ComEd initiated aggressive credit action during the third quarter of 1999 in an effort to identify and resolve outstanding billing and collection issues and to reduce its outstanding aged accounts receivable. Such efforts included customer outreach programs and other direct customer contact programs. The outcome of these efforts cannot currently be determined, but could result in increased provisions for uncollectible accounts in future periods. 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, Amortization and Decommissioning. Depreciation, amortization and decommissioning expense decreased $31 million, $14 million and $35 million for the three months, nine months and twelve months ended September 30, 1999, respectively, compared to the same periods ended September 30, 1998. The decrease in the recent three-month period was primarily due to no additional regulatory asset amortization expense being recorded due to lower than previously estimated annual recovery of such cost through regulated cash flows. The decrease in the recent nine-month period was due to the retirement of steam generators at Braidwood Station in early 1998, which increased depreciation expense for the 1998 period. The decrease in the recent twelve- month period was primarily due to the retirement of Zion Station in December 1997 as well as increased depreciation in 1998 related to the replacement of steam generators. See Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Decommissioning," for additional information. 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 the financial statements of electric utilities. In response to these questions, the FASB is reviewing the accounting for asset removal costs including those related to nuclear decommissioning. If current electric utility industry accounting practices for such decommissioning costs are changed, annual provisions for decommissioning could increase and the estimated costs of decommissioning could be recorded as a liability rather than as accumulated depreciation. Decommissioning costs of currently retired nuclear plants are recorded as a liability. Unicom and ComEd do not believe that such changes, if required, would have an adverse effect on their results of operations due to ComEd's ability to recover decommissioning costs through rates. Interest on Debt. Changes in interest on long-term debt and notes payable for the three months, nine months and twelve months ended September 30, 1999, compared to the same periods ended September 30, 1998, were due to changes in average interest rates and in the amounts of long-term debt and notes payable outstanding. Changes in interest on ComEd's long-term debt also reflected new issues of debt, the retirement and early redemption of debt, and the retirement and redemption of issues which were refinanced at generally lower rates of interest. See Notes 3 and 6 of Notes to Financial Statements for information regarding the redemptions and repurchases of debt and equity. The average amounts of ComEd's long-term debt and notes payable outstanding and average interest rates thereon were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 --------------------- --------------------- --------------------- 1999 1998 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ---------- Long-term debt outstand- ing: Average amount (mil- lions)................ $7,998 $5,823 $8,227 $5,852 $7,671 $5,906 Average interest rate.. 6.77% 7.37% 6.76% 7.40% 7.01% 7.47% Notes payable outstand- ing: Average amount (mil- lions)................ $ 381 $ 412 $ 298 $ 343 $ 311 $ 266 Average interest rate.. 5.50% 5.94% 5.84% 5.92% 5.59% 5.94%
60 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, and as a result, began capitalizing interest in 1998. ComEd capitalized $4 million and $6 million for the three months ended September 30, 1999 and 1998, $16 million and $14 million for the nine months ended September 30, 1999 and 1998, respectively, and $31 million and $14 million for the twelve months ended September 30, 1999 and 1998, respectively, in interest costs on its generation-related construction work in progress and nuclear fuel in process. AFUDC and interest capitalized do not contribute to the current cash flow of Unicom or ComEd. ComEd's ratios of earnings to fixed charges for the twelve months ended September 30, 1999 and December 31, 1998 were 2.56 and 2.59, respectively. ComEd's ratios of earnings to fixed charges and preferred and preference stock dividend requirements for the twelve months ended September 30, 1999 and December 31, 1998 were 2.36 and 2.24, respectively. Business corporations, in general, have been adversely affected by inflation because amounts retained after the payment of all costs have been inadequate to replace, at increased costs, the productive assets consumed. Electric utilities, in particular, have been especially affected as a result of their capital intensive nature and regulation which limits capital recovery and prescribes installation or modification of facilities to comply with increasingly stringent safety and environmental requirements. Because the regulatory process limits the amount of depreciation expense included in ComEd's revenue allowance to the original cost of utility plant investment, the resulting cash flows are inadequate to provide for replacement of that investment in future years or preserve the purchasing power of common equity capital previously invested. 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 Notes 1 and 3 of Notes to Financial Statements, (2) statements regarding estimated capital expenditures in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaptions "Liquidity and Capital Resources-- UTILITY OPERATIONS--Construction Program" and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--Construction Program," and "Changes in the Electric Utility Industry--Response to Regulatory Changes," (3) statements regarding the costs of decommissioning nuclear generating stations in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation--Nuclear Matters," and in Note 1 of Notes to Financial Statements, under "Depreciation, Amortization of Regulatory Assets and Decommissioning," (4) statements regarding cleanup costs associated with MGPs and other remediation sites in Note 21 of Notes to Financial Statements, (5) statements regarding the estimated fair value of forward energy contracts in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS--Market Risks," (6) statements regarding the risks and uncertainties relating to Year 2000 issues set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Liquidity and Capital Resources--UTILITY OPERATIONS-- Year 2000 Conversion," including Unicom's dependence upon the Year 2000 readiness of third parties with whom it has significant business relationships, the estimated costs of remediating or upgrading embedded systems and software that would not otherwise be replaced in accordance with Unicom's business 61 plans, and Unicom's Year 2000 contingency planning process, (7) statements regarding the fossil plant sale in "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaptions "Changes in the Electric Utility Industry--Fossil Plant Sale," "Liquidity and Capital Resources--UTILITY OPERATIONS--Construction Program," and "Liquidity and Capital Resources--UNREGULATED OPERATIONS--Capital Resources," and in Note 4 of Notes to Financial Statements, (8) statements regarding estimates of claims resulting from the summer of 1999 outages set forth in Note 21 of Notes to Financial Statements and (9) statements regarding the Merger Agreement in Note 2 of Notes to Financial Statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" subcaption "Changes in the Electric Utility Industry--Merger Agreement." Management cannot predict the course of future events or anticipate the interaction of multiple factors beyond management's control and their effect on revenues, project timing and costs. The statements regarding revenue reductions and collections of future CTC revenues are subject to unforeseen developments in the market for electricity in Illinois resulting from regulatory changes. The statements regarding estimated capital expenditures, decommissioning costs, cleanup costs and Year 2000 conversion costs are subject to changes in the scope of work and manner in which the work is performed and consequent changes in the timing and level of the projected expenditure, and are also subject to changes in laws and regulations or their interpretation or enforcement. The statements regarding expectations for Year 2000 readiness and Unicom's Year 2000 contingency planning process are also subject to the risk that Year 2000 remediation efforts of Unicom and other parties with whom it has significant business relationships are not successful. The statements regarding the fair value of forward energy contracts are subject to changes in generating capability and a reduction in the demand for electricity. The statement regarding the use of proceeds from the fossil plant sale is subject to the possibility that regulatory action might affect the amount and use of such proceeds and the possibility that, due to changing market conditions, Unicom and ComEd may determine that other uses of the proceeds may be in their best interest. The statements regarding estimates of claims resulting from the summer of 1999 outages are subject to the risk that the actual amount of losses suffered by customers and restoration costs may exceed the estimated amounts. The statements regarding the Merger Agreement and the associated repurchase of shares are subject to the risk of a significant delay in the expected completion of, and unexpected consequences resulting from, the transactions contemplated by the Merger Agreement, including the inability to close the transaction, and to changes in the number of shares of outstanding common stock of Unicom and PECO for unforeseen reasons. 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. 62 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 September 30, 1999 and December 31, 1998, and the related statements of consolidated operations, retained earnings/(deficit) and cash flows for the three-month, nine-month and twelve- month periods ended September 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Commonwealth Edison Company and subsidiary companies as of September 30, 1999 and December 31, 1998, and the results of their operations and their cash flows for the three- month, nine-month and twelve-month periods ended September 30, 1999 and 1998, in conformity with accounting principles generally accepted in the United States. Arthur Andersen LLP Chicago, Illinois November 12, 1999 (except with respect to Note 1 as to which the date is May 12, 2000) 63 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED OPERATIONS The following Statements of Consolidated Operations for the three months, nine months and twelve months ended September 30, 1999 and 1998 reflect the results of past operations and are not intended as any representation as to results of operations for any future period. Future operations will necessarily be affected by various and diverse factors and developments, including changes in electric prices, regulation, population, business activity, asset dispositions, competition, taxes, environmental control, energy use, fuel, cost of labor, purchased power and other matters, the nature and effect of which cannot now be determined.
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 ---------------------- ---------------------- ----------------------- 1999 1998 1999 1998 1999 1998 ---------- ---------- ---------- ---------- ---------- ----------- (Thousands of Dollars) Electric Operating Revenues............... $2,064,011 $2,089,547 $5,271,794 $5,528,794 $6,831,542 $ 7,163,379 ---------- ---------- ---------- ---------- ---------- ----------- Electric Operating Expenses and Taxes: Fuel................... $ 302,181 $ 340,317 $ 796,654 $ 804,483 $1,049,699 $ 1,062,539 Purchased power........ 249,375 193,637 419,358 646,388 520,987 751,325 Operation.............. 383,438 388,357 1,133,360 1,077,611 1,513,094 1,539,085 Maintenance............ 168,993 169,536 590,572 603,666 776,169 772,637 Depreciation and amortization.......... 200,284 231,008 695,387 709,774 923,216 958,400 Taxes (except income).. 143,912 178,800 405,454 570,365 532,241 755,814 Income taxes -- Current--Federal..... 164,697 171,051 350,417 293,191 343,217 297,201 --State.............. 34,704 29,603 74,805 55,113 71,521 57,871 Deferred--Federal-- net................. (10,944) (10,920) (86,319) (29,937) (25,621) 1,325 --State--net......... (1,385) 4,134 (17,204) 1,543 (6,210) 10,774 Investment tax credits deferred--net......... (7,021) (6,889) (21,063) (20,937) (27,856) (28,588) ---------- ---------- ---------- ---------- ---------- ----------- $1,628,234 $1,688,634 $4,341,421 $4,711,260 $5,670,457 $ 6,178,383 ---------- ---------- ---------- ---------- ---------- ----------- Electric Operating Income................. $ 435,777 $ 400,913 $ 930,373 $ 817,534 $1,161,085 $ 984,996 ---------- ---------- ---------- ---------- ---------- ----------- Other Income and (Deductions): Interest on long-term debt, net of interest capitalized........... $ (130,663) $ (107,356) $ (400,821) $ (324,693) $ (506,732) $ (441,178) Interest on notes payable............... (5,282) (6,170) (13,003) (15,186) (17,377) (15,817) Allowance for funds used during construction.......... 6,581 4,467 15,982 12,325 20,121 24,217 Income taxes applicable to nonoperating activities............ 2,080 1,671 (1,169) 18,946 (17,418) 31,151 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) (22,283) (22,283) (29,710) (29,710) Loss on nuclear plant closure............... -- -- -- -- -- (885,611) Income tax effect of nuclear plant closure............... -- -- -- -- -- 362,952 Miscellaneous--net..... (14,016) (26) 29,935 (24,286) 60,893 (96,071) ---------- ---------- ---------- ---------- ---------- ----------- $ (148,728) $ (114,842) $ (391,359) $ (355,177) $ (490,223) $(1,050,067) ---------- ---------- ---------- ---------- ---------- ----------- Net Income/(Loss) before Extraordinary Items.... $ 287,049 $ 286,071 $ 539,014 $ 462,357 $ 670,862 $ (65,071) Extraordinary Losses, less Applicable Income Taxes.................. -- -- (27,579) -- (27,579) (810,335) ---------- ---------- ---------- ---------- ---------- ----------- Net Income/(Loss)....... $ 287,049 $ 286,071 $ 511,435 $ 462,357 $ 643,283 $ (875,406) Provision for Dividends on Preferred and Preference Stocks...... 1,830 14,053 20,170 43,062 33,991 57,635 ---------- ---------- ---------- ---------- ---------- ----------- Net Income/(Loss) on Common Stock........... $ 285,219 $ 272,018 $ 491,265 $ 419,295 $ 609,292 $ (933,041) ========== ========== ========== ========== ========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 64 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, ASSETS 1999 1998 ------ ------------- ------------ (Thousands of Dollars) Utility Plant: Plant and equipment, at original cost (includes construction work in progress of $959 million and $858 million, respectively)...................... $28,501,029 $27,801,246 Less--Accumulated provision for depreciation...... 15,749,560 15,234,320 ----------- ----------- $12,751,469 $12,566,926 Nuclear fuel, at amortized cost................... 864,229 874,979 ----------- ----------- $13,615,698 $13,441,905 ----------- ----------- Investments: Nuclear decommissioning funds..................... $ 2,340,005 $ 2,267,317 Subsidiary companies.............................. 69,032 48,636 Other investments, at cost........................ 45,800 57,031 ----------- ----------- $ 2,454,837 $ 2,372,984 ----------- ----------- Current Assets: Cash.............................................. $ 10,043 $ 219 Temporary cash investments........................ 28,130 26,935 Cash held to redemption of securities............. 606,822 3,062,816 Special deposits.................................. 382 271 Receivables-- Customers....................................... 1,285,420 1,364,760 Forward share repurchase contract............... 678,016 -- Other........................................... 148,349 155,492 Provisions for uncollectible accounts........... (61,355) (48,008) Coal and fuel oil, at average cost................ 130,662 134,965 Materials and supplies, at average cost........... 241,952 229,532 Deferred income taxes related to current assets and liabilities.................................. 24,892 26,486 Prepayments and other............................. 33,555 18,387 ----------- ----------- $ 3,126,868 $ 4,971,855 ----------- ----------- Deferred Charges and Other Noncurrent Assets: Regulatory assets................................. $ 4,473,652 $ 4,578,427 Other............................................. 91,123 85,406 ----------- ----------- $ 4,564,775 $ 4,663,833 ----------- ----------- $23,762,178 $25,450,577 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 65 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, CAPITALIZATION AND LIABILITIES 1999 1998 ------------------------------ ------------- ------------ (Thousands of Dollars) Capitalization (see accompanying statements): Common stock equity.................................. $ 5,270,861 $ 5,055,854 Preferred and preference stocks without mandatory redemption requirements............................. 18,820 91,479 Preference stock subject to mandatory redemption requirements........................................ -- 69,475 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities*............. 350,000 350,000 Long-term debt....................................... 7,049,748 7,677,219 ----------- ----------- $12,689,429 $13,244,027 ----------- ----------- Current Liabilities: Notes payable........................................ $ 448,750 $ 276,356 Current portion of long-term debt, redeemable preference stock and capitalized lease obligations.. 1,104,153 2,226,868 Accounts payable..................................... 486,158 605,712 Accrued interest..................................... 127,414 178,238 Accrued taxes........................................ 325,896 165,466 Dividends payable.................................... 89,469 104,022 Customer deposits.................................... 62,211 56,954 Accrued plant closing costs.......................... 15,198 78,430 Other................................................ 130,326 149,304 ----------- ----------- $ 2,789,575 $ 3,841,350 ----------- ----------- Deferred Credits and Other Noncurrent Liabilities: Deferred income taxes................................ $ 3,688,501 $ 3,787,978 Nuclear decommissioning liability for retired plants. 1,266,900 1,215,400 Accumulated deferred investment tax credits.......... 535,089 562,285 Accrued spent nuclear fuel disposal fee and related interest............................................ 753,926 728,413 Obligations under capital leases..................... 213,725 333,653 Regulatory liabilities............................... 599,739 595,005 Other................................................ 1,225,294 1,142,466 ----------- ----------- $ 8,283,174 $ 8,365,200 ----------- ----------- Commitments and Contingent Liabilities (Note 21) $23,762,178 $25,450,577 =========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal amount of ComEd's 8.48% subordinated deferrable interest notes due September 30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated deferrable interest debentures due January 15, 2027. The accompanying Notes to Financial Statements are an integral part of the above statements. 66 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CAPITALIZATION
September 30, December 31, 1999 1998 -------------- ----------- (Thousands of Dollars) Common Stock Equity: Common stock, $12.50 par value per share-- Outstanding--213,972,524 shares and 214,057,171 shares, respectively............................. $ 2,677,979 $ 2,677,969 Premium on common stock and other paid-in capital.. 2,207,264 2,223,706 Capital stock and warrant expense.................. (12,537) (15,664) Retained earnings.................................. 408,520 176,643 Treasury stock--264,406 shares and 178,982 shares, respectively...................................... (10,365) (6,800) ----------- ----------- $ 5,270,861 $ 5,055,854 ----------- ----------- Preferred and Preference Stocks Without Mandatory Redemption Requirements: Preference stock, non-cumulative, without par val- ue-- Outstanding--2,600 shares......................... $ 16,991 $ 16,991 Preference stock, cumulative, without par value-- Outstanding--No shares and 13,499,549 shares, respectively .................................... -- 504,957 Current redemption requirements for preference stock included in current liabilities............. -- (432,320) $1.425 convertible preferred stock, cumulative, without par value-- Outstanding--57,526 shares and 58,211 shares, re- spectively....................................... 1,829 1,851 Prior preferred stock, cumulative, $100 par value per share-- No shares outstanding............................. -- -- ----------- ----------- $ 18,820 $ 91,479 ----------- ----------- Preference Stock Subject to Mandatory Redemption Re- quirements: Preference stock, cumulative, without par value-- Outstanding--700,000 shares and 1,720,345 shares, respectively..................................... $ 69,475 $ 171,348 Current redemption requirements for preference stock included in current liabilities............. (69,475) (101,873) ----------- ----------- $ -- $ 69,475 ----------- ----------- Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securities.............. $ 350,000 $ 350,000 ----------- ----------- Long-Term Debt: First mortgage bonds: Maturing 1999 through 2003--6 3/8% to 9 3/8%..... $ 672,245 $ 1,080,000 Maturing 2004 through 2013--4.40% to 8 3/8%...... 1,305,400 1,485,400 Maturing 2014 through 2023--5.85% to 9 7/8%...... 1,609,443 1,981,000 ----------- ----------- $ 3,587,088 $ 4,546,400 Transitional trust notes, due 2000 through 2008-- 5.29% to 5.74%.................................... 3,162,955 3,400,000 Sinking fund debentures, due 1999 through 2011-- 2 3/4% to 7 5/8%.................................. 31,383 94,159 Pollution control obligations, due 2007 through 2014--3.75% to 5 7/8%............................. 139,200 140,700 Other long-term debt............................... 1,056,300 1,056,346 Current maturities of long-term debt included in current liabilities............................... (876,387) (1,497,706) Unamortized net debt discount and premium.......... (50,791) (62,680) ----------- ----------- $ 7,049,748 $ 7,677,219 ----------- ----------- $12,689,429 $13,244,027 =========== ===========
The accompanying Notes to Financial Statements are an integral part of the above statements. 67 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS/(DEFICIT)
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- -------- ---------- (Thousands of Dollars) Balance at Beginning of Period................. $ 211,003 $ (43,295) $176,643 $(19,172) $142,989 $1,418,848 Add--Net income/(loss).. 287,049 286,071 511,435 462,357 643,283 (875,406) --------- --------- -------- -------- -------- ---------- $ 498,052 $ 242,776 $688,078 $443,185 $786,272 $ 543,442 --------- --------- -------- -------- -------- ---------- Deduct-- Dividends declared on-- Common stock........ $ 85,589 $ 85,695 $256,695 $257,082 $342,388 $ 342,773 Preferred and preference stocks.. 1,224 13,870 7,309 42,836 19,791 57,385 Preference stock redemption premiums. (9,984) -- -- -- -- -- Other capital stock transactions--net... 12,703 222 15,554 278 15,573 295 --------- --------- -------- -------- -------- ---------- $ 89,532 $ 99,787 $279,558 $300,196 $377,752 $ 400,453 --------- --------- -------- -------- -------- ---------- Balance at End of Period (Includes $827 million and $546 million of appropriated retained earnings at September 30, 1999 and 1998, respectively).......... $ 408,520 $ 142,989 $408,520 $142,989 $408,520 $ 142,989 ========= ========= ======== ======== ======== ==========
The accompanying Notes to Financial Statements are an integral part of the above statements. 68 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ----------------------- ----------------------- 1999 1998 1999 1998 1999 1998 --------- --------- ----------- ---------- ----------- ---------- (Thousands of Dollars) Cash Flow from Operating Activities: Net income/(loss)...... $ 287,049 $ 286,071 $ 511,435 $ 462,357 $ 643,283 $ (875,406) Adjustments to reconcile net income/(loss) to net cash provided by operating activities: Depreciation and amortization........ 208,597 245,362 737,501 751,423 970,440 1,013,281 Deferred income taxes and investment tax credits--net........ (11,861) (13,348) (115,059) (9,008) (43,256) (352,101) Extraordinary loss related to write-off of certain net regulatory assets... - - - - - 810,335 Loss on nuclear plant closure............. - - - - - 885,611 Provisions/(payments) for revenue refunds--net........ (2,439) - (22,297) (45,470) 306 - Equity component of allowance for funds used during construction........ (2,243) (1,814) (5,999) (5,358) (7,600) (12,570) Provisions/(payments) for liability for separation costs-- net................. (1,746) (9,853) (11,544) (2,817) 1,029 (11,779) Net effect on cash flows of changes in: Receivables........ 44,240 (281,151) 83,927 (430,553) 28,647 (510,533) Coal and fuel oil.. 15,078 53,064 4,303 (31,444) 21,446 (7,662) Materials and supplies.......... (2,439) 14,324 (12,420) 7,686 2,413 49,123 Accounts payable excluding nuclear fuel lease principal payments and separation costs--net........ 1,137 (131,869) (106,930) (15,106) 20,158 63,103 Accrued interest and taxes......... 7,952 107,217 127,657 205,176 (118,229) 57,864 Other changes in certain current assets and liabilities....... 36,964 31,780 91,196 83,468 148,914 189,403 Other--net........... 23,989 42,824 150,440 100,510 117,393 141,890 --------- --------- ----------- ---------- ----------- ---------- $ 604,278 $ 342,607 $ 1,432,210 $1,070,864 $ 1,784,944 $1,440,559 --------- --------- ----------- ---------- ----------- ---------- Cash Flow from Investing Activities: Construction expenditures.......... $(262,946) $(198,155) $ (736,654) $ (618,277) $(1,021,602) $ (949,613) Nuclear fuel expenditures.......... (90,926) (28,616) (204,873) (123,583) (247,458) (151,686) Sales of generating plants................ - - - 177,454 - 238,245 Equity component of allowance for funds used during construction.......... 2,243 1,814 5,999 5,358 7,600 12,570 Contributions to nuclear decommissioning funds................. - - (39,426) (80,077) (96,120) (114,721) Other investments and special deposits...... (15,885) 658 (18,353) (288) (19,239) 19,618 --------- --------- ----------- ---------- ----------- ---------- $(367,514) $(224,299) $ (993,307) $ (639,413) $(1,376,819) $ (945,587) --------- --------- ----------- ---------- ----------- ---------- Cash Flow from Financing Activities: Issuance of securities-- Transitional trust notes................ $ - $ - $ - $ - $ 3,382,629 $ - Other long-term debt.. - 222,068 - 222,068 - 222,068 Capital stock......... 6 20 21 244 17,029 244 Retirement and redemption of securities-- Transitional trust notes................ (97,045) - (237,045) - (237,045) - Other long-term debt.. (1,017) (51,009) (1,059,452) (423,192) (1,134,452) (483,195) Capital stock......... (75,034) (24,270) (639,298) (30,495) (649,669) (34,066) Deposits and securities held for retirement and redemption of securities............ - 995 - - - - Prepayment of forward share repurchase contract.............. - - (662,113) - (662,113) - Cash dividends paid on capital stock......... (99,246) (110,729) (300,839) (326,063) (404,644) (430,615) Proceeds from sale/leaseback of nuclear fuel.......... - 39,612 - 101,038 - 146,768 Nuclear fuel lease principal payments.... (55,610) (43,321) (157,546) (204,330) (208,820) (246,681) Increase/(decrease) in short-term borrowings............ 36,900 (81,200) 172,394 250,496 40,104 365,896 --------- --------- ----------- ---------- ----------- ---------- $(291,046) $ (47,834) $(2,883,878) $ (410,234) $ 143,019 $ (459,581) --------- --------- ----------- ---------- ----------- ---------- Change in Net Cash Balance................ $ (54,282) $ 70,474 $(2,444,975) $ 21,217 $ 551,144 $ 35,391 Cash, Temporary Cash Investments and Cash Held for Redemption of Securities: Balance at Beginning of Period............. 699,277 23,377 3,089,970 72,634 93,851 58,460 --------- --------- ----------- ---------- ----------- ---------- Balance at End of Period................ $ 644,995 $ 93,851 $ 644,995 $ 93,851 $ 644,995 $ 93,851 ========= ========= =========== ========== =========== ==========
The accompanying Notes to Financial Statements are an integral part of the above statements. 69 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies. See Unicom's Note 1 of Notes to Financial Statements for a discussion of significant accounting policies, except for the following specific policies discussed below and the subcaption "Average Common Shares Outstanding" in Unicom's Note 1. Income Taxes. ComEd is included in the consolidated federal and state income tax returns filed by Unicom. Current and deferred income taxes of the consolidated group are allocated to ComEd as if ComEd filed separate tax returns. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book/tax temporary differences reverse. Prior years' deferred investment tax credits are amortized through credits to income generally over the lives of the related property. Income tax credits resulting from interest charges applicable to nonoperating activities, principally construction, are classified as other income. Interest. Total interest costs incurred on debt, leases and other obligations were $155 million and $133 million for the three months ended September 30, 1999 and 1998, respectively, $470 million and $404 million for the nine months ended September 30, 1999 and 1998, respectively, and $593 million and $545 million for the twelve months ended September 30, 1999 and 1998, respectively. Statements of Consolidated Cash Flows. For purposes of the Statements of Consolidated Cash Flows, temporary cash investments, generally investments maturing within three months at the time of purchase, are considered to be cash equivalents. Supplemental cash flow information for the three months, nine months and twelve months ended September 30, 1999 and 1998 was as follows:
Three Months Ended September Nine Months Ended Twelve Months Ended 30 September 30 September 30 ---------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 -------- ------- -------- -------- --------- --------- (Thousands of Dollars) Supplemental Cash Flow Information: Cash paid during the period for: Interest (net of amount capitalized). $156,159 $96,567 $479,015 $342,687 $561,107 $439,112 Income taxes (net of refunds)............ $140,913 $23,040 $225,020 $ 23,546 $ 514,684 $ 222,230 Supplemental Schedule of Non-Cash Investing and Financing Activities: Capital lease obliga- tions incurred........ $ 189 $40,954 $ 1,625 $104,933 $ 3,062 $ 152,812
(2) Merger Agreement. See Unicom's Note 2 of Notes to Financial Statements. (3) Accounting Effects Related to the 1997 Act. See Unicom's Note 3 of Notes to Financial Statements, except for EPS information. (4) Closure and Sale of Plants. See Unicom's Note 4 of Notes to Financial Statements, except for EPS information. (5) Authorized Shares and Voting Rights of Capital Stock. At September 30, 1999, the authorized shares of capital stock were: common stock--250,000,000 shares; preference stock--7,510,451 shares; $1.425 convertible preferred stock--57,526 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. 70 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (6) Common Equity. In the fourth quarter of 1998, ComEd entered into a forward purchase arrangement with Unicom for the repurchase of $200 million of ComEd common stock. This contract, which was accounted for as an equity instrument as of December 31, 1998, was settled on a net cash basis in February 1999 resulting in a $16 million reduction to common stock equity on the Consolidated Balance Sheets. In February 1999, ComEd also entered into a prepaid forward purchase agreement with Unicom for the repurchase of approximately 15 million shares of Unicom common stock. This forward purchase arrangement was amended to also include the repurchase of approximately 5.1 million shares for a total of 20.1 million shares, subsequent to the net cash settlement of the $200 million repurchase program, as described above. The repurchase arrangement, as amended, provides for final settlement no later than February 2000, on either a physical (share) basis, or a net cash basis. The terms of the repurchase agreement between ComEd and Unicom are identical to the terms of Unicom's repurchase agreement with the financial institution. The repurchase agreement between ComEd and Unicom is expected to be settled on the same basis Unicom settles its repurchase arrangements with the financial institution. The amount at which the arrangement can be settled is dependent principally upon the average market price at which Unicom common shares have been repurchased under its repurchase agreement, compared to the forward price per share. The share repurchases will not reduce shares outstanding or common stock equity, and resulting return on common equity calculations, until the date of physical settlement. ComEd does not currently anticipate that settlement will occur in 1999. The repurchase arrangement has been recorded as a receivable on the Consolidated Balance Sheets and has been adjusted at the end of each reporting period to reflect the aggregate market value of the shares deliverable under the arrangement. Consequently, the arrangement has increased earnings volatility in 1999. An unrealized loss of $18 million (after-tax) for the three months ended and net unrealized gains of $16 million (after-tax) for the nine and twelve months ended September 30, 1999 have been recorded related to the arrangement. At September 30, 1999, shares of common stock were reserved for the following purposes: Conversion of $1.425 convertible preferred stock................... 58,676 Conversion of warrants............................................. 25,263 ------ 83,939 ======
Shares of common stock issued for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ -------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- --------- --------- ---------- Conversion of $1.425 convertible preferred stock.................. 202 652 697 7,848 697 7,848 Conversion of warrants.. 15 52 80 176 132 187 --------- --------- ------- --------- -------- ---------- 217 704 777 8,024 829 8,035 ========= ========= ======= ========= ======== ==========
As of September 30, 1999 and December 31, 1998, 264,406 and 178,982 shares, respectively, of ComEd common stock were reacquired and held as treasury stock at a cost of $10 million and $7 million, respectively. At September 30, 1999 and December 31, 1998, 75,791 and 76,079, respectively, of common stock purchase warrants were outstanding. The warrants entitle the holders to convert such warrants into common stock at a conversion rate of one share of common stock for three warrants. 71 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued As of September 30, 1999 and December 31, 1998, $827 million and $580 million, respectively, of retained earnings had been appropriated for future dividend payments. (7) Stock Option Awards/Employee Stock Purchase Plan. See Unicom's Note 7 of Notes to Financial Statements, except for EPS information. (8) Preferred and Preference Stocks Without Mandatory Redemption Requirements. See Unicom's Note 8 of Notes to Financial Statements. (9) Preference Stock Subject to Mandatory Redemption Requirements. See Unicom's Note 9 of Notes to Financial Statements. (10) Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely the Company's Subordinated Debt Securities. See Unicom's Note 10 of Notes to Financial Statements. (11) Long-Term Debt. See Unicom's Note 11 of Notes to Financial Statements, except for the last two paragraphs regarding Unicom Thermal and Northwind Midway's guaranteed senior Notes. (12) Lines of Credit. See the first paragraph of Unicom's Note 12 of Notes to Financial Statements. (13) Disposal of Spent Nuclear Fuel. See Unicom's Note 13 of Notes to Financial Statements. (14) Fair Value of Financial Instruments. See Unicom's Note 14 of Notes to Financial Statements, except for following section. Capitalization. The estimated fair values of preferred and preference stocks, company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities, transitional trust notes and long-term debt were obtained from an independent consultant. The estimated fair values, which include the current portions of redeemable preference stock and long-term debt but exclude accrued interest and dividends, as of September 30, 1999 and December 31, 1998 were as follows:
September 30, 1999 December 31, 1998 --------------------------------- -------------------------------- Unrealized Carrying Losses/ Carrying Unrealized Fair Value (Gains) Fair Value Value Losses Value ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of Dollars) Preferred and preference stocks................. $ 71,304 $ 208 $ 71,512 $ 678,156 $ 11,500 $ 689,656 Company-obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely the Company's subordinated debt securities........ $ 350,000 $ (1,234) $ 348,766 $ 350,000 $ 20,678 $ 370,678 Transitional trust notes.................. $3,162,955 $(116,799) $3,046,156 $3,382,821 $ 67,168 $3,449,989 Long-term debt.......... $4,776,727 $ 125,838 $4,902,565 $5,791,757 $442,077 $6,233,834
(15) Pension and Postretirement Benefits. See Unicom's Note 15 of Notes to Financial Statements. (16) Separation Plan Costs. See Unicom's Note 16 of Notes to Financial Statements, except for EPS information. 72 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued (17) Income Taxes. The components of the net deferred income tax liability at September 30, 1999 and December 31, 1998 were as follows:
September 30, December 31, 1999 1998 ------------- ------------ (Thousands of Dollars) Deferred income tax liabilities: Accelerated cost recovery and liberalized deprecia- tion, net of removal costs........................ $3,960,161 $4,007,681 Overheads capitalized.............................. 136,193 140,922 Repair allowance................................... 225,100 233,861 Regulatory assets recoverable through future rates. 678,583 680,356 Deferred income tax assets: Postretirement benefits............................ (360,356) (331,566) Unamortized investment tax credits................. (181,467) (191,135) Regulatory liabilities to be settled through future rates............................................. (599,739) (595,005) Nuclear plant closure.............................. (13,238) (38,354) Other--net......................................... (181,628) (145,268) ---------- ---------- Net deferred income tax liability................... $3,663,609 $3,761,492 ========== ==========
The $98 million decrease in the net deferred income tax liability from December 31, 1998 to September 30, 1999 is comprised of an $91 million credit to net deferred income tax expense and a $7 million decrease in regulatory assets net of regulatory liabilities pertaining to income taxes for the period. The amount of accelerated cost recovery and liberalized depreciation included in deferred income tax liabilities for both periods, includes amounts related to the regulatory asset for impaired production plant. The amount of regulatory assets included in deferred income tax liabilities primarily relates to the equity component of AFUDC which is recorded on an after-tax basis, the borrowed funds component of AFUDC which was previously recorded net of tax and other temporary differences for which the related tax effects were not previously recorded. The amount of other regulatory liabilities included in deferred income tax assets primarily relates to deferred income taxes provided at rates in excess of the current statutory rate. The components of net income tax expense charged/(credited) to continuing operations for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------- --------------------- 1999 1998 1999 1998 1999 1998 --------- --------- --------- -------- --------- ---------- (Thousands of Dollars) Electric operating in- come: Current income taxes... $ 199,401 $ 200,654 $ 425,222 $348,304 $ 414,738 $ 355,072 Deferred income taxes.. (12,329) (6,786) (103,523) (28,394) (31,831) 12,099 Investment tax credits deferred--net (7,021) (6,889) (21,063) (20,937) (27,856) (28,588) Other (income) and de- ductions: Current income taxes... (5,809) (1,802) (4,057) (59,017) 5,160 (58,661) Deferred income taxes.. 6,159 364 12,238 47,908 23,787 (337,039) Investment tax credits. (2,153) -- (6,133) (7,472) (10,768) (29,997) --------- --------- --------- -------- --------- ---------- Net income taxes charged/(credited) to continuing operations.. $ 178,248 $ 185,541 $ 302,684 $280,392 $ 373,230 $ (87,114) ========= ========= ========= ======== ========= ==========
73 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued Provisions for current and deferred federal and state income taxes and amortization of investment tax credits resulted in the following effective income tax rates for the three months, nine months and twelve months ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ --------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- ---------- --------- Pre-tax book income/(loss) (thou- sands)................. $465,300 $ 471,612 $841,698 $742,749 $1,044,092 $(152,185) Effective income tax rate................... 38.3% 39.3% 36.0% 37.8% 35.8% 57.2%
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, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ------------------ -------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Federal income taxes computed at statutory rate................... $ 162,855 $ 165,064 $294,594 $259,962 $ 365,432 $ (53,265) Equity component of AFUDC which was excluded from taxable income................. (126) (102) (336) (300) (426) (2,824) Amortization of investment tax credits, net of deferred income taxes ................. (5,907) (4,517) (17,525) (18,246) (24,782) (40,221) State income taxes, net of federal income taxes.................. 22,511 21,689 39,100 35,350 47,414 2,723 Unrealized gain on for- ward share repurchase contract............... 6,130 -- (5,566) -- (5,566) -- Earnings on nontax-qual- ified decommissioning fund................... (951) -- (3,719) -- (3,719) -- Differences between book and tax accounting, primarily property- related deductions..... (6,264) 3,407 (3,864) 3,626 (5,123) 6,473 --------- --------- -------- -------- --------- --------- Net income taxes charged/(credited) to continuing operations.. $ 178,248 $185,541 $302,684 $280,392 $ 373,230 $ (87,114) ========= ========= ======== ======== ========= =========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes, for the three months, nine months and twelve months ended September 30, 1999 and 1998 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended September 30 September 30 September 30 -------------------- ----------------- ------------------- 1999 1998 1999 1998 1999 1998 --------- --------- -------- -------- --------- --------- (Thousands of Dollars) Illinois public utility revenue................ $ (601) $ 5,983 $ 1,296 $107,911 $ 8,365 $ 161,257 Illinois invested capi- tal.................... -- -- -- -- -- 21,229 Illinois electricity distribution tax....... 32,942 29,950 87,615 81,580 116,061 81,580 Municipal utility gross receipts............... 29,832 53,001 80,418 134,108 98,811 171,506 Real estate............. 33,441 34,199 95,947 98,558 121,520 139,084 Municipal compensation.. 23,714 26,819 60,515 70,904 78,821 88,382 Energy assistance and renewable energy charge................. 8,117 8,273 25,562 24,545 33,753 24,545 Other--net.............. 16,467 20,574 54,101 52,759 74,910 68,231 --------- --------- -------- -------- --------- --------- $ 143,912 $ 178,799 $405,454 $570,365 $ 532,241 $ 755,814 ========= ========= ======== ======== ========= =========
Effective January 1, 1998, the Illinois invested capital tax was repealed and the Illinois electricity distribution tax was enacted as a replacement. The new tax is based on the kilowatthours delivered to ultimate consumers. Effective August 1, 1998, as provided for by the 1997 Act, the Illinois electricity excise tax, replacing the Illinois public utility revenue tax, and certain municipal utility taxes are recorded as 74 COMMONWEALTH EDISON COMPANY AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Concluded liabilities. Previously, similar taxes were presented on the Statements of Consolidated Operations as revenue and expense. The reduction in operating revenues and taxes, except income taxes, due to the change in presentation for such taxes was approximately $30 million, $160 million and $226 million for the three months, nine months and twelve months ended September 30, 1999, respectively. This change in the presentation for such taxes did not have an effect on results of operations. See Unicom's Note 21 for additional information regarding Illinois invested capital taxes. (19) Lease Obligations. See the first and second paragraphs of Unicom's Note 19 of Notes to Financial Statements. Future minimum rental payments at September 30, 1999 for operating leases are estimated to aggregate to $381 million, including $9 million in 1999, $38 million in 2000, $31 million in 2001, $31 million in 2002, $28 million in 2003 and $244 million in 2004-2024. (20) Joint Plant Ownership. See Unicom's Note 20 of Notes to Financial Statements. (21) Commitments and Contingent Liabilities. See Unicom's Note 21 of Notes to Financial Statements. 75 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, except for EPS information. Regulation. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Regulation," which is incorporated herein by this reference. Results of Operations. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Results of Operations" (other than the first paragraph thereof), which is incorporated herein by this reference, except for EPS information. Forward-Looking Information. See Unicom's "Management's Discussion and Analysis of Financial Condition and Results of Operations," subcaption "Forward-Looking Information," which is incorporated herein by this reference, except for references to Unregulated Operations. 76 PART II. OTHER INFORMATION Item 1. Legal Proceedings. Two pending enforcement issues have been resolved. The first issue was resolved on July 20, 1999 with ComEd receiving a Severity Level III violation with no civil penalty. The second issue was resolved on November 3, 1999, with ComEd receiving a Severity Level II violation, with a proposed civil penalty of $110,000. ComEd does not plan to contest the penalty. To ComEd's knowledge, there are no enforcement issues pending or under review by the NRC. During 1989 and 1991, actions were brought in federal and state courts in Colorado against ComEd and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects. With respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts against Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions have been settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge v. Cotter (United States District Court for the District of Colorado, Civil Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991 cases. The verdict against Cotter and in favor of the plaintiff, after an amended judgement was issued March 11, 1999, totaled approximately $6 million, including compensatory and punitive damages, interest, and medical monitoring. The matter is currently on appeal. Oral argument was heard in the Tenth Circuit Court of Appeals on September 23, 1999. A decision is expected before the end of the year. A case involving the next group of plaintiffs is set for trial in federal district court in Denver on October 2, 2000. 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. In August 1999, three class action lawsuits were filed against ComEd related to a series of service interruptions during the summer of 1999. The combined effect of these events resulted in over 100,000 customers losing service. On August 12, 1999, service was interrupted to ComEd customers on the near north and near west side of the City's central business district. While major commercial customers were affected, all service was restored on the same date. The class action complaints have been consolidated and seek to recover damages for personal injuries and property damage, as well as economic loss for these events. Further, ComEd initiated expedited claim settlements for those with primarily food spoilage claims. Conditional class certification has been approved by the Court for the sole purpose of exploring settlement talks. The lawsuits are pending in the Circuit Court of Cook County where the next status hearing is scheduled for November 15, 1999. ComEd's management believes adequate reserves have been established in connection with these cases. Following the above-referenced series of service interruptions, the ICC opened a three-phase investigation of the design and reliability of ComEd's transmission and distribution system. At the conclusion of each phase of the investigation, the ICC will issue a report that will include specific recommendations for ComEd and a timetable for executing the recommendations. The final phase of the investigation is expected to conclude in early 2001. 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, 77 can be sued for costs associated with a U.S. EPA directed cleanup, may voluntarily settle with the U.S. Government concerning their liability for cleanup costs, or may voluntarily begin a site investigation and site remediation prior to listing on the NPL under state oversight. Various states, including Illinois, have enacted statutes which contain provisions substantially similar to CERCLA. ComEd and its subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites, or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA. See Note 21 of Notes to Financial Statements for information regarding costs associated with investigating and remediating former MGP sites. From time to time, Unicom and its subsidiaries are, or are claimed to be, in violation of or in default under orders, statutes, rules or regulations relating to environmental controls and other matters, compliance plans imposed upon or agreed to by them or permits issued by various federal and state agencies for the construction or operation of their facilities. Unicom and ComEd do not believe, so far as they now foresee, that such violations or defaults will have a material adverse effect on their future business and operating results, except for events otherwise described in Unicom and ComEd's Annual Reports on Form 10-K for the year ended December 31, 1998 or in these Quarterly Reports on Form 10-Q for the quarterly period ended September 30, 1999, which could have such an effect. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits
Exhibit Number Description of Exhibit ------- -------------------------------------------------------------- (23)-1 Consent of independent public accountants applicable to Unicom Corporation. (23)-2 Consent of independent public accountants applicable to Commonwealth Edison Company.
Documents indicated by a plus sign (+) identify management contracts or compensatory plans or arrangements. (b) Reports on Form 8-K A Current Report on Form 8-K dated July 1, 1999 was filed by Unicom and ComEd announcing that the Company's second quarter earning is expected to meet or exceed analyst earning expectations. The Company further indicated its expected earnings goals for year 1999 and 2000. A Current Report on Form 8-K dated July 1, 1999 was filed by Unicom and ComEd announcing Unicom Destinations and Directions 1999, the new strategic road map for the Company's business operations. 78 A Current Report on Form 8-K dated September 15, 1999 was filed by Unicom and ComEd announcing a five-point plan to improve the reliability of its transmission and distribution system over the next two years. A Current Report on Form 8-K dated September 23, 1999 was filed by Unicom and ComEd announcing a plan of merger between Unicom Corporation and PECO Energy Company. A Current Report on Form 8-K dated September 27, 1999 was filed by Unicom and ComEd disclosing the presentation material used in an investor meeting relating to the merger announcement. A Current Report on Form 8-K dated September 29, 1999 was filed by Unicom and ComEd announcing the Merger Agreement and the Amendment to the Rights Agreement. 79 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 15th day of November, 1999. The signature for each undersigned company shall be deemed to relate only to matters having reference to such company and its subsidiaries thereof. Unicom Corporation Registrant Robert E. Berdelle By __________________________________ Robert E. Berdelle Vice President and Comptroller (Chief accounting officer and officer duly authorized to sign on behalf of the registrant) Commonwealth Edison Company Registrant Robert E. Berdelle By __________________________________ Robert E. Berdelle Vice President and Comptroller (Chief accounting officer and officer duly authorized to sign on behalf of the registrant) 80 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP Exhibit (23)-1 Unicom Corporation Form 10-Q/A 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/A for the quarterly period ended September 30, 1999, 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 Unicom Corporation's Common Stock), 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's Management Deferred Compensation Plan). Arthur Andersen LLP Chicago, Illinois May 12, 2000 EX-23.2 3 CONSENT OF ARTHUR ANDERSEN LLP Exhibit (23)-2 Commonwealth Edison Company Form 10-Q/A 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/A for the quarterly period ended September 30, 1999, 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 Mandatorily 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 Mandatorily 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). Arthur Andersen LLP Chicago, Illinois May 12, 2000 -----END PRIVACY-ENHANCED MESSAGE-----