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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-16169
Exelon Corporation
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2990190
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
37th Floor, 10 South Dearborn
Post Office Box A-3005
Chicago, Illinois 60690-3005
(Address of principal executive offices) (Zip Code)
(312) 394-4321
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has 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 (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date:
The Company had 318,440,473 shares of common stock outstanding on
October 27, 2000.
On October 20, 2000, pursuant to a Second Amended and Restated
Agreement and Plan of Exchange and Merger dated as of September 22, 1999 as
amended and restated as of October 10, 2000, among PECO Energy Company, a
Pennsylvania corporation (PECO Energy), Exelon Corporation, a Pennsylvania
corporation (Exelon) and Unicom Corporation, an Illinois corporation (Unicom),
PECO Energy, Exelon and Unicom consummated the merger and exchange.
Exelon had no substantive operations for the three and nine months
ended September 30, 2000. However, as a result of the timing of the consummation
of the merger, under the Securities Exchange Act of 1934, Exelon is required to
file a Form 10-Q for the period ending September 30, 2000. The merger
transaction has been accounted for under the purchase method of accounting with
PECO Energy as the acquiror and Unicom as the acquired company. This Exelon Form
10-Q consists of PECO Energy's Form 10-Q as of September 30, 2000 and Unicom's
Quarterly Report filed as an exhibit.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Millions, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------- ------- ------- -------
OPERATING REVENUES
Electric $ 1,370 $ 1,674 $ 3,540 $ 3,825
Gas 79 50 379 363
Infrastructure Services and Other 180 5 447 21
------- ------- ------- -------
TOTAL OPERATING REVENUES 1,629 1,729 4,366 4,209
------- ------- ------- -------
OPERATING EXPENSES
Fuel and Energy Interchange 576 786 1,515 1,746
Operating and Maintenance 454 339 1,305 1,015
Depreciation and Amortization 83 57 244 171
Taxes Other Than Income Taxes 67 76 197 196
------- ------- ------- -------
TOTAL OPERATING EXPENSES 1,180 1,258 3,261 3,128
------- ------- ------- -------
OPERATING INCOME 449 471 1,105 1,081
------- ------- ------- -------
OTHER INCOME AND DEDUCTIONS
Interest Expense (113) (108) (333) (296)
Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership (2) (4) (7) (19)
Allowance for Funds Used During Construction 1 -- 2 2
Equity in Earnings (Losses) of Unconsolidated Affiliates 23 (5) 26 (28)
Other, Net 22 14 50 31
------- ------- ------- -------
TOTAL OTHER INCOME AND DEDUCTIONS (69) (103) (262) (310)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 380 368 843 771
INCOME TAXES 142 137 316 287
------- ------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 238 231 527 484
EXTRAORDINARY ITEM - NET OF INCOME TAXES (1) -- (4) (27)
------- ------- ------- -------
NET INCOME 237 231 523 457
PREFERRED STOCK DIVIDENDS 3 3 8 9
------- ------- ------- -------
EARNINGS APPLICABLE TO COMMON STOCK $ 234 $ 228 $ 515 $ 448
======= ======= ======= =======
AVERAGE SHARES OF COMMON STOCK OUTSTANDING 170 187 175 201
======= ======= ======= =======
EARNINGS PER AVERAGE COMMON SHARE:
BASIC:
Income Before Extraordinary Item $ 1.38 $ 1.22 $ 2.96 $ 2.36
Extraordinary Item -- -- (0.02) (0.13)
------- ------- ------- -------
Net Income $ 1.38 $ 1.22 $ 2.94 $ 2.23
======= ======= ======= =======
DILUTED:
Income Before Extraordinary Item $ 1.36 $ 1.21 $ 2.94 $ 2.34
Extraordinary Income -- -- (0.02) (0.13)
------- ------- ------- -------
Net Income $ 1.36 $ 1.21 $ 2.92 $ 2.21
======= ======= ======= =======
DIVIDENDS PER AVERAGE COMMON SHARE $ 0.25 $ 0.25 $ 0.75 $ 0.75
======= ======= ======= =======
See Notes to Condensed Consolidated Financial Statements
3
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
September 30, December 31,
2000 1999
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 169 $ 228
Accounts Receivable, Net 776 704
Inventories, at average cost 232 206
Other 180 87
------- -------
Total Current Assets 1,357 1,225
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET 5,196 5,049
DEFERRED DEBITS AND OTHER ASSETS
Competitive Transition Charge 5,232 5,275
Recoverable Deferred Income Taxes 638 638
Deferred Non-Pension Postretirement Benefits Costs 80 84
Investments 722 538
Loss on Reacquired Debt 66 71
Goodwill 192 121
Other 184 131
------- -------
Total Deferred Debits and Other Assets 7,114 6,858
------- -------
TOTAL ASSETS $13,667 $13,132
======= =======
See Notes to Condensed Consolidated Financial Statements
4
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(continued)
September 30, December 31,
2000 1999
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable, Bank $ 284 $ 163
Long-Term Debt Due Within One Year 306 128
Accounts Payable 308 270
Accrued Expenses 489 616
Deferred Income Taxes 22 15
Other 121 94
-------- --------
Total Current Liabilities 1,530 1,286
-------- --------
LONG-TERM DEBT 6,252 5,969
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred Income Taxes 2,444 2,411
Unamortized Investment Tax Credits 275 286
Pension Obligation 213 213
Non-Pension Postretirement Benefits Obligation 457 443
Other 467 430
-------- --------
Total Deferred Credits and Other Liabilities 3,856 3,783
-------- --------
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF A PARTNERSHIP 128 128
MANDATORILY REDEEMABLE PREFERRED STOCK 37 56
COMMITMENTS AND CONTINGENCIES (NOTE 7)
SHAREHOLDERS' EQUITY
Common Stock (No Par) 3,576 3,576
Preferred Stock 137 137
Other Paid-In Capital 3 1
Retained Earnings (Accumulated Deficit) 301 (103)
Treasury Stock, at cost (2,179) (1,705)
Accumulated Other Comprehensive Income 26 4
-------- --------
Total Shareholders' Equity 1,864 1,910
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 13,667 $ 13,132
======== ========
See Notes to Condensed Consolidated Financial Statements
5
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Millions)
Nine Months Ended September 30,
--------------------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 523 $ 457
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation and Amortization 335 246
Provision for Uncollectible Accounts 43 40
Extraordinary Item (net of income taxes) 4 27
Deferred Income Taxes 19 (15)
Amortization of Investment Tax Credits (11) (11)
Deferred Energy Costs 6 43
Equity in Earnings (Losses) of Unconsolidated Affiliates (26) 28
Other Items Affecting Operations (28) 86
Changes in Working Capital:
Accounts Receivable (20) (186)
Repurchase of Accounts Receivable (50) (150)
Inventories (26) (6)
Accounts Payable 19 15
Accrued Expenses (90) 156
Other Current Assets and Liabilities (93) (70)
------- -------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES 605 660
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Plant (435) (362)
Exelon Infrastructure Services Acquisitions, net of cash acquired (91) --
Investments in and Advances to Joint Ventures -- (60)
Increase in Other Investments (67) (68)
------- -------
NET CASH FLOWS USED IN INVESTING ACTIVITIES (593) (490)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt 1,017 3,997
Retirement of Long-Term Debt (545) (1,068)
Common Stock Repurchase (496) (1,507)
Change in Short-Term Debt 118 (403)
Dividends on Preferred and Common Stock (139) (160)
Retirement of Mandatorily Redeemable Preferred Stock (19) (37)
Proceeds from Exercise of Stock Options 17 14
Retirement of Company Obligated Mandatorily Redeemable
Preferred Securities of a Partnership -- (221)
Repayment of Capital Lease Obligations -- (139)
Other Items Affecting Financing (24) (30)
------- -------
NET CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES (71) 446
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (59) 616
------- -------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 228 48
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 169 $ 664
======= =======
See Notes to Condensed Consolidated Financial Statements
6
PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements as of
September 30, 2000 and for the three and nine months then ended are unaudited,
but include all adjustments that PECO Energy Company (Company) considers
necessary for a fair presentation of such financial statements. All adjustments
are of a normal, recurring nature. The year-end condensed consolidated balance
sheet data were derived from audited financial statements but do not include all
disclosures required by generally accepted accounting principles. Certain
prior-year amounts have been reclassified for comparative purposes. These notes
should be read in conjunction with the Notes to Consolidated Financial
Statements in Item 8 of the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, as amended by Form 10-K/A filed on April 28, 2000.
2. MERGER WITH UNICOM CORPORATION
On September 22, 1999, the Company and Unicom Corporation (Unicom)
entered into an Agreement and Plan of Exchange and Merger providing for a merger
of equals. On October 10, 2000, the Agreement and Plan of Exchange and Merger
was amended and restated (Merger Agreement). On October 20, 2000, the merger was
completed and all of the shares of the Company were exchanged on a one-for-one
basis in accordance with the Merger Agreement. As a result of this share
exchange, the Company became a wholly owned subsidiary of Exelon Corporation.
The transaction is being accounted for as a purchase with the Company as
acquiror.
Under a comprehensive settlement agreement entered into by the Company
in connection with the approval by the Pennsylvania Public Utility Commission
(PUC) of the merger, the Company has agreed to $200 million in rate reductions
for all customers over the period January 1, 2002 through 2005 and extended rate
caps on the Company's retail electric distribution charges through December 31,
2006. The comprehensive settlement agreement also provides for electric
reliability and customer service standards, mechanisms to enhance competition
and customer choice, expanded assistance to low-income customers, extensive
funding for wind and solar energy and community education, nuclear safety
research funds, customer protection against nuclear costs outside of
Pennsylvania, and maintenance of charitable and civic contributions and
employment for the Company's headquarters in Philadelphia.
7
3. SERIES 2000-A TRANSITION BONDS
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of transition bonds (Series 2000-A Transition Bonds) to securitize a
portion of the Company's authorized stranded cost recovery. As a result of this
transaction, the Company has securitized a total of $5 billion of its $5.26
billion of stranded cost recovery. The transition bonds issued by PETT,
including the Series 2000-A Transition Bonds, are solely obligations of PETT,
secured by intangible transition property sold by the Company to PETT
concurrently with the issuance of the transition bonds and certain other related
collateral.
The terms of the Series 2000-A Transition Bonds are as follows:
Expected
Approximate Final
Series 2000-A Face Amount Interest Payment Termination
Class (millions) Rate Date Date
------------- ----------- -------- ----------------- -----------------
A-1 $110 7.18% September 1, 2001 September 1, 2003
A-2 $140 7.30% September 1, 2002 September 1, 2004
A-3 $399 7.63% March 1, 2009 March 1, 2010
A-4 $351 7.65% September 1, 2009 September 1, 2010
The Company has used the proceeds from the securitization to reduce
the Company's stranded costs and related capitalization. On May 3, 2000, $502
million of the proceeds were used to settle a forward purchase agreement that
was entered into in January 2000 resulting in the repurchase of 12 million
shares of common stock. During May and June 2000, the Company used $463 million
to purchase and/or redeem First and Refunding Mortgage Bonds, to reduce other
debt, to repurchase accounts receivable and to pay transaction expenses. The
remaining proceeds were used to redeem First and Refunding Mortgage Bonds on
August 1, 2000.
The Company incurred extraordinary charges aggregating $4 million,
net of tax, consisting of prepayment premiums and the write-off of unamortized
deferred financing costs associated with the early retirement of debt during the
nine months ended September 30, 2000.
In February 2000, the Company entered into forward starting interest
rate swaps for a notional amount of $1 billion in anticipation of the issuance
of the Series 2000-A Transition Bonds in the second quarter of 2000. On May 2,
2000, the Company settled these forward starting interest rate swaps and paid
the counterparties approximately $12 million which was deferred and is being
amortized over the life of the Series 2000-A Transition Bonds as an increase in
interest expense consistent with the Company's hedge accounting policy.
8
4. SEGMENT INFORMATION
The Company's segment information as of and for the three and nine
months ended September 30, 2000 as compared to the same periods in 1999 is as
follows (in millions):
Quarter Ended September 30, 2000 as compared to the Quarter Ended September 30, 1999
- ------------------------------------------------------------------------------------
Intersegment
Distribution Generation Ventures Corporate Revenues Consolidated
Revenues:
2000 $ 877 $ 901 $ 193 $ - $ (342) $ 1,629
1999 $ 882 $ 1,089 $ 7 $ - $ (249) $ 1,729
EBIT (a):
2000 $ 277 $ 267 $ (9) $ (41) $ 494
1999 $ 390 $ 140 $ (9) $ (41) $ 480
Nine Months Ended September 30, 2000 as compared to Nine Months Ended September 30, 1999
- ----------------------------------------------------------------------------------------
Revenues:
2000 $ 2,496 $ 2,125 $ 469 $ - $ (724) $ 4,366
1999 $ 2,535 $ 2,285 $ 16 $ - $ (627) $ 4,209
EBIT (a):
2000 $ 928 $ 412 $ (21) $ (138) $ 1,181
1999 $ 1,055 $ 197 $ (46) $ (122) $ 1,084
Total Assets:
September 30, 2000 $ 10,629 $ 1,837 $ 781 $ 420 $ 13,667
December 31, 1999 $ 10,294 $ 1,779 $ 640 $ 419 $ 13,132
(a) EBIT - Earnings Before Interest and Income Taxes.
9
5. EARNINGS PER SHARE
Diluted earnings per average common share is calculated by dividing
earnings applicable to common stock by the average number of shares of common
stock outstanding after giving effect to stock options issuable under the
Company's stock option plans which are considered to be dilutive common stock
equivalents. The following table shows the effect of the stock options issuable
under the Company's stock option plans on the average number of shares used in
calculating diluted earnings per average common share (in millions of shares):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Average Common Shares Outstanding 170 187 175 201
Assumed Exercise of Stock Options 2 1 1 1
------ ------ ------ -----
Potential Average Dilutive
Common Shares Outstanding 172 188 176 202
======= ======= ======= =======
6. SALES OF ACCOUNTS RECEIVABLE
The Company is party to an agreement with a financial institution under
which it can sell or finance with limited recourse an undivided interest,
adjusted daily, in designated accounts receivable until November 2000. In May
2000, the Company used a portion of the proceeds from the Series 2000-A
Transition Bonds to repurchase $50 million of the interest in accounts
receivable, including $10 million of special agreement accounts receivable (See
Note 3 - Series 2000-A Transition Bonds). This repurchase reduced the amount of
accounts receivable the Company could sell or finance under the agreement from
$275 million to $225 million.
At September 30, 2000, the Company had sold a $225 million interest in
accounts receivable, consisting of a $187 million interest in accounts
receivable which the Company accounts for as a sale under Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," and a $38 million interest
in special agreement accounts receivable which are accounted for as a long-term
note payable. The Company retains the servicing responsibility for these
receivables. The agreement requires the maintenance of a minimum level of
eligible accounts receivable which, if not met, requires the Company to deposit
cash with the financial institution. At September 30, 2000, these requirements
were met.
10
7. COMMITMENTS AND CONTINGENCIES
For information regarding the Company's capital commitments, nuclear
insurance, nuclear decommissioning and spent fuel storage, energy commitments,
environmental issues and litigation, see Note 6 of Notes to Consolidated
Financial Statements for the year ended December 31, 1999.
In July 2000, the Company signed an agreement with the Department of
Energy (DOE) under which the Company will be reimbursed for costs resulting from
the DOE's delay in accepting spent nuclear fuel. The agreement applies only to
the Peach Bottom Atomic Power Station (Peach Bottom). The Company's portion of
the reimbursement is approximately $16 million. The agreement allows the Company
to reduce the charges paid to the Nuclear Waste Fund to reflect costs reasonably
incurred by the Company due to the DOE's delay. In accordance with the Nuclear
Waste Policy Act of 1982 (NWPA), the Company pays the DOE one mil ($.001) per
kilowatthour of net nuclear generation for the cost of nuclear fuel disposal.
Past and future costs associated with Peach Bottom's recently completed on-site
dry storage facility are eligible for this reduction in future DOE fees.
Negotiations of settlements relating to the Company's other nuclear plants will
be conducted on a plant-by-plant basis.
The Company has identified 28 sites where former manufactured gas plant
(MGP) activities have or may have resulted in actual site contamination. As of
September 30, 2000, the Company's accrual for environmental investigation and
remediation costs was $55 million, including $30 million for MGP investigation
and remediation that currently can be reasonably estimated. The Company cannot
predict whether it will incur other significant liabilities for additional
investigation and remediation costs at these or additional sites identified by
the Company, environmental agencies or others, or whether all such costs will be
recoverable from third parties.
At December 31, 1998, the Company incurred a charge of $125 million
($74 million, net of income taxes) for its Early Retirement and Separation
Program relating to 1,157 employees. The estimated cost of separation benefits
was approximately $47 million. Retirement benefits of approximately $78 million
are being paid to the retirees over their lives. All cash payments related to
the Early Retirement and Separation Program were funded through the assets of
the Company's Service Annuity Plan. The Early Retirement and Separation Program
terminated on June 30, 2000.
11
At September 30, 2000, the Company had long-term commitments, in
megawatt hours (MWhs) and dollars, relating to the purchase and sale of energy,
capacity and transmission rights from unaffiliated utilities and others as
expressed in the tables below (in millions):
Power Only
-----------------------------------------
Purchases Sales
----------------- -----------------
MWhs Dollars MWhs Dollars
---- ------- ---- -------
2000 4 $ 27 7 $ 207
2001 19 195 16 627
2002 27 131 10 460
2003 28 138 6 233
2004 27 116 3 107
Thereafter 135 82 5 167
----- -------
Total $ 689 $ 1,801
===== =======
Transmission
Capacity Capacity Rights
Purchases Sales Purchases
in Dollars in Dollars in Dollars
---------- ---------- ----------
2000 $ 10 $ 5 $ 24
2001 83 32 60
2002 149 21 63
2003 176 16 22
2004 167 3 21
Thereafter 1,833 10 79
------- ---- -----
Total $ 2,418 $ 87 $ 269
======= ==== =====
In the first quarter of 2000, the Company restructured an existing
power sales contract from a variable price with fixed capacity sales to a fixed
price power only contract which decreased the Company's commitments for capacity
sales and increased the Company's commitments for power only sales.
12
8. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," (SFAS No. 133) to establish
accounting and reporting standards for derivatives. The new standard requires
recognizing all derivatives as either assets or liabilities on the balance sheet
at their fair value and specifies the accounting for changes in fair value
depending upon the intended use of the derivative.
In June 2000, the FASB issued SFAS No. 138 "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133. The Company expects to adopt SFAS No. 133
and SFAS No. 138 on January 1, 2001. The Company initiated a process to
implement SFAS No. 133 and SFAS No. 138 by evaluating all of the derivatives of
the Company for SFAS No. 133 and SFAS No. 138 implications. This phase of
implementation has been completed and the Company is in the process of
evaluating the impact of SFAS No. 133 and SFAS No. 138 on its financial
statements.
9. EXELON INFRASTRUCTURE SERVICES, INC. ACQUISITIONS
In the second quarter of 2000, Exelon Infrastructure Services, Inc.
(EIS), an unregulated subsidiary of the Company, acquired the stock or assets of
four utility service contracting companies for an aggregate purchase price of
approximately $91 million, net of cash acquired, including stock of EIS. The
acquisitions were accounted for using the purchase method of accounting. The
initial estimate of the excess of purchase price over the fair value of net
assets acquired was approximately $77 million which is being amortized over 20
years.
10. SITHE ENERGIES ACQUISITION
On August 14, 2000, the Company signed a definitive agreement to
purchase 49.9% of Sithe Energies North America's (Sithe) outstanding common
stock for $682 million, with an option to purchase the remaining common stock
outstanding exercisable between two and five years after the date of closing, at
a price to be determined based on prevailing market conditions.
Sithe is an independent power generator in North America utilizing
primarily fossil and hydro generation. The purchase involves approximately
10,000 megawatts (MW) of generation consisting of 3,800 MW of existing merchant
generation, 2,500 MW under construction, and another 3,700 MW of generation in
various stages of development, as well as Sithe's domestic marketing and
development businesses. The generation assets are located primarily in
Massachusetts and New York, but also include plants in Pennsylvania, California,
Colorado and Idaho, as well as Canada and Mexico.
13
11. OYSTER CREEK ACQUISITION
In August 2000, AmerGen Energy Company, LLC (AmerGen), the joint
venture between the Company and British Energy, plc, completed the purchase of
Oyster Creek Nuclear Generating Facility (Oyster Creek) from GPU, Inc. (GPU) for
$10 million. Under the terms of the purchase agreement, GPU has agreed to fund
outage costs not to exceed $89 million, including the cost of fuel, for a
refueling outage scheduled for October 2000. AmerGen will repay these costs to
GPU in nine equal annual installments beginning in August 2001. In addition,
AmerGen assumed full responsibility for the ultimate decommissioning of Oyster
Creek. At the closing of the sale, GPU provided funding for the decommissioning
trust of $440 million. GPU is purchasing the electricity generated by Oyster
Creek pursuant to a power purchase agreement.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
On September 22, 1999, the Company and Unicom Corporation (Unicom)
entered into an Agreement and Plan of Exchange and Merger providing for a merger
of equals. On October 10, 2000, the Agreement and Plan of Exchange and Merger
was amended and restated (Merger Agreement). For additional information, see
"PART II, ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - General," in the Company's 1999 Annual Report on
Form 10-K as amended by Form 10-K/A filed on April 28, 2000. On October 20,
2000, the merger was completed and all of the shares of the Company were
exchanged on a one-for-one basis in accordance with the Merger Agreement. As a
result of this share exchange, the Company became a wholly owned subsidiary of
Exelon Corporation (Exelon). The transaction is being accounted for as a
purchase with the Company as acquiror. In the fourth quarter of 2000, the
Company expects to incur certain charges, including severance costs, stock
compensation costs and settlement charges related to the merger. As of September
30, 2000, the Company is unable to estimate the aggregate financial statement
impact of these charges.
Under a comprehensive settlement agreement entered into by the Company
in connection with the approval by the Pennsylvania Public Utility Commission
(PUC) of the merger, the Company has agreed to $200 million in rate reductions
for all customers over the period January 1, 2002 through 2005 and extended rate
caps on the Company's retail electric distribution charges through December 31,
2006. The comprehensive settlement agreement also provides for electric
reliability and customer service standards, mechanisms to enhance competition
and customer choice, expanded assistance to low-income customers, extensive
funding for wind and solar energy and community education, nuclear safety
research funds, customer protection against nuclear costs outside of
Pennsylvania, and maintenance of charitable and civic contributions and
employment for the Company's headquarters in Philadelphia.
In connection with the regulatory approvals of the merger, Exelon
received authorization to restructure the operations of the Company and Unicom.
Exelon is currently contemplating restructuring the Company's generation and
ventures business units into newly formed subsidiaries of Exelon in 2001.
Accordingly, the operations of the Company after the contemplated restructuring
would essentially represent the Company's distribution business unit.
Retail competition for electric generation services began in
Pennsylvania on January 1, 1999. Effective January 1, 2000, all of the Company's
retail electric customers in its traditional service territory have the right to
choose their generation suppliers. At September 30, 2000, approximately 17% of
the Company's residential load, 46% of its commercial load and 41% of its
industrial load were purchasing generation service from an alternative electric
generation supplier. As of that date, Exelon Energy, the Company's alternative
energy supplier, was providing electric generation service to approximately
99,000 business and residential customers located throughout Pennsylvania.
15
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of transition bonds (Series 2000-A Transition Bonds) to securitize a
portion of the Company's authorized stranded cost recovery. See Note 3 of Notes
to Condensed Consolidated Financial Statements.
In the second quarter of 2000, Exelon Infrastructure Services, Inc.
(EIS) acquired four additional infrastructure services companies. These
acquisitions combined with EIS' acquisitions in the fourth quarter of 1999
contributed to the growth in revenue, operating and maintenance (O&M) expenses
and depreciation and amortization expenses in the three and nine month periods
ended September 30, 2000 as compared to the same prior year periods.
In the third quarter of 2000, the Company reclassified the results of
operations for its non-utility businesses in its Condensed Consolidated
Statements of Income from other income and deductions to revenue and O&M expense
for the three and nine month periods ended September 30, 2000 and 1999.
16
RESULTS OF OPERATIONS
Revenue and Expense Items as a
Percentage of Total Operating
Revenues Percentage Dollar Changes
2000 vs. 1999
Quarter Nine Months Quarter Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
------------- ------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
84% 97% 81% 91% Electric (18%) (7%)
5% 3% 9% 8% Gas 58% 4%
11% -- 10% 1% Infrastructure Services and Other 3,500% 2,029%
------ ------- ------ -------
100% 100% 100% 100% Total Operating Revenues (6%) 4%
---- ---- ---- ----
35% 46% 35% 41% Fuel and Energy Interchange (27%) (13%)
28% 20% 30% 24% Operating and Maintenance 34% 29%
5% 3% 6% 4% Depreciation and Amortization 46% 43%
4% 4% 4% 5% Taxes Other Than Income (12%) 1%
----- ----- ----- -----
72% 73% 75% 74% Total Operating Expenses (6%) 4%
---- ---- ---- ----
28% 27% 25% 26% Operating Income (5%) 2%
---- ---- ---- ----
(7%) (7%) (8%) (8%) Interest Charges 2% 8%
Equity in Earnings (Losses) of
1% -- 1% (1%) Unconsolidated Affiliates 560% 193%
1% 1% 1% 1% Other, Net 57% 61%
----- ------ ------ -------
Income Before Income Taxes and
23% 21% 19% 18% Extraordinary Item 3% 9%
9% 8% 7% 6% Income Taxes 4% 10%
----- ----- ----- -----
14% 13% 12% 12% Income Before Extraordinary Item 3% 9%
-- -- -- (1%) Extraordinary Items (100%) (85%)
-------------- ------- -------
14% 13% 12% 11% Net Income 3% 14%
==== ===== ===== =====
Third Quarter 2000 Compared To Third Quarter 1999
Operating Revenues
Electric revenues decreased $304 million, or 18%, to $1,370 million for
the quarter ended September 30, 2000 compared to the same 1999 period. The
decrease was attributable to lower revenues from the generation business unit of
$280 million and lower revenues from the distribution business unit of $24
million.
The decrease in electric revenues from the generation business unit was
primarily attributable to lower wholesale revenues of $166 million as a result
of $128 million associated with lower volume and $38 million associated with
lower prices. The decrease was also attributable to reduced sales of competitive
electric generation services by Exelon Energy of $65
17
million as a result of $74 million from decreased volume partially offset by $9
million as a result of increased prices. In addition, the termination of the
operating agreement for the Clinton Nuclear Power Station (Clinton) resulted in
lower revenues of $49 million. As a result of the acquisition by AmerGen Energy
Company, LLC (AmerGen) of Clinton in December 1999, the operating agreement was
terminated and, accordingly, the operations of Clinton have been included in
Equity in Earnings (Losses) of Unconsolidated Affiliates on the Company's
Statements of Income since that date. The decrease from the distribution
business unit was primarily attributable to $103 million as a result of lower
volume from the effects of weather conditions partially offset by an increase of
$79 million attributable to customers selecting the distribution business unit
as their electric generation supplier and rate adjustments.
Gas revenues increased $29 million, or 58%, to $79 million for the
quarter ended September 30, 2000 compared to the same 1999 period. The increase
in gas revenues was primarily attributable to $11 million resulting from
increased volume, $11 million from wholesale sales of natural gas and $7 million
as a result of higher prices.
Infrastructure services and other revenues increased $175 million, to
$180 million primarily as a result of the EIS acquisitions in the fourth quarter
of 1999 and the second quarter of 2000.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense decreased $210 million, or 27%, to
$576 million for the quarter ended September 30, 2000 compared to the same 1999
period. The decrease was attributable to lower fuel and energy interchange
expenses associated with the generation business unit of $228 million partially
offset by an increase in energy interchange expenses in the distribution
business unit of $18 million. As a percentage of revenue, fuel and energy
interchange expenses were 35% as compared to 46% in the comparable prior year
period.
The decrease in fuel and energy interchange expense from the generation
business unit was primarily attributable to $153 million from Exelon Energy
sales principally related to $162 million as a result of decreased volume
partially offset by $9 million as a result of increased prices. The decrease was
also attributable to $101 million from wholesale operations principally related
to $73 million as a result of decreased volume and $28 million as a result of
decreased prices. These decreases were partially offset by an increase of $32
million for the cost to supply the distribution business unit. The generation
business unit is the primary source of supply for the distribution business
unit. Accordingly, sales volume changes at the distribution business unit have a
direct impact on fuel and energy interchange expense of the generation business
unit. The increase from the distribution business unit was primarily
attributable to $8 million principally related to wholesale sales of natural gas
and $7 million in PJM Interconnection, LLC (PJM) ancillary charges.
18
Operating and Maintenance Expense
O&M expense increased $115 million, or 34%, to $454 million for the
quarter ended September 30, 2000 compared to the same 1999 period. As a
percentage of revenue, O&M expenses were 28% as compared to 20% in the same 1999
period. The ventures business unit's O&M expenses increased $158 million related
to the infrastructure services business as a result of the EIS acquisitions. The
generation business unit's O&M expenses decreased $30 million primarily as a
result of O&M expenses related to the operating agreement for Clinton of $19
million in 1999, $8 million related to the abandonment of an information system
implementation in 1999, lower joint-owner expenses of $7 million and $5 million
of lower administrative and general expenses related to the unregulated retail
sales of electricity. These decreases were partially offset by higher
compensation expense of $6 million and higher non-utility operations expense of
$3 million. The distribution business unit's O&M expenses decreased $3 million
primarily as a result of $11 million of expenses related to restoration
activities as a result of Hurricane Floyd in 1999 partially offset by increases
in miscellaneous O&M expenses. In addition, the Company experienced a decrease
in general corporate expenses consisting of $12 million from lower pension
expense as a result of the performance of the investments in the Company's
pension plan and $5 million of lower Year 2000 (Y2K) remediation expenditures in
1999 partially offset by an increase of $7 million in incremental merger
expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $26 million, or 46%, to
$83 million for the quarter ended September 30, 2000 compared to the same 1999
period. As a percentage of revenue, depreciation and amortization expense was 5%
as compared to 3% in the comparable prior year period. The increase was
primarily attributable to $16 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000. The
increase also included $9 million related to EIS depreciation and amortization
expense and $1 million related to increased plant in service.
Taxes Other Than Income
Taxes other than income decreased $9 million, or 12%, to $67 million
for the quarter ended September 30, 2000 compared to the same 1999 period. The
decrease was primarily attributable to lower real estate taxes of $3 million
relating to a change in tax laws for utility property in Pennsylvania and $3
million as a result of the elimination of the gross receipts tax on gas sales
partially offset by a net increase in gross receipts tax on electric sales.
Interest Charges
Interest charges consist of interest expense, distributions on Company
Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS)
and Allowance for Funds Used During Construction (AFUDC). Interest charges
increased $2 million, or 2%, to $114 million for the quarter ended September 30,
2000 compared to the same 1999 period. The increase was primarily attributable
to interest on the Series 2000-A Transition Bonds of $18 million partially
offset by the Company's reduction of long-term debt with the proceeds of
transition bonds which reduced interest charges by $15 million.
19
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $28
million to earnings of $23 million for the quarter ended September 30, 2000 as
compared to losses of $5 million in the same 1999 period. The increase was
primarily attributable to $42 million of earnings from the Company's equity
investment in AmerGen as a result of the acquisitions of Three Mile Island Unit
No. 1 Nuclear Generating Facility (TMI) and Clinton in December 1999 partially
offset by $12 million of increased losses from the Company's telecommunications
equity investments principally as a result of costs associated with customer
base growth.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates increased $8 million to income of
$22 million for the quarter ended September 30, 2000 as compared to $14 million
in the same 1999 period. The increase in other income and deductions was
primarily attributable to gains on sales of investments of $9 million partially
offset by a decrease in interest income of $2 million.
Income Taxes
The effective tax rate was 37.4% for the quarter ended September 30,
2000 as compared to 37.2% in the same 1999 period.
Extraordinary Items
During the third quarter of 2000, the Company incurred an extraordinary
charge of $1 million, net of tax, consisting of prepayment premiums and the
write-off of unamortized deferred financing costs associated with the early
retirement of debt with a portion of the proceeds from the issuance of Series
2000-A Transition Bonds in May 2000.
Preferred Stock Dividends
Preferred stock dividends for the quarter ended September 30, 2000 were
consistent with the comparable prior year. In August 2000, the Company redeemed
$19 million of Mandatorily Redeemable Preferred Stock.
Earnings
Earnings applicable to common stock increased $6 million, or 3%, to
$234 million in the third quarter of 2000. Earnings per average common share on
a fully diluted basis increased $0.15 per share or 12%, to $1.36 per share in
the third quarter of 2000, reflecting the increase in net income and a decrease
in the weighted average shares of common stock outstanding as a result of the
use of proceeds from the Company's April 1999 and May 2000 stranded cost
recovery securitizations.
20
Nine Months Ended September 30, 2000 Compared To Nine Months Ended September 30,
1999
Operating Revenues
Electric revenues decreased $285 million, or 7%, to $3,540 million for
the nine months ended September 30, 2000 compared to the same 1999 period. The
decrease was attributable to lower revenues from the generation business unit of
$240 million and lower revenues from the distribution business unit of $45
million.
The decrease in electric revenues from the generation business unit was
primarily attributable to $100 million from lower wholesale revenues as a result
of $150 million associated with lower volume partially offset by $50 million
associated with higher prices. In addition, the sale of competitive electric
generation services by Exelon Energy decreased $72 million which was primarily
attributable to $97 million as a result of decreased volume partially offset by
$25 million from increased prices. In addition, the termination of the operating
agreement for Clinton resulted in lower revenues of $62 million. The decrease
from the distribution business unit was primarily attributable to a decrease of
$83 million as a result of lower volume from the effects of weather conditions
partially offset by an increase of $38 million attributable to customers
selecting the distribution business unit as their electric generation supplier
and rate adjustments.
Gas revenues increased $16 million, or 4%, to $379 million for the nine
months ended September 30, 2000 compared to the same 1999 period. The increase
in gas revenues was primarily attributable to $22 million resulting from
increased volume from new and existing customers, $11 million from wholesale
sales of natural gas and $4 million resulting from increased volume related to
weather conditions. These increases were partially offset by $15 million from
the elimination of the gross receipts tax in connection with gas restructuring
in Pennsylvania and $9 million as a result of lower prices.
Infrastructure services and other revenues increased $426 million to
$447 million primarily as a result of the EIS acquisitions in the fourth quarter
of 1999 and the second quarter of 2000.
Fuel and Energy Interchange Expense
Fuel and energy interchange expense decreased $231 million, or 13%, to
$1,515 million for the nine months ended September 30, 2000 compared to the same
1999 period. The decrease was attributable to lower fuel and energy interchange
expenses associated with the generation business unit of $227 million and the
distribution business unit of $4 million. As a percentage of revenue, fuel and
energy interchange expenses were 35% as compared to 41% in the comparable prior
year period.
The decrease in fuel and energy interchange expense from the generation
business unit was primarily attributable to $207 million from Exelon Energy
sales principally related to $240 million as a result of decreased volume
partially offset by $33 million as a result of increased prices. The decrease
was also attributable to $93 million from wholesale operations principally
related to $92 million as a result of decreased volume and $1 million as a
result of decreased prices. These decreases were partially offset by an increase
of $70 in the cost to supply the
21
distribution business unit. The decrease from the distribution business unit was
primarily attributable to $24 million in lower PJM Interconnection, LLC (PJM)
ancillary charges partially offset by an increase of $15 million principally
related to wholesale sales of natural gas.
Operating and Maintenance Expense
O&M expense increased $290 million, or 29%, to $1,305 million for the
nine months ended September 30, 2000 compared to the same 1999 period. As a
percentage of revenue, O&M expenses were 30% as compared to 24% in the same 1999
period. The ventures business unit's O&M expenses increased $416 million related
to the infrastructure services business as a result of the EIS acquisitions. The
generation business unit's O&M expenses decreased $94 million primarily as a
result of O&M expenses related to the operating agreement for Clinton of $44
million in 1999, lower non-utility operations expense of $21 million, $15
million related to the abandonment of two information systems implementations in
1999, $14 million related to lower administrative and general expenses related
to the unregulated retail sales of electricity, $11 million related to lower
joint-owner expenses and $8 million associated with the write-off of excess and
obsolete inventory in 1999. These decreases were partially offset by higher
compensation expense of $19 million in the comparable prior year period. The
distribution business unit's O&M expenses increased $1 million primarily as a
result of $7 million higher compensation expense partially offset by $11 million
of additional expenses related to restoration activities as a result of
Hurricane Floyd in 1999. In addition, the Company experienced a decrease in
general corporate expenses of $35 million from lower pension expense as a result
of the performance of the investments in the Company's pension plan and $23
million of lower Y2K remediation expenditures. These decreases were partially
offset by an increase of $28 million in incremental merger expenses.
Depreciation and Amortization Expense
Depreciation and amortization expense increased $73 million, or 43%, to
$244 million for the nine months ended September 30, 2000 compared to the same
1999 period. As a percentage of revenue, depreciation and amortization expense
was 6% as compared to 4% in the comparable prior year period. The increase was
primarily attributable to $43 million associated with the commencement of the
amortization of $5.26 billion of Competitive Transition Charges in 2000. The
increase also included $23 million related to EIS depreciation and amortization
expense and $7 million related to increased plant in service.
22
Taxes Other Than Income
Taxes other than income increased $1 million, or 1%, to $197 million
for the nine months ended September 30, 2000 compared to the same 1999 period.
As a percentage of revenue, taxes other than income were 4% as compared to 5% in
the comparable prior year period. The increase was primarily attributable to a
$22 million capital stock tax credit in 1999 related to an adjustment associated
with the impact of the 1997 restructuring charge on the Company's equity value.
This increase was partially offset by lower real estate taxes of $10 million
relating to a change in tax laws for utility property in Pennsylvania and $7
million as a result of the elimination of the gross receipts tax on gas sales
partially offset by a net increase in gross receipts tax on electric sales.
Interest Charges
Interest charges increased $25 million, or 8%, to $338 million for the
nine months ended September 30, 2000 compared to the same 1999 period. The
increase was primarily attributable to interest on the transition bonds of $86
million partially offset by the Company's reduction of long-term debt with the
proceeds of transition bonds, which reduced interest charges by $65 million.
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings (losses) of unconsolidated affiliates increased $54
million to earnings of $26 million for the nine months ended September 30, 2000
as compared to losses of $28 million in the same 1999 period. The increase was
primarily attributable to $61 million of earnings from the Company's equity
investment in AmerGen as a result of the acquisitions of TMI and Clinton in
December 1999 partially offset by $7 million of increased losses from the
Company's telecommunications equity investments principally as a result of costs
associated with customer base growth.
Other Income and Deductions
Other income and deductions excluding interest charges and equity in
earnings (losses) of unconsolidated affiliates increased $19 million to income
of $50 million for the nine months ended September 30, 2000 as compared to $31
million in the same 1999 period. The increase in other income and deductions was
primarily attributable to a $15 million write-off in 1999 of the investment in
Grays Ferry Cogeneration Partnership in connection with the settlement of
litigation, gains on sales of investments of $8 million and $6 million from the
favorable settlement of litigation. These increases were partially offset by a
decrease in interest income of $9 million.
Income Taxes
The effective tax rate was 37.5% as compared to 37.2% in the comparable
prior year period.
23
Extraordinary Items
The Company incurred extraordinary charges aggregating $4 million, net
of tax, consisting of prepayment premiums and the write-off of unamortized
deferred financing costs associated with the early retirement of debt with a
portion of the proceeds from the issuance of Series 2000-A Transition Bonds in
May 2000 during the nine months ended September 30, 2000.
During the second quarter of 1999, the Company incurred an
extraordinary charge of $27 million, net of tax, consisting of prepayment
premiums and the write-off of unamortized deferred financing costs associated
with the early retirement of debt with a portion of the proceeds from the
issuance of transition bonds in 1999.
Preferred Stock Dividends
Preferred stock dividends for the nine months ended September 30, 2000
decreased $1 million, or 11%, to $8 million as compared to the same 1999 period.
The decrease was attributable to the retirement of $37 million of Mandatorily
Redeemable Preferred Stock in August 1999 with a portion of the proceeds from
the issuance of transition bonds. In addition, the Company redeemed $19 million
of Mandatorily Redeemable Preferred Stock in August 2000.
Earnings
Earnings applicable to common stock increased $67 million, or 15%, to
$515 million for the nine months ended September 30, 2000. Earnings per average
common share on a fully diluted basis increased $0.71 per share or 32%, to $2.92
per share for the nine months ended September 30, 2000, reflecting the increase
in net income and a decrease in the weighted average shares of common stock
outstanding as a result of the use of proceeds from the Company's April 1999 and
May 2000 stranded cost recovery securitizations.
DISCUSSION OF LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities decreased $55 million to
$605 million for the nine months ended September 30, 2000 as compared to $660
million in the same 1999 period. The decrease was primarily attributable to a
net decrease in changes in working capital of $19 million and less cash
generated by operations of $36 million. The decrease in changes in working
capital was principally related to improvement in cash collections of Exelon
Energy accounts receivable and lower repurchases of accounts receivable with
transition bond proceeds partially offset by the timing of cash payments for
accrued expenses.
Cash flows used by investing activities were $593 million for the nine
months ended September 30, 2000 as compared to $490 million in the same 1999
period. The increase was attributable to capital expenditures and ventures
business unit investments, including the acquisition by EIS of four
infrastructure services companies partially offset by investments in and
advances to joint ventures in 1999.
Cash flows used in financing activities were $71 million for the nine
months ended September 30, 2000, as compared to cash flows provided by financing
activities of $446 million
24
in the same 1999 period. The decrease was primarily attributable to the
securitization of $4 billion of stranded cost recovery in March 1999 and the use
of a portion of the related proceeds partially offset by the securitization of
$1 billion of stranded cost recovery in May 2000 and the use of related
proceeds.
At September 30, 2000, the Company had outstanding $284 million of
notes payable which included $282 million of commercial paper and $2 million of
lines of credit. At September 30, 2000, the Company had available formal and
informal lines of bank credit aggregating $100 million and available revolving
credit facilities aggregating $900 million, which support its commercial paper
program. At September 30, 2000, the Company had $2 million in short-term
investments.
On May 2, 2000, PECO Energy Transition Trust (PETT), an independent
statutory business trust organized under the laws of Delaware and a wholly owned
subsidiary of the Company, issued an additional $1 billion aggregate principal
amount of transition bonds (Series 2000-A Transition Bonds) to securitize a
portion of the Company's authorized stranded cost recovery. As a result, the
Company has securitized a total of $5 billion of its $5.26 billion of stranded
cost recovery through the issuance by PETT of transition bonds. The transition
bonds are solely obligations of PETT, secured by intangible transition property
sold by the Company to PETT concurrently with the issuance of the transition
bonds and certain other related collateral. The Company has used the proceeds
from the securitizations to reduce the Company's stranded costs and related
capitalization. The proceeds of the Series 2000-A Transition Bonds were used to
repurchase 12 million share of common stock, to retire $422 million principal
amount of debt, to repurchase $50 million of accounts receivable and to pay
transaction expenses. In connection with the PUC's approval of the issuance of
the Series 2000-A Transition Bonds, the Company, through its distribution
business unit, agreed to provide its retail customers with rate reductions in
the total amount of $60 million beginning on January 1, 2001. This rate
reduction will be effective for calendar year 2001 only.
In June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
FASB Statement No. 133" (SFAS No. 138). This standard amends the accounting and
reporting standards of SFAS No. 133. The Company expects to adopt SFAS No. 133
and SFAS No. 138 on January 1, 2001. The Company initiated a process to
implement SFAS No. 133 and SFAS No. 138 by evaluating all of the derivatives of
the Company for SFAS No. 133 and SFAS No. 138 implications. This phase of
implementation has been completed and the Company is in the process of
evaluating the impact of SFAS No. 133 and SFAS No. 138 on its financial
statements.
25
YEAR 2000 READINESS DISCLOSURE
During 1999, the Company successfully addressed, through its Year 2000
Project (Y2K Project), the issue resulting from computer programs using two
digits rather than four to define the applicable year and other programming
techniques that constrain date calculations or assign special meanings to
certain dates.
The current estimated total cost of the Y2K Project is $61 million, the
majority of which is attributable to testing. This estimate includes the
Company's share of Y2K costs for jointly owned facilities. The total amount
expended on the Y2K Project through September 30, 2000 was $58 million. The
Company is funding the Y2K Project from operating cash flows.
The Company's systems experienced no Y2K difficulties on December 31,
1999 or since that date. The Company's operations have not, to date, been
adversely affected by any Y2K difficulties that suppliers or customers may have
experienced. The Company will continue to monitor its systems for potential Y2K
difficulties through the remainder of 2000.
For additional information regarding the Y2K Readiness Disclosure see
"PART II - ITEM 7. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Outlook" in the Company's Annual Report on Form 10-K
for the year 1999, as amended by Form 10-K/A filed on April 28, 2000.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, certain of the
matters discussed in this Report are forward-looking statements, including the
application of the proceeds of the Series 2000-A Transition Bonds and the 2001
rate reduction, and accordingly, are subject to risks and uncertainties. The
factors that could cause actual results to differ materially include those
discussed herein as well as those listed in notes 7, 8 and 10 of Notes to
Condensed Consolidated Financial Statements and other factors discussed in the
Company's filings with the Securities and Exchange Commission. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report. The Company undertakes no obligation
to publicly release any revision to these forward-looking statements to reflect
events or circumstances after the date of this Report.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company uses a combination of fixed rate and variable rate debt to
reduce interest rate exposure. Interest rate swaps are used to adjust exposure
when deemed appropriate, based upon market conditions. These strategies attempt
to provide and maintain the lowest cost of capital.
In February 2000, the Company entered into forward starting interest
rate swaps for a notional amount of $1 billion in anticipation of the issuance
of the Series 2000-A Transition Bonds in the second quarter of 2000. On May 2,
2000, the Company settled these forward starting interest rate swaps and paid
the counterparties approximately $12 million which was deferred and is being
amortized over the life of the Series 2000-A Transition Bonds as an increase in
interest expense consistent with the Company's hedge accounting policy.
At September 30, 2000, the Company's interest rate swaps had a fair
market value of $78 million which was based on the present value difference
between the contracted rate and the market rates at September 30, 2000.
The aggregate fair value of the interest rate swaps that would have
resulted from a hypothetical 50 basis point decrease in the spot yield at
September 30, 2000 is estimated to be $43 million. If the interest rate swaps
had been terminated at September 30, 2000, this estimated fair value represents
the amount to be paid by the counterparties to the Company.
The aggregate fair value of the interest rate swaps that would have
resulted from a hypothetical 50 basis point increase in the spot yield at
September 30, 2000 is estimated to be $112 million. If the interest rate swaps
had been terminated at September 30, 2000, this estimated fair value represents
the amount to be paid by the counterparties to the Company.
There were no material changes in the nine months ended September 30,
2000 in the Company's quantitative and qualitative disclosures about market risk
associated with commodity price risk, equity price risk and interest rate risk
associated with variable rate debt from December 31, 1999.
For information on Commodity Risk, Interest Rate Risk and Equity Price
Risk, see "PART II, ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK," in the Company's 1999 Annual Report on Form 10-K as amended by
Form 10-K/A filed on April 28, 2000.
27
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On October 18, 2000, the Company filed a Competitive Default Service
(CDS) Coordination Agreement with the PUC, pursuant to which the Company will
assign to NewPower Company (NewPower), 299,300 randomly selected residential
non-shopping customers. Customers who have been assigned may chose not to
participate in CDS or may, without charge or penalty, return to the Company's
provider of last resort service or switch to another electric generation
supplier (EGS). The Company and NewPower have filed a joint petition requesting
PUC approval by November 1, 2000. The joint petition also requests PUC
confirmation that all 299,300 customers assigned to CDS would be included in
calculating the 35% market share threshold requirement contained in the
Company's Final Restructuring Order. Under the market share threshold
requirement, if less than 35% of the Company's residential and commercial
customers have chosen an EGS by January 1, 2001, the number of customers
sufficient to meet the required threshold level will be randomly selected and
assigned to an EGS through a PUC-determined process. The Company does not expect
that the CDS Coordination Agreement will have a material adverse effect on the
Company's operations or financial condition.
28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
2-1 - Amended and Restated Agreement and Plan of Merger dated as
of October 10, 2000, among PECO Energy Company, Exelon
Corporation and Unicom Corporation. (Incorporated by
reference from the September 30, 2000 PECO Energy Company
Form 10-Q.)
10-1 - Stock Purchase Agreement among Exelon (Fossil) Holdings,
Inc., as Buyer, and The Stockholders of Sithe Energies,
Inc., as Sellers, and Sithe Energies, Inc. (Incorporated by
reference from the September 30, 2000 PECO Energy Company
Form 10-Q.)
10-2 - Amended and Restated Employment Agreement among Unicom
Corporation, Commonwealth Edison Company and John W. Rowe.
27 - Financial Data Schedule.
99-1 - Unicom Corporation Quarterly Report as of September 30,
2000.
(b) During the quarter ended September 30, 2000, the Company filed the
following Current Reports on Form 8-K:
Exelon Corporation:
------------------
None
PECO Energy Company:
-------------------
Date of earliest event reported:
August 8, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the sale of GPU, Inc.'s Oyster Creek Nuclear
Generating Facility to AmerGen.
Date of earliest event reported:
August 14, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the purchase of 49.9% of Sithe Energies
North America's outstanding common stock.
Date of earliest event reported:
August 15, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding presentation/webcast to financial analysts
and other interested parties on the Sithe Energies Investment.
Subsequent to September 30, 2000, the Company filed the following
Current Reports on Form 8-K:
29
Exelon Corporation:
------------------
Date of earliest event reported:
October 20, 2000 reporting information under "ITEM 2.
ACQUISITION OR DISPOSITION OF ASSETS" regarding the completion
of the merger among PECO Energy and Unicom into Exelon. The
financial information required by "ITEM 7. FINANCIAL
STATEMENT, PRO FORM FINANCIAL INFORMATION AND EXHIBITS" will
be filed by Amendment within 60 days of the date of this
filing.
Date of earliest event reported:
October 30, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding a presentation at the Edison Electric
Institute Fall Financial Conference to explain the merger of
PECO Energy and Unicom to form Exelon.
PECO Energy Company:
-------------------
Date of earliest event reported:
October 19, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the approval by the Securities and Exchange
Commission of the merger between the Company and Unicom into
Exelon Corporation.
Date of earliest event reported:
October 20, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the completion of the merger between the
Company and Unicom into Exelon Corporation.
Date of earliest event reported:
October 24, 2000 reporting information under "ITEM 5. OTHER
EVENTS" regarding the Company's earnings release for the third
quarter of 2000.
30
Signatures
Pursuant to requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXELON CORPORATION
/s/ Ruth Ann M. Gillis
--------------------------------
RUTH ANN M. GILLIS
Senior Vice President and
Chief Financial Officer
(Chief Accounting Officer)
Date: November 13, 2000
31
11/12/99
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
among
UNICOM CORPORATION,
COMMONWEALTH EDISON COMPANY
and
JOHN W. ROWE
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement"), dated
as of December 15, 1999 (the "Agreement Date"), by and among Unicom Corporation,
an Illinois corporation ("Unicom"), Commonwealth Edison Company, an Illinois
corporation ("ComEd"), and John W. Rowe ("Executive"), amends and restates, to
be effective immediately prior to the Merger Effective Time (as defined below),
that certain Employment Agreement dated as of March 10, 1998, as heretofore and
as hereafter otherwise amended prior to the Merger Effective Time (the "Prior
Agreement"), by and among Unicom, ComEd and Executive.
WHEREAS, Executive is currently serving as Chairman of the Unicom Board
and the ComEd Board, President and Chief Executive Officer of both Unicom and
ComEd and a member of the Unicom Board and the ComEd Board;
WHEREAS, Peco Energy Company, a Pennsylvania corporation ("Parent"),
Newholdco Corporation, a Pennsylvania corporation (the "Company") and Unicom
have executed an Agreement and Plan of Exchange and Merger, dated as of
September 22, 1999 (the "Merger Agreement"), which contemplates that Parent
shall become a wholly owned subsidiary of the Company and immediately thereafter
Unicom will be merged with and into the Company (the "Merger"), which Merger
will become effective at the Merger Effective Time (as defined in the Merger
Agreement);
WHEREAS, as contemplated by the Merger Agreement, the Company will be
the surviving corporation in the Merger and, as such, will by operation of law
succeed to the rights and obligations of Unicom hereunder;
WHEREAS, in order to induce Executive to serve, on and after the Merger
Effective Time, as President and Co-Chief Executive Officer of the Company (as
the surviving entity in the Merger and as successor to Unicom at the Merger
Effective Time), and Chairman of the Executive Committee of the Company Board
and other positions as provided in this Agreement, Unicom desires from and after
the Merger Effective Time to provide Executive with compensation and other
benefits on the terms and conditions set forth in this Agreement; and
WHEREAS, Executive is willing to accept such employment and perform
such services on the terms and conditions hereunder set forth;
NOW, THEREFORE, in consideration of the mutual undertakings of the
parties hereto, Unicom, ComEd and Executive agree as follows:
ARTICLE I.
DEFINITIONS
The terms set forth below have the following meanings (such meanings to
be applicable to both the singular and plural forms):
I.1 "Accrued Base Salary" means that portion of Executive's Base Salary
which is accrued but unpaid as of the Termination Date.
I.2 "Accrued Annual Incentive" means either:
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(1) the amount of any Annual Incentive earned with
respect to the calendar year ended prior to the Termination
Date, but which is unpaid as of the Termination Date, if both
(x) the amount of such Annual Incentive has been objectively
determined solely by the application of a formula that does
not provide the Company, Unicom or any Company Affiliate any
discretion to increase the amount of the Annual Incentive and
(y) neither the Company, Unicom nor any Company Affiliate has
applied any discretion it may have pursuant to the Annual
Incentive Award Program in which Executive participates or
otherwise to reduce the amount of such Annual Incentive or,
(2) if the conditions specified in clause (i) of this
sentence have not been satisfied, the average of the Annual
Incentives that were actually paid to Executive with respect
to Executive's last three full calendar years of employment by
the Company, Unicom or any Company Affiliate.
For purposes of clause (ii) of the preceding sentence, if Annual
Incentives have been paid to Executive in respect of fewer than three years,
such average shall be computed by reference to the Annual Incentives that were
actually paid to Executive.
I.3 "Affiliate" means, when used with reference to any Person, any
other Person directly or indirectly controlling, controlled by, or under direct
or indirect common control with, the referent Person or such other Person, as
the case may be. For the purposes of this definition, the term "control" when
used with respect to any Person means the power to direct or cause the direction
of management or policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise.
I.4 "Agreement Date" -- see the recitals to this Agreement.
I.5 "Anniversary Date" means any annual anniversary of March 16, 1998.
I.6 "Annual Incentive" -- see Section 4.2.
I.7 "Base Salary" -- see Section 4.1.
I.8 "Beneficiary" -- see Section 10.4.
I.9 "Cause" means any of the following:
(1) Executive's conviction of a felony or of a misdemeanor
involving moral turpitude, fraud or dishonesty,
(2) wilful misconduct by Executive in the performance of his
duties under this Agreement that was intended to personally benefit
Executive, or
(3) material breach of this Agreement by Executive (other than
as a result of incapacity due to physical or mental illness);
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provided that, if a material breach of this Agreement involved an act, or a
failure to act, which was done, or omitted to be done, by Executive in good
faith and with a reasonable belief that Executive's act, or failure to act, was
in the best interest of the Company or was required by applicable law or
administrative regulation, such breach shall not constitute Cause if, within 30
days (10 days in the event of a breach of covenants contained in Article IX)
after Executive is given written notice of such breach that specifically refers
to this Section, Executive cures such breach to the fullest extent that it is
curable.
I.10 "Change in Control" means any one or more of the following to
occur after the Merger Effective Time:
(1) the acquisition by any Person (including for purposes of
this definition any "person" within the meaning of Section 13(d) (3) or
14(d) (2) of the Exchange Act) of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of either (i) the then outstanding shares of Common Stock (the
"Outstanding Common Stock") or (ii) the combined voting power of the
then-outstanding Voting Securities of the Company (the "Outstanding
Voting Securities"), but excluding (A) any acquisition directly from
the Company (excluding any acquisition resulting from the exercise of
an exercise, conversion or exchange privilege unless the security being
so exercised, converted or exchanged was acquired directly from the
Company), (B) any acquisition by the Company, (C) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by the
Company or any corporation controlled by the Company (a "Company Plan")
or (D) any acquisition by any corporation pursuant to a transaction
which complies with clauses (i), (ii) and (iii) of subsection (c) of
this definition; provided further, that for purposes of clause (B), if
any Person (other than the Company or any Company Plan) shall become
the beneficial owner of 20% or more of the Outstanding Common Stock or
20% or more of the Outstanding Voting Securities by reason of an
acquisition by the Company, and such Person shall, after such
acquisition by the Company, become the beneficial owner of any
additional shares of the Outstanding Common Stock or any additional
Outstanding Voting Securities (other than pursuant to any dividend
reinvestment plan or arrangement maintained by the Company) and such
beneficial ownership is publicly announced, such additional beneficial
ownership shall constitute a Change in Control;
(2) individuals who, as of the Merger Effective Time,
constitute the Company Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Incumbent Board;
provided that any individual who becomes a director of the Company
subsequent to the Merger Effective Time whose election, or nomination
for election by the Company's stockholders, was approved by the vote of
at least a majority of the directors then comprising the Incumbent
Board shall be deemed a member of the Incumbent Board; and provided
further, that any individual who was initially elected as a director of
the Company as a result of an actual or threatened election contest (as
such terms are used in Rule 14a-11 promulgated under the Exchange Act)
or any other actual or threatened solicitation of proxies or consents
by or on behalf of any Person other than the Company Board shall not be
deemed a member of the Incumbent Board;
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(3) approval by the stockholders of the Company of a
reorganization, merger or consolidation or sale or other disposition of
more than 50% of the operating assets of the Company (determined on a
consolidated basis) other than in connection with a sale-leaseback or
other arrangement resulting in the continued utilization of such assets
(or the operating products of such assets) by the Company (such
reorganization, merger, consolidation, sale or other disposition, a
"Corporate Transaction"); excluding, however, a Corporate Transaction
pursuant to which:
(1) all or substantially all of the individuals or
entities who are the beneficial owners, respectively, of the
Outstanding Common Stock and the Outstanding Voting Securities
immediately prior to such Corporate Transaction will
beneficially own, directly or indirectly, more than 60% of,
respectively, the outstanding shares of common stock, and the
combined voting power of the outstanding Voting Securities of
such corporation, as the case may be, of the corporation
resulting from such Corporate Transaction (including a
corporation which as a result of such transaction owns the
Company or all or substantially all of its assets either
directly or indirectly) in substantially the same proportions
relative to each other as their ownership, immediately prior
to such Corporate Transaction, of the Outstanding Common Stock
and the Outstanding Voting Securities, as the case may be;
(2) no Person (other than the Company; any Company
Plan; the corporation resulting from such Corporate
Transaction; and any Person which beneficially owned,
immediately prior to such Corporate Transaction, directly or
indirectly, 20% or more of the Outstanding Common Stock or the
Outstanding Voting Securities, as the case may be) will
beneficially own, directly or indirectly, 20% or more of,
respectively, the outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the
combined voting power of the outstanding Voting Securities of
such corporation;
(3) individuals who were members of the Incumbent
Board will constitute at least a majority of the members of
the board of directors of the corporation resulting from such
Corporate Transaction; and
(4) Executive shall be appointed or elected to
positions in respect of the corporation resulting from such
Corporate Transaction that are comparable to the positions
held by Executive pursuant to Section 2.1 immediately prior to
the Corporate Transaction; or
(4) approval by the stockholders of the Company of a plan of
complete liquidation or dissolution of the Company, other than a plan
of liquidation or dissolution which results in the acquisition of all
or substantially all the assets of the Company by its Affiliates.
I.11 "ComEd" -- see the recitals to this Agreement.
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I.12 "Common Stock" means common stock, without par value, of the
Company.
I.13 "Commencement Date" -- see Section 3.1.
I.14 "Company" -- see the recitals to this Agreement.
I.15 "Company Board" means the Board of Directors of the Company.
I.16 "Compensation Committee" means the Compensation Committee of the
Company Board, or any successor committee thereto.
I.17 "Confidential Information" means any information not generally
known in the relevant trade or industry, which was obtained from the Company,
Unicom or any Company Affiliate, or which was learned, discovered, developed,
conceived, originated or prepared during or as a result of the performance of
any services by Executive on behalf of the Company, Unicom or any Company
Affiliate and which:
(1) relates to one or more of the following:
(1) trade secrets of the Company or an Affiliate thereof
or any customer or supplier of the Company or an Affiliate
thereof;
(2) existing or contemplated products, services,
technology, designs, processes, formulae, algorithms, research
or product developments of the Company or an Affiliate thereof
or any customer or supplier of the Company or an Affiliate
thereof;
(3) business plans, sales or marketing methods, methods
of doing business, customer lists, customer usages and/or
requirements, supplier information of the Company or an
Affiliate thereof or any customer or supplier of the Company
or an Affiliate thereof; or
(2) the Company or an Affiliate thereof or any customer or
supplier of the Company or an Affiliate thereof may reasonably have the
right to protect by patent, copyright or by keeping it secret and
confidential.
Confidential Information does not include any information that is or may become
publicly known other than through the improper actions of Executive.
I.18 "Contract Term" -- see Section 3.1.
I.19 "Disability" means a mental or physical condition which, in the
opinion of the Company Board, renders Executive unable or incompetent to carry
out the job responsibilities which such Executive held or the duties to which
Executive was assigned at the time the disability was incurred, which has
existed for at least three months and which in the opinion of a physician
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mutually agreed upon by the Company and Executive (provided that neither party
shall unreasonably withhold or delay such agreement) is expected to be permanent
or to last for an indefinite duration or a duration in excess of six months.
I.20 "Early Retirement" means a Termination of Employment by Executive
on or after March 16, 2003, other than a Normal Retirement or a Termination for
Good Reason prior to Normal Retirement.
I.21 "Exchange Act" means the Securities Exchange Act of 1934.
I.22 "Executive" -- see the recitals to this Agreement.
I.23 "Formula Annual Incentive" means the greater of (i) the Annual
Incentive for the latest calendar year ended on or before the Termination Date,
or (ii) the average of the Annual Incentives that were actually paid (or would
have been paid in respect of the year preceding the Termination Date but for a
termination of Executive's employment after the end of such preceding year) to
Executive with respect to Executive's last three full calendar years of
employment by the Company, Unicom or any Affiliate of the Company. For purposes
of clause (ii) of the preceding sentence, if Annual Incentives have been paid to
Executive in respect of fewer than three years, such average shall be computed
by reference to the Annual Incentives that were actually paid to Executive.
I.24 "Good Reason" means any material breach of this Agreement by the
Company, including:
(1) a failure to provide the compensation and benefits
required by this Agreement, including a reduction in the Base Salary of
Executive below the Base Salary in effect during the immediately
preceding year under this Agreement or, where applicable, the Prior
Agreement, unless such reduction is commensurate with and part of a
general salary reduction program applicable to all senior executives of
the Company;
(2) failure to appoint or elect Executive (i) for the period
beginning at the Merger Effective Time and continuing until the last
day of the first half of the Transition Period, the President and
Co-Chief Executive Officer of the Company, the Chairman of the
Executive Committee of the Company Board and as a member of the Company
Board, (ii) for the period beginning at the commencement of the last
half of the Transition Period and continuing until the last day of the
Transition Period, the Co-Chief Executive Officer of the Company, the
Chairman of the Company Board and a member of the Company Board, and
(iii) for the period commencing immediately prior to the end of the
Transition Period and continuing after the Transition Period, the sole
Chief Executive Officer of the Company, Chairman of the Company Board
and a member of the Company Board; except that, in the event that prior
to the end of the Transition Period Corbin A. McNeill, Jr. should cease
to serve as Co-Chief Executive Officer of the Company, or prior to the
end of the first half of the Transition Period as Chairman of the
Company Board, "Good Reason" under this subsection (b) shall also
include failure to immediately appoint or elect Executive as sole Chief
Executive Officer and/or Chairman of the Company Board, as applicable;
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(3) causing or requiring Executive to report to any Person or
group other than the Company Board;
(4) any material adverse change in the status,
responsibilities or perquisites of Executive; or
(5) any public announcement by the Company Board that it is
seeking a replacement for Executive, which announcement is made prior
to Executive's attaining age 60, unless Executive has consented to such
announcement;
provided, however, that an act or omission shall not constitute a material
breach of this Agreement by the Company:
(1) unless Executive gives the Company 30 days' prior
notice of such act or omission and the Company fails to cure
such act or omission within the 30-day period;
(2) if Executive first acquired actual knowledge of
such act or omission more than 12 months before Executive
gives the Company such notice; or
(3) if Executive has consented in writing to such act
or omission in a document that makes specific reference to
this Section.
I.25 "Initial Term" shall mean the period, if any, beginning at the
Merger Effective Time and ending on March 15, 2001.
I.26 "including" means including without limitation.
I.27 "Key Employee" means any employee of the Company who is Group
Level 12 or above ("Group Level") or any employee of any Affiliate of the
Company who is at a level which is the equivalent of Group Level.
I.28 "LTIP" means the Company's Long-Term Incentive Plan.
I.29 "Merger" -- see the recitals to this Agreement.
I.30 "Merger Effective Time" -- see the recitals to this Agreement.
I.31 "Normal Retirement" means a Termination of Employment by Executive
either (i) on or after March 16, 2006 or (ii) on or after March 16, 2003 if the
Company Board shall have determined with the written consent of the Executive
that such Termination shall constitute Normal Retirement for purposes of this
Agreement.
I.32 "Option" means an option to purchase shares of Common Stock
pursuant to the terms and conditions of either this Agreement and the LTIP (or
any successor plan) or the Prior Agreement and the Unicom Long-Term Incentive
Plan.
7
I.33 "Option Expiration Date" means, with respect to a specific Option,
the expiration date of such Option as specified in the grant agreement or the
plan (as applicable) relating thereto.
I.34 "Parent" -- see the recitals to this Agreement.
I.35 "Performance Unit Program" means Unicom's Long Term Performance
Unit Award Program, or any successor program maintained by the Company.
I.36 "Person" means any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, entity or government (whether federal,
state, county, municipal or otherwise).
I.37 "Post-Retirement Health Care Coverage" means the medical, dental
and vision care coverage provided by the Company or Unicom from time to time to
its retired senior executives who retired at or after March 10, 1998.
I.38 "Practices" means practices, policies and programs.
I.39 "Prior Agreement" -- see the recitals to this Agreement.
I.40 "Prorated Annual Incentive" means, in respect of the calendar year
during which the Termination Date occurs, an amount equal to the product of the
Formula Annual Incentive multiplied by a fraction, the numerator of which equals
the number of days between January 1 of such calendar year and the Termination
Date and the denominator of which equals 365.
I.41 "SERP Benefit" -- see Section 6.2(a).
I.42 "Service Annuity System" means the Commonwealth Edison Company
Service Annuity System.
I.43 "Severance Period" means the period that commences on the
Termination Date and ends two years after the Termination Date; provided,
however, that if (i) the Termination Date occurs at any time prior to December
31, 2004, (ii) the Termination Date occurs within the first 24 months after a
Change in Control, or (iii) the Termination Date occurs at any time because of a
Termination for Good Reason within the meaning of Section 1.24(b), the Severance
Period shall end three years after the Termination Date.
I.44 "Supplemental Retirement Plan" means the Commonwealth Edison
Company Supplemental Management Retirement Plan.
I.45 "Taxes" means federal, state, local or other income, employment or
other taxes.
I.46 "Termination Date" means the date as of which Executive's
employment with the Company and all Affiliates thereof is terminated by the
Company or by Executive for any reason.
8
I.47 "Termination for Good Reason" means a Termination of Employment by
Executive for Good Reason.
I.48 "Termination of Employment" occurs on the first day on which
Executive is for any reason no longer employed by the Company or any Affiliate
thereof.
I.49 "Termination Without Cause" means a termination of Executive's
employment by the Company and all Affiliates thereof for any reason other than
Cause or Disability.
I.50 "Transition Period" means the period beginning at the Merger
Effective Time and ending on December 31, 2003.
I.51 "Unicom" -- see the recitals to this Agreement.
I.52 "Voting Securities" means, with respect to a corporation, the
securities of such corporation entitled to vote generally in the election of the
directors of such corporation.
ARTICLE II.
DUTIES
II.1 Duties. During the Contract Term, (a) for the period beginning at
the Merger Effective Time and continuing until the last day of the first half of
the Transition Period, Executive shall be the President and Co-Chief Executive
Officer of the Company, the Chairman of the Executive Committee of the Company
Board, and a member of the Company Board, (b) for the period beginning at the
commencement of the last half of the Transition Period and continuing until the
last day of the Transition Period, Executive shall be the Co-Chief Executive
Officer of the Company, the Chairman of the Company Board and a member of the
Company Board, and (c) for the period commencing immediately prior to the end of
the Transition Period and continuing after the Transition Period, Executive
shall be sole Chief Executive Officer of the Company, Chairman of the Company
Board and a member of the Company Board. In the event, however, that prior to
the end of the Transition Period Corbin A. McNeill, Jr. should cease during the
Contract Term to serve as Co-Chief Executive Officer of the Company, Executive
shall immediately be sole Chief Executive Officer of the Company, and if Corbin
A. McNeill, Jr. should cease to serve during the Contract Term as Chairman of
the Company Board prior to the end of the first half of the Transition Period,
Executive shall immediately become Chairman of the Company Board. It is
contemplated that, in connection with each annual meeting of shareholders (or
action by written consent in lieu thereof) of the Company during the Contract
Term, the shareholders of the Company will elect Executive to the Company Board.
During the Contract Term (excluding any periods of vacation, sick leave or
disability to which Executive is entitled), Executive (subject to Section 2.2)
shall devote his full attention and time to the business and affairs of the
Company and use his best efforts to perform his duties and responsibilities
described herein.
II.2 Other Activities. Executive may (a) serve on corporate, civic or
charitable boards or committees, (b) fulfill speaking engagements or teach at
educational institutions or (c) manage
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personal investments, in each case to the extent that such activities do not
materially interfere with the performance of his duties under this Agreement.
ARTICLE III.
TERM OF AGREEMENT
III.1 Term. The term of this Agreement (the "Contract Term") shall
begin at the Merger Effective Time (the "Commencement Date") and shall continue
in effect until the Termination Date.
ARTICLE IV.
COMPENSATION
IV.1 Base Salary. During any portion of the Contract Term consisting of
the Initial Term, the Company shall pay Executive in accordance with its normal
payroll practices an annual salary (the "Base Salary") of at least $900,000 but
not less than either Executive's annual salary under the Prior Agreement
immediately prior to the Merger Effective Time or the annual salary of the other
Co-Chief Executive Officer, if any, of the Company. After the expiration of the
Initial Term, the Base Salary shall be reviewed at least annually and may be
adjusted at any time and from time to time as shall be determined by the
Compensation Committee, except that during the Transition Period Executive's
Base Salary shall not be less than the annual salary of the other Co-Chief
Executive Officer, if any, of the Company. Any increase in Base Salary shall not
limit or reduce any other obligation to Executive under this Agreement.
IV.2 Annual Incentive. During the Contract Term, Executive shall
participate in the Company's Annual Incentive Award Program and shall be
eligible to receive an annual incentive award in accordance with the terms and
conditions thereof and on the same basis as other senior executives of the
Company, except that during the Transition Period such award shall not be less
than that of the other Co-Chief Executive Officer, if any, of the Company.
Executive shall continue to participate in the Unicom Annual Incentive Award
Program in accordance with the terms and conditions thereof with respect to
annual incentive awards (collectively with annual incentive awards granted under
the Company's Annual Incentive Award Program, "Annual Incentive") granted prior
to the Merger Effective Time.
IV.3 Long-Term Incentives. Effective as of the Commencement Date,
Executive shall participate in the Company's LTIP and in any Performance Unit
Program in accordance with the terms and conditions thereof and on the same
basis as other senior executives of the Company, except that during the
Transition Period such participation shall be on a basis that is not less than
that of the other Co-Chief Executive Officer, if any, of the Company. Executive
shall continue to participate in the Performance Unit Program in accordance with
the terms and conditions thereof with respect to performance cycles in effect as
of the Merger Effective Time. In addition, any award payable to Executive under
the Performance Unit Program with respect to the three-year performance period
ending on December 31, 2000 will be made as though Executive had participated in
such Program throughout such performance period (except in the event of a
Termination of Employment, in which case the provisions of the Performance Unit
Program shall apply).
IV.4 Deferred Stock and Additional Option.
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(1) Deferred Stock. Pursuant to the Prior Agreement, effective
on the date in 1999 on which Executive's Annual Incentive with respect
to 1998 first became payable pursuant to Section 4.3 of the Prior
Agreement (the "Grant Date"), Unicom granted to Executive a right to
receive, on the Payment Date (as defined in the last sentence of
Section 4.4(b)), a number of shares of Common Stock of Unicom (the
"Deferred Shares") equal to the sum of:
(1) a number of shares (the "Initial Deferred
Shares") equal to $600,000 divided by 100% of the fair market
value (determined in accordance with the Unicom Long-Term
Incentive Plan or any applicable successor plan (the "Fair
Market Value")) of a share of the Common Stock of Unicom on
the Grant Date (such price, the "Grant Price"), and
(2) the aggregate number of shares of such Common
Stock that would be issued from time to time if all dividends
(other than dividends payable in such Common Stock) payable in
respect of the Initial Deferred Shares were reinvested in
additional shares of such Common Stock (assuming for this
purposes that the Initial Deferred Shares were outstanding
throughout the period beginning on the Grant Date and ending
on the Payment Date) based on the Fair Market Value of such
Common Stock as of the applicable dividend payment date.
Such Deferred Shares shall be payable as provided in this Section 4.4;
provided, however, that the aggregate number and kind of Deferred
Shares shall from time to time be equitably adjusted to prevent any
material dilution or enlargement of the aggregate value of the Deferred
Shares that may otherwise occur by reason of a change in the number or
kind of outstanding shares of Unicom Common Stock or of Common Stock
resulting from any recapitalization, reorganization, merger,
consolidation, stock split, stock dividend or any similar change
affecting such Common Stock (other than a dividend which is deemed to
have been reinvested pursuant to clause (ii) of this Section 4.4(a)),
including the Merger.
(2) Vesting. The Deferred Shares shall vest as follows: as to
50% of the Deferred Shares specified in clause (i) of Section 4.4(a),
on the Grant Date, and as to all remaining Deferred Shares (the
"Unvested Deferred Shares") on the date in 2000 on which Executive's
Annual Incentive with respect to 1999 first becomes payable pursuant to
Section 4.3 of the Prior Agreement (the "Year 2000 Bonus Date") . On or
before the fifth business day following Executive's Termination Date
(such day, the "Payment Date"), the Company shall deliver to Executive
a number of shares of Common Stock equal to the number of Deferred
Shares that have become vested on or before the Termination Date.
(3) Effect on SERP Benefit. Solely for purposes of determining
the amount of Executive's SERP Benefit pursuant to Section 6.2,
Executive's Annual Incentive with respect to each of 1998 and 1999
under the Prior Agreement shall be deemed to have been $300,000 greater
than the Annual Incentive actually paid to Executive in respect of such
year.
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(4) Additional Option. Effective as of the Grant Date, Unicom
granted to Executive an Option (the "Additional Option") with an
exercise price equal to the Grant Price and subject to such other terms
and conditions as are applicable to other stock options granted to
senior executives of Unicom under the Unicom Long-Term Incentive Plan.
The Additional Option shall be exercisable during its term as follows:
(i) as to 50% of the shares subject thereto, at any time on or after
the Grant Date, and (ii) as to all of the other shares subject thereto
(the "Unvested Option Shares"), at any time on or after the Year 2000
Bonus Date.
ARTICLE V.
OPTION GRANTS
V.1 Initial Grant. On March 16, 1998, Unicom granted to Executive an
Option to purchase 250,000 shares of Unicom Common Stock. Subject to the
provisions of Article VII and Article VIII, such Option shall become exercisable
in equal installments on each of the three first Anniversary Dates and shall
thereafter remain exercisable until the 10th Anniversary Date. The option price
of such Option equaled 100% of the fair market value of Unicom's Common Stock as
of March 16, 1998 as determined by the Compensation Committee of the Unicom
Board.
V.2 Future Grants. As of the Merger Effective Time, the Compensation
Committee shall in its discretion consider Executive for a grant of Options
under the LTIP, but such grant shall be in an amount which is not less than the
Options granted as of the Merger Effective Time to the other Co-Chief Executive
Officer, if any, of the Company. In addition, during the Contract Term, the
Compensation Committee shall in its discretion consider Executive for possible
future annual or other grants of Options under the LTIP on the same date or
dates and on the same basis as other senior executives of the Company, except
that during the Transition Period such grants shall be in amounts which are not
less than those granted to the other Co-Chief Executive Officer, if any, of the
Company. Subject to the provisions of Article VII and Article VIII, Options
granted to Executive under the Unicom Long-Term Incentive Plan prior to the
Merger Effective Time shall become exercisable in accordance with their terms
and the terms of the Unicom Long-Term Incentive Plan.
ARTICLE VI.
OTHER BENEFITS
VI.1 Savings and Other Plans. During the Contract Term, Executive shall
be entitled to participate in all savings, deferred compensation and retirement
plans which are or may hereafter become generally available to senior executives
of the Company (subject to the eligibility requirements of such plans, except as
such eligibility requirements are modified by the provisions of Article IV and
this Article VI), except that during the Transition Period such participation
shall be on terms no less favorable than those available to the other Co-Chief
Executive Officer, if any, of the Company.
VI.2 Retirement Benefits.
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(1) Upon the first to occur of Executive's Early Retirement or
Normal Retirement, a Termination Without Cause, a Termination for Good
Reason, a Termination of Employment by reason of death or Disability or
a Termination of Employment by the Executive for any other reason on or
after the first anniversary of the Commencement Date (any of the
foregoing, a "SERP Payment Event"), Executive (or, in the event of his
death, his surviving spouse) shall thereafter receive a retirement
benefit (the "SERP Benefit") determined pursuant to Section 6.2(b).
(2) The SERP Benefit to be provided to Executive during any
year shall equal an amount which, when added to all other retirement
benefits provided to Executive by the Company and its Affiliates during
such year (including payments under the Service Annuity System, the
Supplemental Retirement Plan, any Social Security supplement paid by
ComEd until Executive attains age 65, any retirement benefit paid
pursuant to Section 8.4, and any other sources) results an aggregate
annual retirement benefit equal to the annual retirement benefit that
would have been payable under the Service Annuity System (including
under the Supplemental Retirement Plan) as in effect on the March 10,
1998, calculated as though Executive had:
(1) retired at age 60 (or, if greater, his attained
age upon the first SERP Payment Event), and
(2) accrued 20 years of service on March 16, 1998
and one additional year of service on each Anniversary Date
occurring on or before the Termination Date;
provided, however, that in no event shall any SERP Benefit be payable:
(A) during the Severance Period if either Section
7.3 or 8.3 is applicable,
(B) in the event that, before the first SERP Payment
Event, Executive shall have received a Notice of Consideration
(as defined in Section 7.1(b)(i)) and his employment is
subsequently terminated by the Company for Cause, or
(C) in the event of any Termination of Employment
other than in connection with a SERP Payment Event.
In addition, Executive's right to receive the SERP Benefit shall be
subject to Section 7.7.
(3) Executive shall have the option to receive the SERP
Benefit (i) as a lump-sum amount, payable within 30 days after
Termination of Employment notwithstanding the provisions of Section
6.2(b)(A), (ii) as a regular life annuity, or (iii) as a joint and
survivor marital annuity (to be appropriately adjusted in accordance
with the provisions of the Service Annuity System). In the event of
Executive's death during his employment by the Company, his spouse will
immediately become entitled to a surviving spouse benefit.
VI.3 Welfare Benefits. During the Contract Term, Executive (and his
family) shall be eligible to participate in and shall receive benefits under all
welfare benefit plans and Practices provided by the Company (including medical,
prescription, dental, vision care, disability, salary
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continuance, employee life, group life, dependent life, accidental death and
travel accident insurance plans and programs) generally available to senior
executives of the Company; provided, however, that the Company shall provide at
no cost to Executive an amount of term life insurance coverage that, when added
to the coverage available at no cost to Executive under the Company's group or
employee life plans or programs, equals three times his Base Salary. During the
Transition Period participation in such welfare benefit plans and Practices
shall be on terms no less favorable than those available to the other Co-Chief
Executive Officer, if any, of the Company.
VI.4 Employee Benefits. During the Contract Term, Executive shall be
entitled to employee benefits generally available to other senior executives of
the Company, including financial planning and tax planning services, except that
during the Transition Period such employee benefits available to Executive shall
be no less favorable than those available to the other Co-Chief Executive
Officer, if any, of the Company.
VI.5 Time Off. During each year of the Contract Term, Executive shall
be entitled to 30 "paid time off" days in accordance with the PTO policy
applicable to senior executives of the Company, except that during the
Transition Period such amount shall not be less than the days applicable to the
other Co-Chief Executive Officer, if any, of the Company.
VI.6 Expenses. During the Contract Term, Executive shall be entitled to
receive prompt reimbursement for all of his reasonable employment-related
expenses upon the Company's receipt of accounting in accordance with Practices
applicable to senior executives of the Company, except that during the
Transition Period such Practices shall not be less favorable than those
applicable to the other Co-Chief Executive Officer, if any, of the Company.
VI.7 Office; Support Staff. During the Contract Term, Executive shall
be entitled to an office of a size and with furnishings and other appointments,
and to personal secretarial and other assistance, as is appropriate to the
positions being assumed by Executive, but in no event less than those provided
to other senior executives of the Company or to the other Co-Chief Executive
Officer, if any, of the Company.
ARTICLE VII.
TERMINATION BENEFITS
VII.1 Termination for Cause or Other Than for Good Reason, Retirement,
Death or Disability.
(1) If, whether before or after the end of the Initial Term,
Executive's employment is terminated by the Company for Cause or by
Executive for any reason other than Good Reason, death, Disability,
Early Retirement or Normal Retirement, then:
(1) the Company shall within 10 days after the Termination
Date pay Executive his Accrued Base Salary and Accrued Annual
Incentive;
(2) all of Executive's Options (whether or not then
exercisable) shall expire on the Termination Date; and
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(3) any Performance Unit Program award that has not yet
become payable in accordance with the terms and conditions
thereof shall be forfeited.
(2) The Company may not terminate Executive's employment for
Cause unless:
(1) no fewer than 30 days prior to the Termination
Date, the Company provides Executive with written notice of
its intent to consider a termination of employment for Cause
that states the proposed Termination Date and includes a
detailed description of the specific reasons which form the
basis for such consideration (the "Notice of Consideration");
(2) during a period of not fewer than 15 days after
the date Notice of Consideration is provided, Executive shall
have the opportunity to appear before the Company Board, with
legal representation if he so elects, to present arguments on
his own behalf; and
(3) following the presentation to the Company Board
as provided in clause (ii) above, Executive shall be
terminated for Cause only if (x) not less than 60% of the
members of the Company Board (other than Executive if
Executive is a member of the Company Board, or any other
member of the Company Board alleged to be involved in the
events that form the basis of the proposed termination for
Cause) determines that the actions of Executive constituted
Cause and that his employment should accordingly be terminated
for Cause; and (y) the Company Board provides Executive with a
written determination setting forth the basis of such
termination of employment which shall be consistent with the
reasons set forth in the Notice of Consideration.
(3) After providing Notice of Consideration to Executive, the
Company Board may suspend Executive with pay pending a final
determination pursuant to this Section.
VII.2 Termination for Death or Disability. If Executive's employment
terminates due to death or Disability:
(1) the Company shall pay to Executive, his Beneficiaries or
his estate, as the case may be, immediately after the Termination Date
an amount which is equal to the sum of his Accrued Base Salary, Accrued
Annual Incentive and Prorated Annual Incentive; and
(2) each of Executive's Options (including any Options not
then exercisable) shall be fully exercisable and shall remain
exercisable until the applicable Option Expiration Date.
VII.3 Termination Without Cause or for Good Reason. Except as otherwise
provided in Section 8.3, in the event of a Termination Without Cause or a
Termination for Good Reason:
(1) Executive shall receive a lump sum equal to his Accrued
Base Salary, Accrued Annual Incentive, and Prorated Annual Incentive;
(2) Executive shall receive for the duration of the Severance
Period,
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(1) periodic payments in accordance with the
Company's normal payroll practices and in amounts equal to his
Base Salary in effect under this Agreement or, where
applicable, the Prior Agreement during the calendar year
preceding the Termination Date and, for each year during the
Severance Period, the Formula Annual Incentive, and
(2) a continuation of the benefits described in
Section 6.3 to which Executive and his family are entitled as
of the Termination Date (or, if such benefits are not
available, the economic equivalent thereof);
(3) each of Executive's Options that is exercisable on the
Termination Date shall remain exercisable until the applicable Option
Expiration Date;
(4) each of Executive's Options that has not yet become
exercisable as of the Termination Date shall become exercisable during
the Severance Period at such times and in such amounts (if any) as if
Executive had remained employed by the Company throughout the Severance
Period and, after becoming so exercisable, shall remain exercisable
until the applicable Option Expiration Date; and
(5) any of Executive's Options that remain unexercisable at
the end of the Severance Period shall be forfeited.
VII.4 Termination Upon Normal Retirement. If Executive's employment
terminates due to Normal Retirement:
(1) Executive shall receive a lump sum equal to his Accrued
Base Salary, Accrued Annual Incentive, and Prorated Annual Incentive;
(2) each of Executive's Options that is exercisable on the
Termination Date shall remain exercisable until the applicable Option
Expiration Date; and
(3) each of Executive's Options that has not yet become
exercisable as of the Termination Date shall become exercisable after
Executive's retirement at such times and in such amounts as if
Executive had remained employed by the Company following his retirement
and, after becoming so exercisable, shall remain exercisable until the
applicable Option Expiration Date.
VII.5 Termination Upon Early Retirement. If Executive's employment
terminates due to Early Retirement:
(1) Executive shall receive a lump sum equal to his Accrued
Base Salary, Accrued Annual Incentive, and Prorated Annual Incentive;
(2) each of Executive's Options that is exercisable on the
Termination Date shall remain exercisable until the later to occur of
(i) the end of the period that is applicable under such circumstances
pursuant to the form of grant agreement in general use for grants to
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senior executives at the time such Option was granted or (ii) 90 days
after the Termination Date, but in no event after the applicable Option
Expiration Date; and
(3) each of Executive's Options that has not yet become
exercisable as of the Termination Date shall expire on the Termination
Date.
VII.6 Post-Retirement Health Care Coverage. In the event of any
Termination of Employment on account of death, Disability, Early Retirement,
Normal Retirement, by Executive for Good Reason or by the Company without Cause,
Executive and his spouse shall each be entitled to Post-Retirement Health Care
Coverage for the remainder of their respective lives. Such coverage shall not
duplicate any benefits that may then be available to Executive and his spouse
under Section 6.3 and shall be secondary to any coverage provided by any other
employer or Medicare.
VII.7 Breach of Covenants; Exculpation. In the event of (a) a wilful
and material breach by Executive of any of the covenants contained in Article
IX, or (b) a failure by Executive to cure (to the fullest extent curable) a
non-wilful breach of any of such covenants within 10 days after his receipt of a
written notice thereof from the Company, the Company shall be entitled, after
obtaining a final judicial determination (or, if the Company reasonably
determines, based upon the advice of counsel, that it is more likely than not
that each of the Circuit Court of Cook County, Illinois and the United States
District Court for the Northern District of Illinois will decline to adjudicate
the issue, a final decree in an arbitration proceeding conducted in accordance
with the rules of the American Arbitration Association, with such arbitration
proceeding to be conducted in Chicago, Illinois before a panel of three
arbitrators) to the effect that such action by the Company is appropriate and
consistent with the requirements and procedures set forth in this Agreement, to
take any or all of the following actions:
(1) discontinue the SERP Benefit and any or all payments
and benefits provided to Executive pursuant to Article VII and
any other provision of this Agreement,
(2) terminate any Options then held by Executive,
whether or not then exercisable, and
(3) require Executive to:
(w) repay to the Company all amounts
previously received by Executive pursuant to any
provision of Article VII on or after the first date
on which the Executive breached any of the covenants
contained in Article IX (the "Breach Date"),
(x) repay to the Company all amounts
previously received by Executive pursuant the SERP
Benefit at any time on or after the Termination Date,
(y) pay to the Company an amount equal to
the aggregate "spread" on all Options exercised on or
after the Breach Date, and
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(z) repay to the Company any other amount
that it paid to Executive on or after the Breach Date
which Executive would not have been entitled to
receive if the Company had terminated the employment
of Executive for Cause as of the Breach Date;
provided, however, that (I) no benefits shall be discontinued or terminated nor
shall Executive have any monetary liability to the Company for any breach of the
covenants contained in Article IX for any act or failure to act, including
without limitation simple negligence or an error in judgment, if such act or
failure to act was done in good faith, with a reasonable belief that the act, or
failure to act, was in the best interest of the Company or was required by
applicable law or administrative regulations, and was not done primarily to
benefit Executive and (II) no action may be brought under this Section 7.7 more
than three years after the Termination Date. For purposes of clause (iii) (y) of
the preceding sentence, "spread" in respect of any Option shall mean the product
of the number of shares as to which such Option has been exercised on or after
the Breach Date multiplied by the difference between the closing price of the
Common Stock on the exercise date (or if the Common Stock did not trade on the
New York Stock Exchange on the exercise date, the most recent date on which the
Common Stock did so trade) and the exercise price of the Option.
VII.8 Other Employment; Other Plans. Executive shall not be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to Executive under any provision of this Agreement. The amounts
payable hereunder shall not be reduced by any payments received by Executive
from any other employer; provided, however, that any continued welfare benefits
provided for by Section 6.3 shall not duplicate any benefits that are provided
to Executive and his family by such other employer and shall be secondary to any
coverage provided by such other employer. The provisions of this Article VII or
Article VIII will not limit the entitlement of Executive to any other benefits
available to Executive under any benefit plan or Practice that is maintained by
the Company, Unicom or any Company Affiliate in which Executive participates.
ARTICLE VIII.
EFFECTS OF CERTAIN CONTROL CHANGES
VIII.1 Effect on Certain Defined Terms. In the event of (i) a
Termination Without Cause or a Termination for Good Reason (including a
Termination for Good Reason within the meaning of Section 1.24(b)) for which the
Termination Date occurs at any time during the period beginning on the date on
which a Change in Control first occurs and ending 24 months after such date
(such period, the "Post-Change Period"), (ii) a Termination Without Cause or a
Termination for Good Reason (including a Termination for Good Reason within the
meaning of Section 1.24(b)) for which the Termination Date occurs at any other
time on or after the Commencement Date and prior to the earlier of Normal
Retirement or December 31, 2004, or (iii) a Termination for Good Reason within
the meaning of Section 1.24(b) for which the Termination Date occurs at any
other time on or after the Commencement Date and prior to Normal Retirement:
(1) the term "Formula Annual Incentive" shall mean the greater
of (i) that amount determined pursuant to Section 1.23 or (ii)
Executive's target Annual Incentive determined as of the Termination
Date; and
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(2) for purposes of a Termination for Good Reason for which
the Termination Date occurs during the Post-Change Period, the term
"Good Reason" shall have the meaning specified in Section 1.24, except
that, subject to the proviso at the end of Section 1.24, any one or
more of the following acts or omissions shall also constitute Good
Reason:
(1) a determination by Executive, made in good faith
at any time during the Post-Change Period, that, as a result
of a Change in Control, he is substantially unable to perform,
or that there has been a material reduction in, any of his
duties, functions, responsibilities or authority;
(ii) the failure for any reason of any successor to
the Company to assume this Agreement in writing as required by
Section 8.2;
(iii) a relocation of the principal offices of the
Company at any time during the Post-Change Period by more than
50 miles from the location of such offices immediately before
the date on which the Post-Change Period begins; or
(iv) during any 12-month period commencing after the
Change in Control, any increase of at least 20% in the amount
of time that Executive is required to devote to
business-related travel outside of the metropolitan Chicago,
Illinois area relative to the amount of time that Executive
devoted to such business travel during the 12-month period
immediately prior to the Change in Control, but only to the
extent that such increase is attributable to requirements
imposed upon Executive by the Company Board.
VIII.2 Successor(s). Before the consummation of any Change in Control,
the Company shall obtain from each Person that becomes a successor of the
Company by reason of the Change in Control, the unconditional written agreement
of such Person to assume this Agreement and to perform all of the obligations of
the Company hereunder.
VIII.3 Termination Without Cause or for Good Reason During Post-Change
Period or Termination in Certain Other Situations. In the event of (i) a
Termination Without Cause or a Termination for Good Reason (including a
Termination for Good Reason within the meaning of Section 1.24(b)) for which the
Termination Date occurs during the Post-Change Period, (ii) a Termination
Without Cause or a Termination for Good Reason (including a Termination for Good
Reason within the meaning of Section 1.24(b)) for which the Termination Date
occurs at any other time on or after the Commencement Date and prior to the
earlier of Normal Retirement or December 31, 2004, or (iii) a Termination for
Good Reason within the meaning of Section 1.24(b) for which the Termination Date
occurs at any other time on or after the Commencement Date and prior to Normal
Retirement, the provisions of Section 7.3 shall be inapplicable and, in lieu
thereof:
(a) Executive shall receive a lump sum equal to his Accrued
Base Salary, Accrued Annual Incentive, and Prorated Annual Incentive
(determined by reference to the Formula Annual Incentive computed in
accordance with Section 8.1(a));
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(b) Executive shall receive a lump sum equal to three (3.0)
times the sum of (x) his Base Salary in effect under this Agreement or,
where applicable, the Prior Agreement during the calendar year
preceding the Termination Date and (y) his Formula Annual Incentive
(computed in accordance with Section 8.1(a)) determined as of the
Termination Date;
(c) Executive and his family shall receive for the duration of
the Severance Period, a continuation of the benefits described in
Section 6.3 to which Executive and his family are entitled as of the
Termination Date (or, if such benefits are not available, the economic
equivalent thereof) and, upon the expiration of the Severance Period,
Executive and his spouse shall be entitled to Post-Retirement Health
Care Coverage in accordance with the provisions of Section 7.6;
(d) Company shall, at its expense, engage a professional
outplacement organization which shall provide individual outplacement
services to Executive for a period of six months commencing on the
Termination Date, subject to extension for an additional period of six
months in the sole discretion of Company;
(e) each of Executive's Options that is exercisable on the
Termination Date shall remain exercisable until the applicable Option
Expiration Date;
(f) each of Executive's Options that is not fully exercisable
as of the Termination Date shall immediately become fully exercisable
and shall thereafter remain exercisable until the applicable Option
Expiration Date;
(g) all forfeiture conditions which as of the Termination Date
are applicable to any deferred stock unit, restricted stock or
restricted share units awarded to Executive by the Company pursuant to
the LTIP, a successor plan, or otherwise at any time during the
Contract Term or by Unicom pursuant to the Unicom Long-Term Incentive
Plan or otherwise at any time during the contract term under the Prior
Agreement, shall lapse immediately; and
(h) If all or any portion of any of Executive's awards under
any other bonus or incentive arrangement under the LTIP or the Unicom
Long-Term Incentive Plan shall for any reason be unvested as of the
Termination Date, the Company shall pay Executive a benefit equal to
the increase in the benefit that Executive would have received if the
unvested portion of such benefit had become fully vested as of the
Termination Date.
VIII.4 Enhanced Retirement Benefit.
(a) In the event of (i) a Termination Without Cause or a
Termination for Good Reason (including a Termination for Good Reason
within the meaning of Section 1.24(b)) for which the Termination Date
occurs during the Post-Change Period, (ii) a Termination Without Cause
or a Termination for Good Reason (including a Termination for Good
Reason within the meaning of Section 1.24(b)) for which the Termination
Date occurs at any other time on or after the Commencement
20
Date and prior to the earlier of Normal Retirement or December 31,
2004, or (iii) a Termination for Good Reason within the meaning of
Section 1.24(b) for which the Termination Date occurs at any other time
on or after the Commencement Date and prior to Normal Retirement, the
aggregate amount of Executive's annual retirement benefit pursuant to
Section 6.2(a) shall be computed on the basis of the assumptions set
forth in such Section 6.2(b), together with the additional assumptions
that Executive had:
(x) attained as of the Termination Date an age that
is three greater than the age determined pursuant to clause
(i) of Section 6.2(b),
(y) accrued a number of years of service that is
three years greater than the number of years of service
determined pursuant to clause (ii) of Section 6.2(b), and
(z) received the lump-sum severance benefit specified
in Section 8.3(b) in equal monthly installments during the
Severance Period.
(b) For purposes of applying the adjustments necessary to give
effect to the form in which Executive may from time to time elect to
receive his SERP Benefit pursuant to Section 6.2(c), the term "Service
Annuity System" shall refer to Service Annuity System as in effect on
the last date preceding the Post-Change Period, if any, if the amount
of the SERP Benefit (in the form in which Executive elects to receive
it) would otherwise be reduced by application of the adjustments
provided for under the Service Annuity System as in effect as of the
Termination Date.
VIII.5 Gross-Up for Certain Taxes.
(a) If it is determined by the Company's independent auditors
that any monetary or other benefit received or deemed received by
Executive from the Company or any Affiliate thereof pursuant to this
Agreement or otherwise, whether or not in connection with a Change in
Control (such monetary or other benefits collectively, the "Potential
Parachute Payments"), is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax under any United States
federal, state, local or other law (such excise tax and all such
similar taxes collectively, "Excise Taxes"), then the Company shall,
subject to Sections 8.10 and 8.11, within five business days after such
determination, pay Executive an amount (the "Gross-Up Payment") equal
to the product of:
(i) the amount of such Excise Taxes multiplied by
(ii) the Gross-Up Multiple (as defined in Section 8.8).
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The Gross-Up Payment is intended to compensate Executive for all Excise
Taxes payable by Executive with respect to Potential Parachute Payments
and all Taxes or Excise Taxes payable by Executive with respect to the
Gross-Up Payment.
(b) The determination of the Company's independent auditors
described in Section 8.5(a), including the detailed calculations of the
amounts of the Potential Parachute Payments, Excise Taxes and Gross-Up
Payment and the assumptions relating thereto, shall be set forth in a
written certificate of such auditors (the "Company Certificate")
delivered to Executive. Executive or the Company may at any time
request the preparation and delivery to Executive of a Company
Certificate. The Company shall cause the Company Certificate to be
delivered to Executive as soon as reasonably possible after such
request.
VIII.6 Determination by Executive.
(a) If (i) the Company shall fail to deliver a Company
Certificate to Executive within 30 days after its receipt of his
written request therefor, or (ii) at any time after Executive's receipt
of a Company Certificate, Executive disputes either (x) the amount of
the Gross-Up Payment set forth therein or (y) the determination set
forth therein to the effect that no Gross-Up Payment is due (whether by
reason of Section 8.11 or otherwise), then Executive may elect to
require the Company to pay a Gross-Up Payment in the amount determined
by Executive as set forth in an Executive Counsel Opinion (as defined
in Section 8.9). Any such demand by Executive shall be made by delivery
to the Company of a written notice which specifies the Gross-Up Payment
determined by Executive (together with the detailed calculations of the
amounts of Potential Parachute Payments, Excise Taxes and Gross-Up
Payment and the assumptions relating thereto) and an Executive Counsel
Opinion regarding such Gross-Up Payment (such written notice and
opinion collectively, the "Executive's Determination") . Within 30 days
after delivery of an Executive's Determination to the Company, the
Company shall either (i) pay Executive the Gross-Up Payment set forth
in the Executive's Determination (less the portion thereof, if any,
previously paid to Executive by the Company) or (ii) deliver to
Executive a Company Certificate and a Company Counsel Opinion (as
defined in Section 8.9), and pay Executive the Gross-Up Payment
specified in such Company Certificate. If for any reason the Company
fails to comply with the preceding sentence, the Gross-Up Payment
specified in the Executive's Determination shall be controlling for all
purposes.
(b) If Executive does not request a Company Certificate, and
the Company does not deliver a Company Certificate to Executive, then
(i) the Company shall, for purposes of Section 8.11, be deemed to have
determined that no Gross-Up Payment is due and (ii) Executive shall not
pay any Excise Taxes in respect of Potential Parachute Payments except
in accordance with Sections 8.10(a) or (d).
VIII.7 Additional Gross-Up Amounts. If for any reason (whether pursuant
to subsequently enacted provisions of the Code, final regulations or published
rulings of the IRS, a final judgment of a court of competent jurisdiction, a
determination of the Company's independent auditors set forth in
22
a Company Certificate or, subject to the last two sentences of Section 8.6(a),
an Executive's Determination) it is later determined that the amount of Excise
Taxes payable by Executive is greater than the amount determined by the Company
or Executive pursuant to Section 8.5 or 8.6, as applicable, then the Company
shall, subject to Sections 8.10 and 8.11, pay Executive an amount (which shall
also be deemed a Gross-Up Payment) equal to the product of:
(a) the sum of (1) such additional Excise Taxes and (2) any
interest, penalties, expenses or other costs incurred by Executive as a
result of having taken a position in accordance with a determination
made pursuant to Section 8.5 or 8.6, as applicable, multiplied by
(b) the Gross-Up Multiple.
VIII.8 Gross-Up Multiple. The Gross-Up Multiple shall equal a fraction,
the numerator of which is one (l.0), and the denominator of which is one (1.0)
minus the lesser of (i) the sum, expressed as a decimal fraction, of the
effective after-tax marginal rates of all Taxes and any Excise Taxes applicable
to the Gross-Up Payment or (ii) 0.80, it being intended that the Gross-Up
Multiple shall in no event exceed five (5.0) . (If different rates of tax are
applicable to various portions of a Gross-Up Payment, the weighted average of
such rates shall be used.)
VIII.9 Opinion of Counsel. "Executive Counsel Opinion" means an opinion
of nationally-recognized executive compensation counsel to the effect (i) that
the amount of the Gross-Up Payment determined by Executive pursuant to Section
8.6 is the amount that a court of competent jurisdiction, based on a final
judgment not subject to further appeal, is most likely to decide to have been
calculated in accordance with this Article and applicable law and (ii) if the
Company has previously delivered a Company Certificate to Executive, that there
is no reasonable basis or no substantial authority for the calculation of the
Gross-Up Payment set forth in the Company Certificate. "Company Counsel Opinion"
means an opinion of nationally-recognized executive compensation counsel to the
effect that (i) the amount of the Gross-Up Payment set forth in the Company
Certificate is the amount that a court of competent jurisdiction, based on a
final judgment not subject to further appeal, is most likely to decide to have
been calculated in accordance with this Article and applicable law and (ii) for
purposes of Section 6662 of the Code, Executive has substantial authority to
report on his federal income tax return the amount of Excise Taxes set forth in
the Company Certificate.
VIII.10 Amount Increased or Contested.
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(a) Executive shall notify the Company in writing (an
"Executive's Notice") of any claim by the IRS or other taxing authority
(an "IRS Claim") that, if successful, would require the payment by
Executive of Excise Taxes in respect of Potential Parachute Payments in
an amount in excess of the amount of such Excise Taxes determined in
accordance with Section 8.5 or 8.6, as applicable. Such Executive's
Notice shall include the nature and amount of such IRS Claim, the date
on which such IRS Claim is due to be paid (the "IRS Claim Deadline"),
and a copy of all notices and other documents or correspondence
received by Executive in respect of such IRS Claim. Executive shall
give his Executive's Notice as soon as practicable, but no later than
the earlier of (i) 10 business days after Executive first obtains
actual knowledge of such IRS Claim or (ii) five business days before
the IRS Claim Deadline; provided, however, that Executive's failure to
give such notice shall affect the Company's obligations under this
Article only to the extent that the Company is actually prejudiced by
such failure. If at least one business day before the IRS Claim
Deadline the Company shall:
(1) deliver to Executive a Company Certificate to the
effect that the IRS Claim has been reviewed by the Company's
independent auditors and, notwithstanding the IRS Claim, the
amount of Excise Taxes, interest and penalties payable by
Executive is either zero or an amount less than the amount
specified in the IRS Claim,
(2) pay to Executive an amount (which shall also be
deemed a Gross-Up Payment) equal to the positive difference
between (x) the product of the amount of Excise Taxes,
interest and penalties specified in the Company Certificate,
if any, multiplied by the Gross-Up Multiple, and (y) the
portion of such product, if any, previously paid to Executive
by the Company, and
(3) direct Executive pursuant to Section 8.10(d) to
contest the balance of the IRS Claim,
then Executive shall pay only the amount, if any, of Excise Taxes,
interest and penalties specified in the Company Certificate. In no
event shall Executive pay an IRS Claim earlier than 30 days after
having given an Executive's Notice to the Company (or, if sooner, the
IRS Claim Deadline).
(b) At any time after the payment by Executive of any amount
of Excise Taxes or related interest or penalties in respect of
Potential Parachute Payments (whether or not such amount was based upon
a Company Certificate, an Executive's Determination or an IRS Claim),
the Company may in its discretion require Executive to pursue a claim
for a refund (a "Refund Claim") of all or any portion of such Excise
Taxes, interest or penalties as the Company may specify by written
notice to Executive.
(c) If the Company notifies Executive in writing that the
Company desires Executive to contest an IRS Claim or to pursue a Refund
Claim, Executive shall:
24
(i) give the Company all information that it
reasonably requests in writing from time to time relating to
such IRS Claim or Refund Claim, as applicable,
(ii) take such action in connection with such IRS
Claim or Refund Claim (as applicable) as the Company
reasonably requests in writing from time to time, including
accepting legal representation with respect thereto by an
attorney selected by the Company, subject to the approval of
Executive (which approval shall not be unreasonably withheld
or delayed),
(iii) cooperate with the Company in good faith to
contest such IRS Claim or pursue such Refund Claim, as
applicable,
(iv) permit the Company to participate in any
proceedings relating to such IRS Claim or Refund Claim, as
applicable, and
(iv) contest such IRS Claim or prosecute such Refund
Claim (as applicable) to a determination before any
administrative tribunal, in a court of initial jurisdiction
and in one or more appellate courts, as the Company may from
time to time determine in its discretion.
The Company shall control all proceedings in connection with such IRS
Claim or Refund Claim (as applicable) and in its discretion may cause
Executive to pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the IRS or other taxing
authority in respect of such IRS Claim or Refund Claim (as applicable);
provided that (i) any extension of the statute of limitations relating
to payment of taxes for the taxable year of Executive relating to the
IRS Claim is limited solely to such IRS Claim, (ii) the Company's
control of the IRS Claim or Refund Claim (as applicable) shall be
limited to issues with respect to which a Gross-Up Payment would be
payable, and (iii) Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the IRS or other taxing
authority.
(d) The Company may at any time in its discretion direct
Executive to (i) contest the IRS Claim in any lawful manner or (ii) pay
the amount specified in an IRS Claim and pursue a Refund Claim;
provided, however, that if the Company directs Executive to pay an IRS
Claim and pursue a Refund Claim, the Company shall advance the amount
of such payment to Executive on an interest-free basis and shall
indemnify Executive, on an after-tax basis, for any Taxes, Excise
Taxes, and any related interest or penalties imposed with respect to
such advance.
(e) The Company shall pay directly all legal, accounting and
other costs and expenses (including additional interest and penalties)
incurred by the Company or Executive in connection with any IRS Claim
or Refund Claim, as applicable, and shall indemnify Executive, on an
after-tax basis, for any Taxes, Excise Taxes and related interest and
penalties imposed on Executive as a result of such payment of costs and
expenses.
25
VIII.11 Limitation on Gross-Up Payments.
(a) Notwithstanding any other provision of this Article VIII,
if the aggregate After-Tax Amount (as defined below) of the Potential
Parachute Payments and Gross-up Payment that, but for this Section
8.11, would be payable to Executive, does not exceed 110% of the
After-Tax Floor Amount (as defined below), then no Gross-Up Payment
shall be made to Executive and the aggregate amount of Potential
Parachute Payments payable to Executive shall be reduced (but not below
the Floor Amount) to the largest amount which would both (i) not cause
any Excise Taxes to be payable by Executive and (ii) not cause any
Potential Parachute Payments to become nondeductible by the Company by
reason of Section 280G of the Code (or any successor provision) . For
purposes of the preceding sentence, Executive shall be deemed to be
subject to the highest effective after-tax marginal rate of Taxes.
(b) For purposes of this Section:
(i) "After-Tax Amount" means the portion of a
specified amount that would remain after payment of all Taxes
and Excise Taxes paid or payable by Executive in respect of
such specified amount;
(ii) "Floor Amount" means the greatest pre-tax amount
of Potential Parachute Payments that could be paid to
Executive without causing him to become liable for any Excise
Taxes in connection therewith; and
(iii) "After-Tax Floor Amount" means the After-Tax
Amount of the Floor Amount.
VIII.12 Refunds. If, after the receipt by Executive of any payment or
advance of Excise Taxes by the Company pursuant to this Article, Executive
receives any refund with respect to such Excise Taxes, Executive shall (subject
to the Company's complying with any applicable requirements of Section 8.10)
promptly pay the Company the amount of such refund (together with any interest
paid or credited thereon after Taxes applicable thereto). If, after the receipt
by Executive of an amount advanced by the Company pursuant to Section 8.10, a
determination is made that Executive shall not be entitled to any refund with
respect to such claim and the Company does not notify Executive in writing of
its intent to contest such determination within 30 days after the Company
receives written notice of such determination, then such advance shall be
forgiven and shall not be required to be repaid and the amount of such advance
shall offset, to the extent thereof, the amount of Gross-Up Payment required to
be paid. Any contest of a denial of refund shall be controlled by Section 8.10.
VIII.13 No Adverse Effect on Pooling of Interests. Any benefits
provided to Executive under this Article VIII may be reduced or eliminated to
the extent necessary, in the reasonable judgment of the Company Board, to enable
the Company to account for a merger, consolidation or similar transaction as a
pooling of interests; provided that (i) the Company Board shall have exercised
such
26
judgment and given Executive written notice thereof prior to the Effective Date,
(ii) the determination of the Company Board shall be supported by a written
certificate of the Company's independent auditors, a copy of which shall be
provided to the Executive before the Effective Date, and (iii) if for any reason
the Company shall, notwithstanding such exercise of judgment by the Company
Board, fail to account for such merger, consolidation or other transaction as a
pooling of interests for any fiscal period that includes the Termination Date,
the Company shall, as soon as practicable after the end of such fiscal period
and, in any event, within 10 business days after the its audited financial
statements for such fiscal period first become publicly available, provide to
Executive the excess, if any, of (x) each severance or other benefit determined
pursuant to Article VIII (without giving effect to this Section 8.13) over (y)
each corresponding severance or other benefit previously provided to Executive
pursuant to Article VII or Article VIII.
ARTICLE IX.
RESTRICTIVE COVENANTS
IX.1 Confidential Information.
(1) Executive acknowledges that it is the policy of the
Company and its Affiliates to maintain as secret and confidential all
Confidential Information, and that Confidential Information has been
and will be developed at substantial cost and effort to the Company and
its Affiliates. Executive acknowledges that he will have access to
Confidential Information with respect to the Company and its Affiliates
which information is a valuable and unique asset of the Company and its
Affiliates and that disclosure of such Confidential Information would
cause irreparable damage to the business and operations of the Company
and its Affiliates.
(2) Executive acknowledges that the Confidential Information
is, as between the Company and its Affiliates and Executive, the
exclusive property of the Company and its Affiliates.
(3) Both during Executive's employment by the Company (whether
during or after the Initial Term) and at any time after the Termination
Date, Executive:
(1) shall not, directly or indirectly, divulge,
furnish or make accessible to any Person any Confidential
Information (except (x) to the extent Executive reasonably and
in good faith believes that such actions are related to, and
required by, Executive's performance of his duties under this
Agreement, or (y) as may be compelled by applicable law or
administrative regulation; provided that Executive, to the
extent not prohibited from doing so by applicable law or
administrative regulation, shall give the Company written
notice of the information to be so disclosed pursuant to
clause (y) of this sentence as far in advance of its
disclosure as is practicable, shall cooperate with the Company
in its efforts to protect the information from disclosure, and
shall limit its disclosure of such information to the minimum
disclosure required by law or administrative regulation unless
the Company agrees in writing to a greater level of
disclosure);
27
(2) shall not use for his own benefit in any manner,
any Confidential Information;
(3) shall not cause any such Confidential Information
to become publicly known; and
(4) shall take all reasonable steps to safeguard such
Confidential Information and to protect it against disclosure,
misuse, loss and theft.
(4) For purposes of this Agreement, Confidential Information
represents trade secrets subject to protection under the Uniform Trade
Secrets Act, as adopted by the State of Illinois, or to any comparable
protection afforded by applicable laws.
IX.2 Non-Competition.
(1) During the period beginning on the Agreement Date and
ending two years after the Termination Date, Executive shall not,
directly or indirectly, in any capacity, engage or participate in,
become employed by, serve as a director of, or render advisory or
consulting or other services in connection with, any Competitive
Business (as defined in Section 9.2(c)).
(2) During the period beginning on the Agreement Date and
ending two years after the Termination Date, Executive shall not at any
time make any financial investment, whether in the form of equity or
debt, or own any interest, directly or indirectly, in any Competitive
Business. Nothing in this subsection shall, however, restrict Executive
from making an investment in any Competitive Business if such
investment does not (i) represent more than 1% of market value of the
outstanding capital stock or debt (as applicable) of such Competitive
Business, (ii) give Executive any right or ability, directly or
indirectly, to control or influence the policy decisions of any
Competitive Business, and (iii) create a conflict of interest between
Executive's duties under this Agreement and his interest in such
investment. In addition, nothing in this subsection shall restrict
Executive's ability to retain any interest (including any interest in
common stock held on March 10, 1998 or subsequently acquired upon
exercise of options or similar rights held on March 10, 1998 or upon
the conversion of convertible securities held on March 10, 1998) in New
England Electric System or any of its successors received by Executive
as a result of his former employment relationship with such entity.
(3) "Competitive Business" means as of any date (including
during the two-year period commencing on the Termination Date) any
Person (and any branch, office or operation thereof) which engages in,
or proposes to engage in (i) the production, transmission,
distribution, marketing or sale of electricity or (ii) any other
business engaged in by the Company or its Affiliates prior to the
Termination Date which represents for any calendar year during the
Contract Term, or is projected by the Company (as reflected in a
business plan adopted by the Company or any Affiliate thereof before
the Termination Date) to yield during any year during the first
three-fiscal year period commencing on or after the Termination Date,
more than 5% of the gross revenue of the Company, and which is located
(i) anywhere in the United States, or (ii) anywhere outside of the
United States where the
28
Company or any Affiliate thereof is then engaged in, or proposes to
engage in, any of such activities.
IX.3 Non-Solicitation. During the period beginning on the Agreement
Date and ending two years after the Termination Date, Executive shall not,
directly or indirectly:
(1) other than in connection with the performance of his
duties as an officer of the Company, encourage any Key Employee to
terminate his or her employment;
(2) employ, engage as a consultant or adviser, or solicit the
employment or engagement as a consultant or adviser of, any Key
Employee (other than by the Company or its Affiliates), or cause any
Person to do any of the foregoing;
(3) establish a business with, or encourage others to
establish a business with, any Key Employee; or
(4) interfere with the relationship of the Company or any of
its Affiliates with, or endeavor to entice away from, the Company or
any of its Affiliates any Person who or which at any time during the
period commencing one year prior to March 16, 1998 was a material
customer or material supplier of, or maintained a material business
relationship with, the Company, Unicom or any of their Affiliates.
IX.4 Reasonableness of Restrictive Covenants.
(1) Executive acknowledges that the covenants contained in
Sections 9.1, 9.2 and 9.3 are reasonable in the scope of the activities
restricted, the geographic area covered by the restrictions, and the
duration of the restrictions, and that such covenants are reasonably
necessary to protect the Company's legitimate interests in its
Confidential Information and in its relationships with employees,
customers and suppliers. Executive further acknowledges such covenants
are essential elements of this Agreement and that, but for such
covenants, Unicom and ComEd would not have entered into this Agreement.
(2) Unicom and ComEd and Executive have each consulted with
their respective legal counsel and have been advised concerning the
reasonableness and propriety of such covenants. Executive acknowledges
that his observance of the covenants contained in Sections 9.1, 9.2 and
9.3 will not deprive him of the ability to earn a livelihood or to
support his dependents.
29
IX.5 Right to Injunction; Survival of Undertakings.
(1) In recognition of the confidential nature of the
Confidential Information, and in recognition of the necessity of the
limited restrictions imposed by Sections 9.1, 9.2 and 9.3, the parties
agree that it would be impossible to measure solely in money the
damages which the Company would suffer if Executive were to breach any
of his obligations under such Sections. Executive acknowledges that any
breach of any provision of this such Sections would irreparably injure
the Company. Accordingly, Executive agrees that if he breaches any of
the provisions of such Sections, the Company shall be entitled, in
addition to any other remedies to which the Company may be entitled
under this Agreement or otherwise, to an injunction to be issued by a
court of competent jurisdiction, to restrain any breach, or threatened
breach, of such provisions, and Executive hereby waives any right to
assert any claim or defense that the Company has an adequate remedy at
law for any such breach.
(2) If a court determines that any of the covenants included
in this Article IX is unenforceable in whole or in part because of such
covenant's duration or geographical or other scope, such court shall
have the power to reduce the duration or scope of such provision, as
the case may be, so as to cause such covenant to be thereafter
enforceable.
(3) All of the provisions of this Article IX shall survive any
Termination of Employment without regard to (i) the reasons for such
termination or (ii) the expiration of the Contract Term.
IX.6 Non-Disparagement. During the two-year period commencing on the
Termination Date, Executive shall not (a) make any written or oral statement
that brings the Company or any of its Affiliates or the employees, officers or
agents of the Company or any of its Affiliates into disrepute, or tarnishes any
of their images or reputations or (b) publish, comment upon or disseminate any
statements suggesting or accusing Company or any of its Affiliates or any of
agents, employees or officers of the Company or any of its Affiliates of any
misconduct or unlawful behavior. This Section shall not be deemed to be breached
by testimony of Executive given in any judicial or governmental proceeding which
Executive reasonably believes to be truthful at the time given or by any other
action of Executive which he reasonably believes is taken in accordance with the
requirements of applicable law or administrative regulation.
ARTICLE X.
MISCELLANEOUS
X.1 Required Withholding. The Company may deduct or withhold from
payments or other benefits otherwise payable to Executive pursuant to the
provisions of this Agreement any amounts that are required by applicable law.
X.2 Remedies. In the event of any Termination of Employment or any
breach of this Agreement by the Company, Executive's exclusive remedies shall be
as specified in Article VII or to enforce any other undertaking of the Company
expressly provided in this Agreement; provided that nothing herein shall deny
Executive the right to seek a final judicial determination (or, if Executive
reasonably determines, based upon the advice of counsel, that it is more likely
than not that each of
30
the Circuit Court of Cook County, Illinois and the United States District Court
for the Northern District of Illinois will decline to adjudicate the issue, a
final decree in an arbitration proceeding conducted in accordance with the rules
of the American Arbitration Association, with such arbitration proceeding to be
conducted in Chicago, Illinois before a panel of three arbitrators) that any
Termination of Employment purportedly made for Cause was, in fact, made not in
good faith or was made without adherence to the requirements or procedures set
forth in this Agreement. If Executive obtains such a final judicial or arbitral
determination, as applicable, the Termination of Employment shall be treated as
a Termination Without Cause for all purposes of this Agreement.
X.3 Assignment; Successors. This Agreement shall be binding upon and
inure to the benefit of Executive and his Beneficiaries and estate and the
Company (as the surviving entity in the Merger and as successor to Unicom at the
Merger Effective Time) and its successors.
X.4 Beneficiary. If Executive dies prior to receiving all of the
amounts payable hereunder pursuant to Article IV, VI (except as may otherwise
expressly be provided in such Article or in the plans referenced therein), VII
or VIII, such amounts shall be paid in a lump-sum payment to the beneficiary
("Beneficiary") designated by Executive in writing to the Company during his
lifetime, which Executive may change from time to time by new designation filed
in like manner without the consent of any Beneficiary; or if no such Beneficiary
is designated, to his estate.
X.5 Nonalienation of Benefits. Benefits payable under this Agreement
shall not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, charge, garnishment, execution or levy of any
kind, either voluntary or involuntary, prior to actually being received by
Executive, and any such attempt to dispose of any right to benefits payable
hereunder shall be void.
X.6 Severability. If all or any part of this Agreement is declared by
any court or governmental authority to be unlawful or invalid, such unlawfulness
or invalidity shall not serve to invalidate any portion of this Agreement not
declared to be unlawful or invalid. Any paragraph or part of a paragraph so
declared to be unlawful or invalid shall, if possible, be construed in a manner
which will give effect to the terms of such paragraph or part of a paragraph to
the fullest extent possible while remaining lawful and valid.
X.7 Amendment; Waiver. This Agreement shall not be amended or modified
except by a written agreement between (a) prior to the Merger Effective Time,
Unicom, ComEd and Executive and (b) on or after the Merger Effective Time, the
Company and Executive. A waiver of any term, covenant or condition contained in
this Agreement shall not result in a waiver of any other term, covenant or
condition, and any waiver of any default shall not result in a waiver of any
later default.
X.8 Notices. All notices hereunder shall be in writing, delivered by
hand, nationally-recognized courier service that guarantees overnight delivery
or by certified mail, return receipt requested, postage prepaid, and addressed
as follows:
31
If to the Company: Newco
Attn: Pamela B. Strobel
Executive Vice President and General Counsel
37th Floor
One First National Plaza
Chicago, Illinois 60690
If to Executive: John W. Rowe
Unit 3306
950 North Michigan Avenue
Chicago, Illinois 60611
With copy to: Robert W. Kleinman, Esq.
Ross & Hardies
150 North Michigan Avenue
Chicago, Illinois 60601-7567
Either party may from time to time designate a new address by accordance with
this Section. Notices shall be effective when received by the addressee.
X.9 Publicity. Until this Agreement has been filed as an exhibit to a
filing by the Company or Unicom with the Securities and Exchange Commission,
neither Executive nor the Company shall issue or cause the publication of any
press release or other public announcement with respect to this Agreement, nor
disclose the contents hereof to any third party, without obtaining in each case
the consent of the other parties hereto, which consent shall not be withheld or
delayed where such release, announcement or disclosure shall be required by
applicable law or administrative regulation.
X.10 Communications. Nothing in this Agreement, including Sections 9.1,
9.6 or 10.9, shall be construed to prohibit Executive from communicating with,
including testifying in any administrative proceeding before, the Nuclear
Regulatory Commission or the United States Department of Labor, or from
otherwise addressing issues related to nuclear safety with any party or taking
any other action protected under Section 211 of the Energy Reorganization Act.
X.11 Legal Expenses. The Company shall pay to Executive all reasonable
legal fees and expenses incurred by Executive in disputing in good faith any
termination of his employment hereunder or in seeking in good faith to obtain or
enforce any benefit or right under this Agreement, provided that Executive shall
have a reasonable basis for his position.
X.12 Articles and Sections. Except where otherwise indicated by the
context, any reference to an "Article" or "Section" shall be to an Article or
Section of this Agreement.
X.13 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
32
X.14 Effectiveness; Prior Agreement; Entire Agreement. This Agreement
shall be binding immediately upon its execution and shall become effective
immediately prior to the Merger Effective Time without further action of Unicom,
the Company, ComEd or Executive. The Prior Agreement shall remain in effect
until as provided in the following sentence. At the Merger Effective Time this
Agreement forms the entire agreement between the parties hereto with respect to
its subject matter, and shall supersede all prior agreements, promises and
representations of the parties regarding employment or severance, whether in
writing or otherwise, including but not limited to the Prior Agreement which
will be without further effect immediately prior to the Merger Effective Time
(and upon the effectiveness of this Agreement) without further action of Unicom,
the Company, ComEd or the Executive or liability to Unicom, the Company, ComEd
or Executive thereunder.
X.15 Applicable Law. This Agreement shall be interpreted and construed
in accordance with the laws of the State of Illinois, without regard to its
choice of law principles.
X.16 Survival. All of Executive's rights hereunder, including his
rights to compensation and benefits prior to the Termination Date, his right to
severance and other benefits subject to the terms and conditions of Article VII
and VIII after the Termination Date, and his obligations under Article IX
hereof, shall survive a Termination of Employment and the termination of this
Agreement.
33
IN WITNESS WHEREOF, the parties have executed this Agreement on the
date first above written.
UNICOM CORPORATION
By: /s/ Edward A. Brennan
-------------------------------------------------
Edward A. Brennan,
Chairman of the Compensation Committee
of the Board of Directors
By: /s/ Donald P. Jacobs
-------------------------------------------------
Donald P. Jacobs,
Lead Non-employee Director
COMMONWEALTH EDISON COMPANY
By: /s/ Edward A. Brennan
-------------------------------------------------
Edward A. Brennan,
Chairman of the Compensation Committee of
the Board of Directors
By: /s/ Donald P. Jacobs
-------------------------------------------------
Donald P. Jacobs,
Lead Non-employee Director
EXECUTIVE:
/s/ John W. Rowe
-------------------------------------------------
John W. Rowe
34
UT 1,000,000 9-MOS DEC-31-2000 SEP-30-2000 PER-BOOK 4,991 927 1,357 6,208 184 13,667 1,397 3 301 1,727 37 137 6,252 0 0 284 306 0 0 0 4,924 13,667 4,366 316 3,261 3,577 789 71 860 333 523 8 515 130 330 605 2.94 2.92
UNICOM CORPORATION
QUARTERLY REPORT
For the Quarterly Period Ended September 30, 2000
Unicom Corporation
Quarterly Report for the Quarterly Period Ended September 30, 2000
This document contains a Quarterly Report for the quarterly period ended
September 30, 2000 for Unicom Corporation. In addition, several portions of
this Quarterly Reports contain forward-looking statements; and reference is
made to pages 58-59 for the location and character of such statements.
INDEX
Page
-----
Definitions.............................................................. 3
PART I. FINANCIAL INFORMATION
Unicom Corporation and Subsidiary Companies:
Financial Statements--
Report of Independent Public Accountants............................. 4
Statements of Consolidated Operations for the three months, nine
months and twelve months ended September 30, 2000 and 1999.......... 5
Consolidated Balance Sheets--September 30, 2000 and December 31,
1999................................................................ 6-7
Statements of Consolidated Capitalization--September 30, 2000 and
December 31, 1999 .................................................. 8
Statements of Consolidated Retained Earnings for the three months,
nine months and twelve months ended September 30, 2000 and 1999..... 9
Statements of Consolidated Comprehensive Income for the three months,
nine months and twelve months ended September 30, 2000 and 1999..... 9
Statements of Consolidated Cash Flows for the three months, nine
months and twelve months ended September 30, 2000 and 1999.......... 10
Notes to Financial Statements........................................ 11-41
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 42-59
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 60
2
DEFINITIONS
The following terms are used in this document with the following meanings:
Term Meaning
---------------------- -------------------------------------------------------
1997 Act Illinois Electric Service Customer Choice and Rate
Relief Law of 1997, as amended
AFUDC Allowance for funds used during construction
APB Accounting Principles Board
APX Automated Power Exchange Inc., a California company
CERCLA Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended
City City of Chicago
ComEd Commonwealth Edison Company, an Exelon subsidiary
ComEd Funding ComEd Funding, LLC, a ComEd subsidiary
ComEd Funding Trust ComEd Transitional Funding Trust, a ComEd Funding
subsidiary
Cotter Cotter Corporation, formerly a ComEd subsidiary
CTC Non-bypassable "competitive transition charge"
DOE U.S. Department of Energy
Edison Development Edison Development Canada Inc., a ComEd subsidiary
EME Edison Mission Energy, an Edison International
subsidiary
EPS Earnings/(Loss) per Common Share
ESPP Employee Stock Purchase Plan
FASB Financial Accounting Standards Board
FERC Federal Energy Regulatory Commission
Fossil Plant ComEd's former six coal-fired generating plants, an oil
and gas-fired plant, and nine peaking unit sites
GAAP Generally Accepted Accounting Principles
ICC Illinois Commerce Commission
IDR Illinois Department of Revenue
Indiana Company Commonwealth Edison Company of Indiana, Inc., a ComEd
subsidiary
INPO Institute of Nuclear Power Operations
ISO Independent System Operator
MGP Manufactured gas plant
NEIL Nuclear Electric Insurance Limited
Northwind Chicago Northwind Chicago, LLC, a UT Holdings subsidiary
Northwind Midway Northwind Midway, LLC, a UT Holdings subsidiary
NRC Nuclear Regulatory Commission
O&M Operation and maintenance
PECO PECO Energy Company, a Pennsylvania company
PPAs Purchase Power Agreements
RES Retail Electric Supplier
RTO Regional Transmission Organization
SEC Securities and Exchange Commission
SFAS Statement of Financial Accounting Standards
SPEs Special purpose entities
S&P Standard & Poor's
Trusts ComEd Financing I and ComEd Financing II, ComEd
subsidiaries
Trust Securities ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely ComEd's
subordinated debt securities
Unicom Unicom Corporation
Unicom Energy Services Unicom Energy Services Inc., a Unicom Enterprises
subsidiary
Unicom Enterprises Unicom Enterprises Inc., a Unicom subsidiary
Unicom Investment Unicom Investment, Inc., a Unicom subsidiary
Unicom Power Holdings Unicom Power Holdings Inc., a Unicom Enterprises
subsidiary
Unicom Thermal Unicom Thermal Technologies Inc., a UT Holdings
subsidiary
U.S. EPA U.S. Environmental Protection Agency
UT Holdings UT Holdings Inc., a Unicom Enterprises subsidiary
3
Part I. Financial Information
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Unicom Corporation:
We have audited the accompanying consolidated balance sheets and statements
of consolidated capitalization of UNICOM CORPORATION (an Illinois corporation)
and subsidiary companies as of September 30, 2000 and December 31, 1999, and
the related statements of consolidated operations, retained earnings,
comprehensive income and cash flows for the three-month, nine-month and
twelve-month periods ended September 30, 2000 and 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Unicom
Corporation and subsidiary companies as of September 30, 2000 and December 31,
1999, and the results of their operations and their cash flows for the three-
month, nine-month and twelve-month periods ended September 30, 2000 and 1999,
in conformity with accounting principles generally accepted in the United
States.
Arthur Andersen LLP
Chicago, Illinois
November 3, 2000
4
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED OPERATIONS
The following Statements of Consolidated Operations for the three months,
nine months and twelve months ended September 30, 2000 and 1999 reflect the
results of past operations and are not intended as any representation as to
results of operations for any future period. Future operations will
necessarily be affected by various and diverse factors and developments,
including changes in electric prices, regulation, population, business
activity, asset dispositions, competition, taxes, environmental control,
energy use, fuel, cost of labor, purchased power and other matters, the nature
and effect of which cannot now be determined.
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
---------------------- ---------------------- ----------------------
2000 1999 2000 1999 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
(Thousands Except Per Share Data)
Operating Revenues...... $2,220,289 $2,084,454 $5,685,671 $5,307,972 $7,225,646 $6,871,640
---------- ---------- ---------- ---------- ---------- ----------
Operating Expenses and
Taxes:
Fuel.................. $ 97,207 $ 302,181 $ 294,046 $ 796,654 $ 494,654 $1,049,699
Purchased power....... 735,894 249,375 1,410,881 419,358 1,544,823 520,987
Operation and
maintenance.......... 654,518 581,937 1,749,008 1,787,435 2,387,446 2,369,062
Depreciation and
amortization......... 230,214 202,109 831,859 700,388 974,719 929,731
Taxes (except
income).............. 138,610 144,791 406,357 407,286 507,525 535,247
Income taxes.......... 45,771 181,654 138,073 305,265 192,007 354,131
Investment tax credits
deferred--net ....... (5,499) (7,021) (16,498) (21,063) (21,263) (27,856)
---------- ---------- ---------- ---------- ---------- ----------
$1,896,715 $1,655,026 $4,813,726 $4,395,323 $6,079,911 $5,731,001
---------- ---------- ---------- ---------- ---------- ----------
Operating Income........ $ 323,574 $ 429,428 $ 871,945 $ 912,649 $1,145,735 $1,140,639
---------- ---------- ---------- ---------- ---------- ----------
Other Income and
(Deductions):
Interest on long-term
debt, net of interest
capitalized.......... $ (133,837) $ (134,622) $ (398,058) $ (413,132) $ (529,888) $ (522,526)
Interest on notes
payable.............. (7,538) (5,282) (13,709) (13,003) (19,308) (17,377)
Allowance for funds
used during
construction......... 5,599 6,581 16,610 15,982 22,440 20,121
Income taxes
applicable to
nonoperating
activities........... (23,196) 2,080 (44,614) (1,169) (16,362) (17,418)
Provisions for
dividends and
redemption premiums--
Preferred and
preference stocks of
ComEd............... (534) (1,830) (2,773) (20,170) (6,359) (33,991)
ComEd-obligated
mandatorily
redeemable preferred
securities of
subsidiary trusts
holding solely
ComEd's subordinated
debt securities..... (7,428) (7,428) (22,283) (22,283) (29,710) (29,710)
Miscellaneous--net.... 9,991 (9,175) 102,158 37,492 43,607 67,816
---------- ---------- ---------- ---------- ---------- ----------
$ (156,943) $ (149,676) $ (362,669) $ (416,283) $ (535,580) $ (533,085)
---------- ---------- ---------- ---------- ---------- ----------
Net Income before
Extraordinary Items ... $ 166,631 $ 279,752 $ 509,276 $ 496,366 $ 610,155 $ 607,554
Extraordinary Losses,
less Applicable Income
Taxes.................. (2,967) -- (7,134) (27,579) (7,134) (27,579)
---------- ---------- ---------- ---------- ---------- ----------
Net Income.............. $ 163,664 $ 279,752 $ 502,142 $ 468,787 $ 603,021 $ 579,975
========== ========== ========== ========== ========== ==========
Earnings per common
share before
extraordinary items
Basic................. $ 0.96 $ 1.29 $ 2.82 $ 2.29 $ 3.21 $ 2.80
Diluted............... $ 0.95 $ 1.28 $ 2.80 $ 2.28 $ 3.20 $ 2.79
Extraordinary losses,
less applicable income
taxes (basic and
diluted)............... $ (0.02) -- $ (0.04) $ (0.13) $ (0.04) $ (0.13)
Earnings per common
share--
Basic................. $ 0.94 $ 1.29 $ 2.78 $ 2.16 $ 3.17 $ 2.67
Diluted............... $ 0.93 $ 1.28 $ 2.76 $ 2.15 $ 3.16 $ 2.66
Cash Dividends Declared
per Common Share....... $ 0.40 $ 0.40 $ 1.20 $ 1.20 $ 1.60 $ 1.60
The accompanying Notes to Financial Statements are an integral part of the
above statements.
5
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2000 1999
------ ------------- ------------
(Thousands of Dollars)
Utility Plant:
Plant and equipment, at original cost (includes
construction work in progress of $801 million and
$672 million, respectively)...................... $25,742,682 $25,007,637
Less--Accumulated provision for depreciation...... 14,151,813 13,729,223
----------- -----------
$11,590,869 $11,278,414
Nuclear fuel, at amortized cost................... 845,401 843,724
----------- -----------
$12,436,270 $12,122,138
----------- -----------
Investments and Other Property:
Nuclear decommissioning funds..................... $ 2,662,020 $ 2,546,540
Investment in leases.............................. 395,868 --
Nonutility property--less accumulated provision
for depreciation of $24,894 and $17,345,
respectively..................................... 251,329 304,976
Goodwill.......................................... 78,373 34,955
Subsidiary companies.............................. 17,583 50,417
Other, at cost.................................... 196,358 130,917
----------- -----------
$ 3,601,531 $ 3,067,805
----------- -----------
Current Assets:
Cash and temporary cash investments............... $ 981,940 $ 1,696,336
Cash held for redemption of securities............ 71,622 285,056
Other cash investments............................ 1,231 62
Special deposits.................................. 515 1,845,730
Investment in leases.............................. 1,235,194 --
Receivables--
Customers....................................... 1,300,276 1,224,678
Forward share repurchase contract............... -- 813,046
Income Taxes.................................... 731,707 --
Other........................................... 192,266 181,532
Provisions for uncollectible accounts........... (48,004) (50,814)
Coal and fuel oil, at average cost................ 18,271 15,613
Materials and supplies, at average cost........... 239,929 221,157
Deferred income taxes related to current assets
and liabilities.................................. 71,276 60,056
Prepayments and other............................. 150,742 36,268
----------- -----------
$ 4,946,965 $ 6,328,720
----------- -----------
Deferred Charges and Other Noncurrent Assets:
Regulatory assets................................. $ 1,526,590 $ 1,792,907
Other............................................. 71,279 94,463
----------- -----------
$ 1,597,869 $ 1,887,370
----------- -----------
$22,582,635 $23,406,033
=========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
6
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
CAPITALIZATION AND LIABILITIES 2000 1999
------------------------------ ------------- ------------
(Thousands of Dollars)
Capitalization (see accompanying statements):
Common stock equity............................... $ 3,700,755 $ 5,332,611
Preferred and preference stocks of ComEd--
Without mandatory redemption requirements....... -- 1,790
ComEd-obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
ComEd's subordinated debt securities*............ 350,000 350,000
Long-term debt.................................... 7,133,995 7,129,906
----------- -----------
$11,184,750 $12,814,307
----------- -----------
Current Liabilities:
Notes payable..................................... $ 1,477,990 $ 4,750
Current portion of long-term debt, redeemable
preference stock and capitalized lease obliga-
tions of subsidiary companies.................... 350,474 915,439
Accounts payable.................................. 928,584 582,920
Accrued interest.................................. 136,473 146,718
Accrued taxes..................................... 130,453 1,386,930
Dividends payable................................. 70,406 94,090
Customer deposits................................. 69,823 68,128
Other............................................. 221,779 316,542
----------- -----------
$ 3,385,982 $ 3,515,517
----------- -----------
Deferred Credits and Other Noncurrent Liabilities:
Deferred income taxes............................. $ 3,451,783 $ 2,484,883
Nuclear decommissioning liability for retired
plants........................................... 1,288,000 1,259,700
Accumulated deferred investment tax credits....... 461,762 484,717
Accrued spent nuclear fuel disposal fee and re-
lated interest................................... 797,457 763,427
Obligations under capital leases of subsidiary
companies........................................ -- 161,611
Regulatory liabilities............................ 580,991 596,157
Other............................................. 1,431,910 1,325,714
----------- -----------
$ 8,011,903 $ 7,076,209
----------- -----------
Commitments and Contingent Liabilities (Note 21)
$22,582,635 $23,406,033
=========== ===========
*As described in Note 10 of Notes to Financial Statements, the sole asset of
ComEd Financing I, a subsidiary trust of ComEd, is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. The sole asset of ComEd Financing II, also a subsidiary trust of
ComEd, is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027.
The accompanying Notes to Financial Statements are an integral part of the
above statements.
7
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
September 30, December 31,
2000 1999
------------- ------------
(Thousands of Dollars)
Common Stock Equity:
Common stock, without par value--
Outstanding--219,075,493 shares and 217,817,610
shares, respectively............................. $ 5,002,631 $ 4,971,618
Preference stock expense of ComEd.................. -- (72)
Retained earnings.................................. 657,421 364,345
Accumulated other comprehensive income............. 3,806 6,815
Treasury stock--49,708,406 shares and 264,406
shares, respectively.............................. (1,963,103) (10,095)
----------- -----------
$ 3,700,755 $ 5,332,611
----------- -----------
Preferred and Preference Stocks of ComEd--
Without Mandatory Redemption Requirements:
$1.425 convertible preferred stock, cumulative,
without par value--Outstanding--no shares and
56,291 shares, respectively..................... $ -- $ 1,790
Prior preferred stock, cumulative, $100 par value
per share--
No shares outstanding........................... -- --
----------- -----------
$ -- $ 1,790
----------- -----------
Subject to Mandatory Redemption Requirements:
Preference stock, cumulative, without par value--
Outstanding--No shares and 700,000 shares,
respectively................................... $ -- $ 69,475
Current redemption requirements for preference
stock included
in current liabilities.......................... -- (69,475)
----------- -----------
$ -- $ --
----------- -----------
ComEd-Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely
ComEd's Subordinated Debt Securities................ $ 350,000 $ 350,000
----------- -----------
Long-Term Debt:
First mortgage bonds:
Maturing 2000 through 2004--5.30% to 9 3/8%...... $ 326,000 $ 698,245
Maturing 2005 through 2014--4.40% to 8 3/8%...... 1,299,400 1,299,400
Maturing 2015 through 2023--6.75% to 9 7/8%...... 1,486,950 1,589,443
----------- -----------
$ 3,112,350 $ 3,587,088
Transitional trust notes, due 2001 through 2008--
5.29% to 5.74%.................................... 2,804,541 3,070,000
Sinking fund debentures, due 2001 through 2011--2
7/8% to 4.75%..................................... 26,674 30,866
Pollution control obligations, due 2007 through
2014--4.65% to 5 7/8%............................. 137,700 139,200
Other long-term debt............................... 1,447,201 1,089,347
Current maturities of long-term debt included in
current liabilities............................... (350,474) (737,615)
Unamortized net debt discount and premium.......... (43,997) (48,980)
----------- -----------
$ 7,133,995 $ 7,129,906
----------- -----------
$11,184,750 $12,814,307
----------- -----------
The accompanying Notes to Financial Statements are an integral part of the
above statements.
8
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED RETAINED EARNINGS
Three Months
Ended September Nine Months Ended Twelve Months Ended
30 September 30 September 30
------------------ ------------------ --------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- --------- ---------
(Thousands of Dollars)
Balance at Beginning of
Period................. $561,502 $157,467 $364,345 $143,537 $348,126 $ 117,833
Add--Net income......... 163,664 279,752 502,142 468,787 603,021 579,975
-------- -------- -------- -------- --------- ---------
$725,166 $437,219 $866,487 $612,324 $ 951,147 $ 697,808
-------- -------- -------- -------- --------- ---------
Deduct--
Cash dividends
declared on
common stock....... $ 67,750 $ 86,979 $209,473 $260,760 $ 296,495 $ 347,566
Other capital stock
transactions--net.. (5) 2,114 (407) 3,438 (2,769) 2,116
-------- -------- -------- -------- --------- ---------
$ 67,745 $ 89,093 $209,066 $264,198 $ 293,726 $ 349,682
-------- -------- -------- -------- --------- ---------
Balance at End of Period
(Includes $1,009
million and $702
million of
appropriated retained
earnings for future
dividend payments at
September 30, 2000 and
1999, respectively)... $657,421 $348,126 $657,421 $348,126 $ 657,421 $ 348,126
======== ======== ======== ======== ========= =========
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
-------------------- ------------------- --------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- --------- --------- ---------
(Thousands of Dollars)
Net Income.............. $ 163,664 $ 279,752 $502,142 $468,787 $603,021 $579,975
Other Comprehensive
Income
Unrealized
gains/(losses) on
securities and
foreign currency
translations......... $ (3,221) $ -- $ (2,696) -- $ 9,051 $ --
Income taxes on other
comprehensive income. 20 -- (313) -- (5,245) --
--------- --------- -------- --------- --------- ---------
Other comprehensive $ $ $
income, net of tax... $ (3,201) -- $ (3,009) -- $ 3,806 --
--------- --------- -------- --------- --------- ---------
Comprehensive Income.... $ 160,463 $ 279,752 $499,133 $468,787 $ 606,827 $ 579,975
========= ========= ======== ========= ========= =========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
9
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
--------------------- ------------------------ ------------------------
2000 1999 2000 1999 2000 1999
---------- --------- ----------- ----------- ----------- -----------
(Thousands of Dollars)
Cash Flow from Operating
Activities:
Net income............. $ 163,664 $ 279,752 $ 502,142 $ 468,787 $ 603,021 $ 579,975
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization........ 273,688 210,648 941,010 742,432 1,104,070 976,815
Deferred income taxes
and investment tax
credits--net........ (87,381) (10,983) (171,786) (109,303) (1,511,488) (35,026)
Contribution to
environmental trust. -- -- -- -- (250,000) --
Recovery of coal
reserve regulatory
assets.............. -- 91,642 -- 111,578 178,038 108,078
Change in MGP
remediation
liability........... (2,600) -- (3,800) -- 64,278 --
Loss/(gain) on
forward share
arrangements........ -- 17,514 (113,071) (15,903) (55,370) (15,903)
Provisions/(payments)
for revenue
refunds--net........ -- (2,439) -- (22,297) (371) 306
Equity component of
allowance for funds
used during
construction........ (2,643) (2,243) (7,945) (5,999) (9,735) (7,600)
Provisions/(payments)
for liability for
separation costs--
net................. 19,303 (1,746) 10,248 (11,544) (40,604) 1,029
Net effect on cash
flows of changes in:
Receivables........ (127,965) (2,306) (47,845) 63,988 (267,880) 29,834
Coal and fuel oil.. 1,000 14,753 (141) 4,143 (3,666) 21,052
Materials and
supplies.......... (3,151) (2,829) (14,972) (10,096) (6,275) 8,150
Accounts payable
excluding
separation costs--
net............... 255,105 10,016 306,624 (92,907) 364,228 26,894
Accrued interest
and taxes......... 15,095 3,198 (901,804) 107,785 236,394 (123,605)
Other changes in
certain current
assets and
liabilities....... (29,487) 37,883 19,597 89,881 (29,241) 152,030
Other--net........... 58,435 (85,162) 155,658 49,221 (16,168) 40,340
---------- --------- ----------- ----------- ----------- -----------
$ 533,063 $ 557,698 $ 673,906 $ 1,369,766 $ 359,231 $ 1,762,369
---------- --------- ----------- ----------- ----------- -----------
Cash Flow from Investing
Activities:
Construction
expenditures.......... $ (319,698) $(271,921) $ (914,425) $ (752,614) $(1,285,302) $(1,042,735)
Nuclear fuel
expenditures.......... (123,007) (90,926) (224,486) (204,873) (273,096) (247,458)
Sales of generating
plants................ -- -- -- -- 4,885,720 --
Investment in leases... (17,279) -- (1,631,062) -- (1,631,062) --
Equity component of
allowance for funds
used during
construction.......... 2,643 2,243 7,945 5,999 9,735 7,600
Contributions to
nuclear
decommissioning
funds................. -- -- (39,400) (39,426) (89,919) (96,120)
Other investments and
special deposits...... (3,638) (26,644) 1,694,534 (39,345) (167,120) (47,603)
Plant removal costs--
net................... 11,474 (17,291) (7,486) (49,303) (25,915) (89,464)
---------- --------- ----------- ----------- ----------- -----------
$ (449,505) $(404,539) $(1,114,380) $(1,079,562) $ 1,423,041 $(1,515,780)
---------- --------- ----------- ----------- ----------- -----------
Cash Flow from Financing
Activities:
Issuance of
securities--
Transitional trust
notes................ $ -- $ -- $ -- $ -- $ -- $ 3,382,629
Other long-term debt.. 450,062 98,025 478,153 161,155 518,748 161,357
Capital stock......... 18,465 3,763 31,013 8,175 43,859 13,912
Retirement, redemption
and repurchase of
securities--
Transitional trust
notes................ (85,459) (97,045) (265,459) (237,045) (358,413) (237,045)
Other long-term debt.. (231,601) (28,017) (606,372) (1,089,027) (948,893) (1,179,228)
Common stock.......... (374,433) (2,390) (959,758) (32,446) (683,649) (39,246)
Preferred stock....... (2,174) (72,644) (72,318) (606,852) (72,358) (610,423)
Common stock forward
repurchase
arrangements.......... -- -- (67,133) (662,113) (262,038) (662,113)
Cash dividends paid on
common stock.......... (70,657) (86,915) (228,737) (260,585) (315,716) (347,428)
Nuclear fuel lease
principal payments.... (235,365) (55,610) (269,985) (157,546) (367,841) (208,820)
Increase/(decrease) in
short-term
borrowings............ 797,624 36,900 1,473,240 155,787 1,029,240 40,104
---------- --------- ----------- ----------- ----------- -----------
$ 266,462 $(203,933) $ (487,356) $(2,720,497) $(1,417,061) $ 313,699
---------- --------- ----------- ----------- ----------- -----------
Change in Net Cash
Balance................ $ 350,020 $ (50,774) $ (927,830) $(2,430,293) $ 365,211 $ 560,288
Cash, Temporary Cash
Investments and Cash
Held for Redemption of
Securities:
Balance at Beginning
of Period........... 703,542 739,125 1,981,392 3,118,644 688,351 128,063
---------- --------- ----------- ----------- ----------- -----------
Balance at End of
Period.............. $1,053,562 $ 688,351 $ 1,053,562 $ 688,351 $ 1,053,562 $ 688,351
========== ========= =========== =========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of the
above statements.
10
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS
(1) Summary of Significant Accounting Policies.
Corporate Structure and Basis of Presentation. Unicom is the parent holding
company of ComEd and Unicom Enterprises. ComEd, a regulated electric utility,
is the principal subsidiary of Unicom. Unicom Enterprises is an unregulated
subsidiary of Unicom and is engaged, through its subsidiaries, in energy
service activities.
The consolidated financial statements include the accounts of Unicom, ComEd,
Indiana Company, Edison Development, the Trusts, ComEd Funding, ComEd Funding
Trust and Unicom's unregulated subsidiaries. All significant intercompany
transactions have been eliminated. Although the accounts of ComEd Funding,
ComEd Funding Trust and the subsidiaries of Unicom Investment, which are SPEs,
are included in the consolidated financial statements, as required by GAAP,
ComEd Funding, ComEd Funding Trust and the subsidiaries of Unicom Investment
are legally separated from Unicom, ComEd and Unicom Investment. The assets of
the SPEs are not available to creditors of Unicom, ComEd or Unicom Investment
and the transitional property and investments held by the SPEs are not assets
of Unicom, ComEd or Unicom Investment.
See Note 2 for information on Unicom's merger with PECO.
Use of Estimates. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Due to the transition to a new
customer information and billing system, a larger portion of customer revenues
and net receivables were based on estimates for the period July 1998 through
November 1999 than in previous and subsequent periods.
Regulation. ComEd is subject to regulation as to accounting and ratemaking
policies and practices by the ICC and FERC. ComEd's accounting policies and
the accompanying consolidated financial statements conform to GAAP applicable
to rate-regulated enterprises for the non-generation portion of its business,
including the effects of the ratemaking process in accordance with SFAS
No. 71, Accounting for the Effects of Certain Types of Regulation. Such
effects on the non-generation portion of its business concern mainly the time
at which various items enter into the determination of operating results in
order to follow the principle of matching costs with the applicable revenues
collected from or returned to customers through future rates.
ComEd's investment in generation-related net utility plant, not subject to
cost-based rate regulation, including construction work in progress and
nuclear fuel, and excluding the decommissioning costs included in the
accumulated provision for depreciation was $7.7 billion and $7.8 billion as of
September 30, 2000 and December 31, 1999, respectively.
11
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Regulatory Assets and Liabilities. Regulatory assets are incurred costs
which have been deferred and are amortized for ratemaking and accounting
purposes. Regulatory liabilities represent amounts to be settled with
customers through future rates. Regulatory assets and liabilities reflected on
the Consolidated Balance Sheets at September 30, 2000 and December 31, 1999
were as follows:
September 30, December 31,
2000 1999
------------- ------------
(Thousands of Dollars)
Regulatory assets:
Impaired production plant(1)....................... $ 103,659 $ 366,221
Deferred income taxes (2).......................... 701,714 688,946
Nuclear decommissioning costs--Dresden Unit 1...... 189,506 202,308
Nuclear decommissioning costs--Zion Units 1 and 2.. 495,811 496,638
Unamortized loss on reacquired debt (3)............ 35,900 38,794
---------- ----------
$1,526,590 $1,792,907
========== ==========
Regulatory liabilities:
Deferred income taxes (2).......................... $ 580,991 $ 596,157
========== ==========
- --------
(1) Expected to be substantially recovered through regulated cash flow by the
end of 2000.
(2) Recorded in compliance with SFAS No. 109, Accounting for Income Taxes, for
non-generation related temporary differences.
(3) Amortized over the remaining lives of the non-generation related long-term
debt issued to finance the reacquisition. See "Loss on Reacquired Debt"
below for additional information.
The regulatory assets for Dresden Unit 1 and Zion Units 1 and 2 represent
unrecovered nuclear decommissioning costs, which are expected to be recovered
over the periods 2000-2011 and 2000-2013, respectively, through future rate
recoveries and related trust fund earnings. See "Depreciation, Amortization of
Regulatory Assets and Liabilities and Decommissioning" below for additional
information.
Depreciation, Amortization of Regulatory Assets and Liabilities, and
Decommissioning. Depreciation, amortization of regulatory assets and
liabilities, and decommissioning for the three months, nine months and twelve
months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------- ----------------- -------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Depreciation expense.... $ 171,820 $ 180,598 $506,432 $538,623 $ 594,046 $ 714,518
Amortization of
regulatory assets and
liabilities--net....... 37,439 556 262,562 98,900 296,853 131,393
--------- --------- -------- -------- --------- ---------
$ 209,259 $ 181,154 $768,994 $637,523 $ 890,899 $ 845,911
Decommissioning expense. 20,955 20,955 62,865 62,865 83,820 83,820
--------- --------- -------- -------- --------- ---------
$ 230,214 $ 202,109 $831,859 $700,388 $ 974,719 $ 929,731
========= ========= ======== ======== ========= =========
The regulatory asset amortization recorded in the recent three, nine and
twelve month periods represent amounts calculated in accordance with the
earnings cap provisions of the 1997 Act.
Consistent with the provisions of the 1997 Act, the (pre-tax) gain on the
December 1999 sale of Fossil Plant assets of $2.587 billion resulted in a
regulatory liability, which was used to recover
12
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
regulatory assets. Therefore, the gain on the sale, excluding $43 million of
amortization of investment tax credits, was recorded as a regulatory liability
in the amount of $2.544 billion and amortized in the fourth quarter of 1999.
The amortization of the regulatory liability and additional regulatory asset
amortization of $2.456 billion are reflected in depreciation and amortization
expense on Unicom's Statements of Consolidated Operations and resulted in a
net reduction to depreciation and amortization expense of $88 million in the
fourth quarter of 1999.
See Note 3 for additional information regarding amortization of regulatory
assets with respect to limits on ComEd's earnings due to statutory sharing
provisions. See Note 4 for additional information regarding the fossil plant
sale.
Provisions for depreciation, including nuclear plant, were at average annual
rates of average depreciable utility plant and equipment for the three months,
nine months and twelve months ended September 30, 2000 and 1999 as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------ ----------------- -------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- --------- ---------
Average annual
depreciation rates..... 2.70% 2.65% 2.70% 2.65% 2.69% 2.67%
Nuclear plant decommissioning costs generally are accrued over the current
NRC license lives of the related nuclear generating units. The accrual is
based on an annual levelized cost of the unrecovered portion of estimated
decommissioning costs, which are escalated for expected inflation to the
expected time of decommissioning and are net of expected earnings on the trust
funds. Dismantling is expected to occur relatively soon after the end of the
current NRC license life of each generating station currently operating. The
accrual for decommissioning is based on the prompt removal method authorized
by NRC guidelines. ComEd's ten operating units have remaining current NRC
license lives ranging from 9 to 28 years. ComEd's Zion Station and Dresden
Unit 1 are retired and are expected to be dismantled beginning in the years
2014 and 2011, respectively, which is consistent with the regulatory treatment
for recovery of the related decommissioning costs.
Based on ComEd's most recent study, decommissioning costs are estimated to
be $5.6 billion in current-year (2000) dollars, including a contingency
allowance. These expenditures are expected to occur primarily during the
period from 2010 through 2034. All such costs are expected to be funded by the
external decommissioning trusts, which ComEd established in compliance with
Illinois law and into which ComEd has been making annual contributions. Future
decommissioning cost estimates may be significantly affected by the adoption
of, or changes to NRC regulations, as well as changes in the assumptions used
in making such estimates, including changes in technology, available
alternatives for the disposal of nuclear waste and inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider to its tariffs. The rider allows annual adjustments
to decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. The ICC has approved ComEd's
current funding plan, which provides for annual contributions of current
accruals and ratable contributions of past accruals over the remaining current
NRC license lives of the nuclear plants.
ComEd is undertaking steps to transfer its nuclear generating assets,
including the decommissioning trust funds, to a generation and power marketing
subsidiary of Exelon ("Genco"), following the merger with PECO. On August 3,
2000 the NRC approved the request of ComEd and PECO to transfer licenses for
both companies' nuclear plants from ComEd and PECO to Genco.
13
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
As part of the transfer of the nuclear generating stations, Genco is to
assume responsibility for the decommissioning of those stations, including
Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue
to collect decommissioning-related charges from its customers. In May 2000,
ComEd filed a petition with the ICC seeking approval to revise its existing
decommissioning rider to its rates. Under the proposed revision, ComEd would
collect approximately $121 million annually for a period of six years, after
which the decommissioning rider and collection of decommissioning funds would
end. On October 25, 2000, an ICC hearing examiner issued a proposed order
denying ComEd's petition on the basis that existing law does not allow the ICC
to authorize ComEd to continue to collect funds for decommissioning nuclear
generating plants that it no longer owns. ComEd believes that the proposed
order is wrong as a matter of law and that the ICC has the statutory authority
to grant ComEd's petition. The ICC is not bound by the proposed order and may
accept or reject it, in whole or in part, in preparing its final order in the
proceedings. Responses from the parties to the proceedings regarding the
proposed order are due in early November and a final order is expected before
year-end. ComEd is evaluating the effect of the proposed order on the proposed
structure of the Genco transaction. The transfer of the nuclear assets,
including the decommissioning trust funds, are subject to satisfactory
resolution of significant regulatory and tax issues. Although ComEd cannot
currently determine whether an alternative funding structure will ultimately
be approved and implemented, such a structure could increase the
decommissioning cost recovery risk. See Note 2 for additional information on
the merger of Unicom and PECO.
For the ten operating nuclear units, decommissioning cost accruals are
recorded as portions of depreciation expense and accumulated provision for
depreciation on the Statements of Consolidated Operations and the Consolidated
Balance Sheets, respectively, as such costs are recovered through rates. As of
September 30, 2000, the total decommissioning costs included in the
accumulated provision for depreciation were $2,197 million.
For ComEd's retired nuclear units, the total estimated liability for nuclear
decommissioning in current-year (2000) dollars is recorded as a noncurrent
liability. The unrecovered portion of the liability is recorded as a
regulatory asset. The nuclear decommissioning liability for retired plants as
of September 30, 2000 was as follows:
Zion
Dresden Units
Unit 1 1 and 2 Total
-------- -------- ----------
(Thousands of Dollars)
Amounts recovered through rates and investment
fund earnings.................................... $124,394 $478,289 $ 602,683
Unrecovered portion of the liability.............. 189,506 495,811 685,317
-------- -------- ----------
Nuclear decommissioning liability for retired
plants.......................................... $313,900 $974,100 $1,288,000
======== ======== ==========
Under Illinois law, decommissioning cost collections are required to be
deposited into external trusts. Consequently, such collections do not add to
the cash flows available for general corporate purposes. The fair value of
funds accumulated in the external trusts at September 30, 2000 was $2,662
million, which includes pre-tax unrealized appreciation of $702 million. The
earnings on the external trusts for operating plants accumulate in the fund
balance and accumulated provision for depreciation. Nuclear decommissioning
funding as of September 30, 2000 was as follows:
(Thousands of Dollars)
Amounts recovered through rates and investment fund
earnings for operating plants (included in the
accumulated provision for depreciation)................ $2,196,811
Amounts recovered through rates and investment fund
earnings for retired plants............................ 602,683
Less past accruals not yet contributed to the trusts.... 137,474
----------
Fair value of external trust funds..................... $2,662,020
==========
14
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
In February 2000, the FASB issued an exposure draft addressing the
accounting for asset removal costs, including those relating to nuclear
decommissioning. The exposure draft would require companies to recognize the
entire decommissioning liability on the balance sheet when the liability is
incurred very early in the operating life of the generating station, rather
than ratably over the operating life of the station as is the current industry
accounting practice. The cost basis of the related nuclear power plant would
be increased by a corresponding amount at the time the liability is recorded
and depreciated over the operating life. Although over the life of the
stations total decommissioning provisions would approximate the total amount
recognized over the life of the stations under current electric utility
accounting practices, amounts for interim years could increase or decrease
from currently expected decommissioning provisions. However, ComEd does not
believe such changes will adversely impact results of operations due to the
ability to recover decommissioning costs through rates. The exposure draft is
proposed to be effective for financial statements issued for fiscal years
beginning after June 15, 2001. A final statement is expected to be issued
during the first quarter of 2001.
Customer Receivables and Revenues. ComEd is engaged principally in the
production, purchase, transmission, distribution and sale of electricity to a
diverse base of residential, commercial, industrial and wholesale customers.
ComEd's electric service territory has an area of approximately 11,300 square
miles and an estimated population of approximately eight million as of
September 30, 2000. It includes the City, an area of about 225 square miles
with an estimated population of approximately three million from which ComEd
derived approximately 30 percent of its ultimate consumer revenues in 1999.
ComEd had approximately 3.5 million electric customers at September 30, 2000.
Revenues are recognized as electric and delivery services are provided to
customers.
As a result of the implementation of a new customer billing and information
system in July 1998, billing and collection delays temporarily increased
accounts receivable from customers. In December 1998 and June 1999, ComEd
recorded increased provisions for uncollectible accounts to recognize the
estimated portion of the receivables that are not expected to be recoverable.
Such provisions increased O&M expenses by $35 million in the twelve months
ended September 30, 1999, compared to normally expected levels. Receivables
from customers include $53 million and $103 million as of September 30, 2000
and December 31, 1999, respectively, in estimated unbilled revenue for service
that has been provided to customers, but for which bill issuance was delayed
beyond the normal date of issuance. Receivables from customers as of September
30, 2000 and December 31, 1999 also include $321 million and $295 million,
respectively, for estimated unbilled revenues for electric service that has
been provided to customers subsequent to the normal billing date and prior to
the end of the reporting period. See "Use of Estimates" above for additional
information regarding ComEd's revenues and net receivables.
See Note 3 for additional information.
Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on
the quantity of heat produced using the unit of production method. As
authorized by the ICC, provisions for spent nuclear fuel disposal costs have
been recorded at a level required to recover the fee payable on the current
nuclear-generated and sold electricity and the current interest accrual on the
one-time fee payable to the DOE for nuclear generation prior to April 7, 1983.
The one-time fee and interest thereon have been recovered and the current fee
and interest on the one-time fee are presently being recovered through base
rates. See Note 13 for additional information concerning the disposal of spent
nuclear fuel, one-time fee and interest accrual on the one-time fee. Nuclear
fuel expenses, including leased fuel costs
15
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
and provisions for spent nuclear fuel disposal costs, were $97 million and
$107 million for the three months ended September 30, 2000 and 1999,
respectively, $294 million and $288 million for the nine months ended
September 30, 2000 and 1999, respectively, and $386 million and $372 million
for the twelve months ended September 30, 2000 and 1999, respectively.
Income Taxes. Deferred income taxes are provided for income and expense
items recognized for financial accounting purposes in periods that differ from
those for income tax purposes. Income taxes deferred in prior years are
charged or credited to income as the book/tax temporary differences reverse.
Prior years' deferred investment tax credits are amortized through credits to
income generally over the lives of the related property. Income tax credits
resulting from interest charges applicable to nonoperating activities,
principally construction, are classified as other income.
AFUDC and Interest Capitalized. In accordance with the uniform systems of
accounts prescribed by regulatory authorities, ComEd capitalizes AFUDC,
compounded semiannually, which represents the estimated cost of funds used to
finance its construction program for the non-generation portion of its
business. The equity component of AFUDC is recorded on an after-tax basis and
the borrowed funds component of AFUDC is recorded on a pre-tax basis. The
average annual capitalization rates for AFUDC were 8.29% and 7.87% for the
three months ended September 30, 2000 and 1999, respectively, 8.29% and 7.85%
for the nine months ended September 30, 2000 and 1999, respectively, and 8.14%
and 7.92% for the twelve months ended September 30, 2000 and 1999,
respectively. In accordance with SFAS No. 34, Capitalization of Interest Cost,
ComEd capitalized $2 million and $4 million for the three months ended
September 30, 2000 and 1999, respectively, $4 million and $16 million for the
nine months ended September 30, 2000 and 1999, respectively, and $10 million
and $31 million for the twelve months ended September 30, 2000 and 1999,
respectively, in interest costs on its generation-related construction work in
progress and nuclear fuel in process. AFUDC and interest capitalized do not
contribute to the current cash flow of Unicom or ComEd.
Interest. Total interest costs incurred on debt, leases and other
obligations were $160 million and $160 million for the three months ended
September 30, 2000 and 1999, respectively, $473 million and $484 million to
the nine months ended September 30, 2000 and 1999, respectively, and $631
million and $611 million for the twelve months ended September 30, 2000 and
1999, respectively.
Debt Discount, Premium and Expense. Discount, premium and expense on long-
term debt of ComEd are being amortized over the lives of the respective
issues.
Loss on Reacquired Debt. Consistent with regulatory treatment, the net loss
from ComEd's reacquisition, in connection with the refinancing of first
mortgage bonds, sinking fund debentures and pollution control obligations
prior to their scheduled maturity dates, is deferred and amortized over the
lives of the long-term debt issued to finance the reacquisition for non-
generation related financings. See "Regulatory Assets and Liabilities" above
and Note 3 for additional information.
Stock Option Awards/Employee Stock Purchase Plan. Unicom has elected to
adopt SFAS No. 123, Accounting for Stock-Based Compensation, for disclosure
purposes only. Unicom accounts for its stock option awards and ESPP under APB
Opinion No. 25, Accounting for Stock Issued to Employees. See Note 7 for
additional information.
16
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Average Common Shares Outstanding. The number of average outstanding common
shares used to compute basic and diluted EPS for the three months, nine months
and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------- ----------------- -------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- --------- ---------
(Thousands of Shares)
Average Number of Common
Shares Outstanding:
Average Number of
Common Shares--Basic.. 174,003 217,375 180,739 217,231 189,935 217,208
Potentially Dilutive
Common Shares--
Treasury Method:
Stock Options........ 1,595 801 1,025 777 899 777
Other Convertible
Securities.......... 86 89 86 89 86 89
--------- --------- -------- -------- --------- ---------
Average Number of Common
Shares--Diluted........ 175,684 218,265 181,850 218,097 190,920 218,074
========= ========= ======== ======== ========= =========
Energy Risk Management Contracts. In the normal course of business, ComEd
utilizes contracts for the forward sale and purchase of energy to manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap arrangements to limit
the market price risk associated with the forward commodity contracts. As
ComEd does not currently utilize financial or commodity instruments for
trading or speculative purposes, any gains or losses on forward commodity
contracts are recognized when the underlying transactions affect earnings.
Revenues and expenses associated with market price risk management contracts
are amortized over the terms of such contracts.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards requiring that every derivative instrument, including certain
derivative instruments embedded in other contracts, be recorded on the
Consolidated Balance Sheets as either an asset or liability measured at its
fair value. In June 2000, FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, as an amendment of SFAS
No. 133. SFAS No. 133, as amended, requires that changes in the derivative's
fair value be recognized currently in earnings, unless specific hedge
accounting criteria are met. The accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item on
the Statements of Consolidated Operations, and requires companies to formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
The effective date of SFAS No. 133, as amended, has been delayed for one
year, to fiscal years beginning after June 15, 2000. SFAS No. 133. SFAS No.
133, as amended, must be applied to (i) derivative instruments and
(ii) certain derivative instruments embedded in hybrid contracts that were
issued, acquired, or substantively modified after January 1, 1998 or January
1, 1999 at the Company's election.
Unicom and ComEd will adopt SFAS No. 133 on January 1, 2001, and are in the
final process of reviewing their various contracts to determine which
contracts need to be reflected as derivatives under the standard and accounted
for at fair value. Among the contracts that are expected to be subject to the
17
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
fair value requirements are contracts related to electricity and gas purchases
and sales. Unicom and ComEd have not fully quantified the effects on their
financial statements of adopting SFAS No. 133 on January 1, 2001. The ultimate
impact will depend upon market prices, at the time of adoption, for
electricity and gas. Adoption of SFAS No. 133 in 2001 will result in increased
volatility in earnings.
Reclassifications. Certain prior year amounts have been reclassified to
conform with current period presentation. These reclassifications had no
effect on operating results.
Cash Held for Redemption of Securities. As of September 30, 2000, the cash
held for redemption of securities reported on the Consolidated Balance Sheets
includes $72 million of escrowed cash and pending instrument funding charges
collected from ComEd customers to be applied to the principal and interest
payment on the transitional trust notes. See Note 3 for additional
information.
Investment in Leases. In June 2000, Unicom Investment entered into a like-
kind exchange transaction utilizing proceeds from the December 1999 sale of
fossil generating stations. Under the transaction, Unicom Investment invested
approximately $1.6 billion, previously classified as special deposits, in
passive generating station leases with two separate entities. The generating
stations were leased back to such entities as part of the transaction. For
financial accounting purposes, the investments are accounted for as direct
financing lease investments. Under the terms of the lease agreements, Unicom
Investment will receive prepayments of its scheduled lease payments of about
$1.24 billion in the fourth quarter of 2000 which will reduce the outstanding
lease investment at that time.
The components of the net investment in the direct financing leases as of
September 30, 2000 are as follows:
(Thousands
of
Dollars)
----------
Total minimum lease payments.................................. $2,727,233
Less: Unearned income......................................... 1,096,172
----------
$1,631,062
==========
Goodwill. Goodwill represents the excess of the purchase consideration over
the fair value of the net assets of the companies or natural gas service
contracts acquired by subsidiaries of Unicom Enterprises. Goodwill arising
from such acquisitions is generally being amortized on a straight-line basis
over 40 years for goodwill arising from the acquisition of established
mechanical services companies and over 10 to 15 years for the goodwill arising
from the acquisition of performance contracting companies and natural gas
service contracts.
Statements of Consolidated Cash Flows. For purposes of the Statements of
Consolidated Cash Flows, temporary cash investments, generally investments
maturing within three months at the time of purchase, and cash held for
redemption of securities are considered to be cash equivalents. Supplemental
cash flow information for the three months, nine months and twelve months
ended September 30, 2000 and 1999 was as follows:
18
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
--------- --------- ---------- -------- ---------- --------
(Thousands of Dollars)
Supplemental Cash Flow
Information:
Cash paid during the
period for:
Interest (net of
amount capitalized). $143,101 $158,363 $ 411,261 $485,881 $ 532,195 $572,934
Income taxes (net of
refunds)............ $ 28,080 $140,915 $1,114,302 $225,022 $1,344,460 $484,873
Supplemental Schedule of
Non-Cash Investing and
Financing Activities:
Capital lease
obligations incurred
by subsidiary
companies............. $ -- $ 189 $ 34 $ 1,625 $ 154 $ 3,062
(2) Merger Agreement. On October 19, 2000, Unicom and PECO received approval
from the Securities and Exchange Commission under the Public Utilities Holding
Company Act of 1935, the last regulatory approval, to complete their merger to
form Exelon Corporation. The companies completed the merger on October 20,
2000 and began trading as Exelon Corporation (NYSE: EXC) on October 23, 2000.
Upon completion of the merger, PECO and ComEd became the principal utility
subsidiaries of Exelon. This result was achieved by a mandatory exchange of
the outstanding common stock of PECO for common stock of Exelon, and a
subsequent merger of Unicom with and into Exelon wherein holders of Unicom
common stock received 0.875 shares of Exelon common stock plus $3.00 in cash
for each of their shares of Unicom common stock. The merger transaction will
be accounted for as a purchase of Unicom by PECO.
Consistent with Unicom's $1 billion share repurchase commitment in the
merger agreement with PECO, Unicom has completed the repurchase of 24 million
shares of its common stock. The shares were repurchased from the open market
over the recent ten months pursuant to agreements with financial institutions.
Approximately $153 million of these share repurchases were funded with
proceeds from the 1998 issuance of transitional trust notes. The remaining
share repurchases were funded from available funds, including funds ultimately
resulting from the fossil plant sale. These share repurchases are in addition
to 26.3 million shares of Unicom common stock that Unicom repurchased in
January 2000 upon settlement of certain forward purchase contracts. See Notes
6 and 23 for additional information.
ComEd and PECO are undertaking steps to transfer their generating assets and
wholesale power marketing operations to subsidiaries following the
consummation of the merger. Subsequent to those transfers, these subsidiaries
will be transferred to Exelon and ultimately will be combined into a power
generation and marketing company, which will be a direct subsidiary of Exelon
("Genco"). In ComEd's case, the transfer will include its Braidwood, Byron,
Dresden, LaSalle and Quad Cities nuclear generating stations representing an
aggregate generating capability of 9,566 megawatts, its Zion station, its
rights and obligations under various power purchase agreements, the assets
constituting its nuclear decommissioning trusts and its wholesale power
marketing business. Genco will enter into a power purchase agreement with
ComEd in which Genco will undertake to supply ComEd's full requirements for
electric energy through 2004 and all of ComEd's requirements up to the
available capacity of the nuclear generating stations in 2005 and 2006. On
August 3, the NRC approved the request of ComEd and PECO to transfer licenses
for both companies' nuclear plants from ComEd and PECO to Genco.
19
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
As part of the transfer of the nuclear generating stations, Genco is to
assume responsibility for the decommissioning of those stations, including
Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue
to collect decommissioning-related charges from its customers. In May 2000,
ComEd filed a petition with the ICC seeking approval to revise its existing
decommissioning rider to its rates. Under the proposed revision, ComEd would
collect approximately $121 million annually for a period of six years, after
which the decommissioning rider and collection of decommissioning funds would
end. On October 25, 2000, an ICC hearing examiner issued a proposed order
denying ComEd's petition on the basis that existing law does not allow the ICC
to authorize ComEd to continue to collect funds for decommissioning nuclear
generating plants that it no longer owns. ComEd believes that the proposed
order is wrong as a matter of law and that the ICC has the statutory authority
to grant ComEd's petition. The ICC is not bound by the proposed order and may
accept or reject it, in whole or in part, in preparing its final order in the
proceedings. Responses from the parties to the proceedings regarding the
proposed order are due in early November and a final order is expected before
year-end. ComEd is evaluating the effect of the proposed order on the proposed
structure of the Genco transaction. The transfer of the nuclear assets,
including the decommissioning trust funds, are subject to satisfactory
resolution of significant regulatory and tax issues.
(3) Accounting Effects Related to the 1997 Act. In December 1997, the
Governor of Illinois signed into law the 1997 Act, which established a phased
process to introduce competition into the electric industry in Illinois under
a less regulated structure. The 1997 Act was amended in June 1999.
As a result of the 1997 Act and FERC rules, prices for the supply of
electric energy are expected to transition from cost-based, regulated rates to
rates determined by competitive market forces. Accordingly, the 1997 Act
provides for, among other things, gradual customer access to other electric
suppliers or a power purchase option which allows the purchase of electric
energy from ComEd at market based prices, and the collection of a CTC from
customers who choose to purchase electric energy from a RES or elect the power
purchase option during a transition period that extends through 2006.
Effective October 1, 1999, the CTC was established in accordance with a
formula defined in the 1997 Act. The CTC, which is applied on a cents per
kilowatthour basis, considers the revenue which would have been collected from
a customer under tariffed rates, reduced by the revenue the utility will
receive for providing delivery services to the customer, the market price for
electricity and a defined mitigation factor, which represents the utility's
opportunity to develop new revenue sources and achieve cost savings. The CTC
allows ComEd to recover some of its costs which might otherwise be
unrecoverable under market-based rates. Nonetheless, ComEd will need to take
steps to address the portion of such costs which are not recoverable through
the CTC. Such steps may include cost control efforts, developing new sources
of revenue and asset dispositions. See Note 4 for additional information.
As of June 1, 2000, more than 62,000 non-residential customers are eligible
to choose a new electric supplier or elect the purchase power option. As of
September 30, 2000, over 7,800 non-residential customers, representing
approximately 18 percent of ComEd's retail kilowatthour sales for the twelve
months prior to the introduction of open access, elected to receive their
electric energy from a RES or chose the purchase power option. The impact of
customer choice on results of operations will depend on various factors,
including the extent to which customers elect to receive energy from a RES or
the purchased power option, the development of a competitive market, the
market price for energy, the extent to which ComEd develops new sources of
revenue and the results of cost control efforts. Because of the inherent
uncertainty in these factors ComEd is unable to predict the long term impact
of customer choice on results of operations. However, ComEd does not expect
customer choice to have a material effect in the near term as a result of the
collection of CTCs as provided by the 1997 Act.
20
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Utilities are required to continue to offer delivery services, including the
transmission and distribution of electric energy, such that customers who
select a RES can receive electric energy from that supplier using existing
transmission and distribution facilities. Such services will continue to be
offered under cost-based, regulated rates. The ICC issued orders in August and
September 1999 approving, with modifications, ComEd's delivery service
tariffs.
The 1997 Act also provides for a 15% residential base rate reduction which
became effective August 1, 1998 and an additional 5% residential base rate
reduction in October 2001. ComEd's operating revenues were reduced by
approximately $170 million in 1998 due to the 15% residential base rate
reduction. The 15% rate reduction further reduced ComEd's operating revenues
by approximately $226 million in 1999, compared to 1998 rate levels.
Notwithstanding the rate reductions and subject to certain earnings tests, a
rate freeze will generally be in effect until at least January 1, 2005. During
this period, utilities may reorganize, sell or assign assets, retire or remove
plants from service, and accelerate depreciation or amortization of assets
with limited ICC regulatory review. A utility may request a rate increase
during the rate freeze period only when necessary to ensure the utility's
financial viability. Under the earnings provision of the 1997 Act, if the
earned return on common equity of a utility during this period exceeds an
established threshold, one-half of the excess earnings must be refunded to
customers. The threshold rate of return on common equity is based on the 30-
Year Treasury Bond rate, plus 5.5% in the years 1998 and 1999, and plus 8.5%
in the years 2000 through 2004. The utility's earned return on common equity
and the threshold return on common equity for ComEd are each calculated on a
two-year average basis. The earnings sharing provision is applicable only to
ComEd's earnings. Consistent with the provisions of the 1997 Act, increased
amortization of regulatory assets may be recorded, thereby reducing the earned
return on common equity, if earnings otherwise would have exceeded the maximum
allowable rate of return. The potential for earnings sharing or increased
amortization of regulatory assets could limit earnings in future periods.
ComEd's returns on average common equity for the years 1999 and 1998 were
11.56% and 10.86%, respectively. The average return of 11.21% for the two year
period ended December 31, 1999 equaled the threshold return for that period
under the earnings provisions of the 1997 Act. ComEd does not currently expect
to trigger the earnings sharing provisions of the 1997 Act in the years 2000
through 2004.
The 1997 Act also allows a portion of ComEd's future revenues to be
segregated and used to support the issuance of securities by ComEd or a SPE.
The proceeds, net of transaction costs, from such security issuances must be
used to refinance outstanding debt or equity or for certain other limited
purposes. In December 1998, ComEd initiated the issuance of $3.4 billion of
transitional trust notes through its SPEs, ComEd Funding and ComEd Funding
Trust. The proceeds from the transitional trust notes, net of transaction
costs, were used to redeem long-term debt and preference stock and reduce
ComEd's outstanding short-term debt, as required. Unicom has also repurchased
its common stock using proceeds it received from ComEd's repurchase of its
common stock held by Unicom. The balance of the proceeds were used for the
payment of fees and other debt issuance costs and a collateral requirement
related to the transitional trust notes.
(4) Fossil Plant Sale. In December 1999, ComEd completed the sale of its
fossil generating assets to EME for a cash purchase price of $4.8 billion. The
fossil generating assets represent an aggregate generating capacity of
approximately 9,772 megawatts.
Just prior to the consummation of the fossil plant sale, ComEd transferred
these assets to an affiliate, Unicom Investment. In consideration for the
transferred assets, Unicom Investment paid ComEd consideration totalling
approximately $4.8 billion in the form of a demand note in the amount
21
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
of approximately $2.4 billion and an interest-bearing note with a maturity of
twelve years. Unicom Investment immediately sold the fossil plant assets to
EME, in consideration of which Unicom Investment received approximately $4.8
billion in cash from EME. Immediately after its receipt of the cash payment
from EME, Unicom Investment paid the $2.4 billion aggregate principal due to
ComEd under the demand note. Unicom Investment will use the remainder of the
cash received from EME to fund other business opportunities, including the
share repurchases. Of the cash received by ComEd, $1.5 billion has been used
to pay the costs and taxes associated with the fossil plant sale, including
ComEd's contribution of $250 million of the proceeds to an environmental trust
as required by the 1997 Act. The remainder of the demand note proceeds will be
available to ComEd to fund, among other things, transmission and distribution
projects, nuclear generation station projects, and environmental and other
initiatives. See Note 1, under "Investment in Leases," for additional
information.
The sale produced an after-tax gain of approximately $1.6 billion, after
recognizing commitments associated with certain coal contracts ($350 million),
recognizing employee-related costs ($112 million) and contributing to the
environmental trust. The coal contract costs include the amortization of the
remaining balance of ComEd's regulatory asset for unrecovered coal reserves of
$178 million and the recognition of $172 million of settlement payments
related to the above-market portion of coal purchase commitments ComEd
assigned to EME at market value upon completion of the fossil plant sale. The
severance costs included pension and post-retirement welfare benefit
curtailment and special termination benefit costs of $51 million and
transition, separation and retention payments of $61 million. A total of 1,730
fossil station employee positions were eliminated upon completion of the
fossil plant sale on December 15, 1999. The employees whose positions were
eliminated have been terminated. Consistent with the provisions of the 1997
Act, the (pre-tax) gain on the sale of $2.587 billion resulted in a regulatory
liability, which was used to recover regulatory assets. Therefore, the gain on
the sale, excluding $43 million of amortization of investment tax credits, was
recorded as a regulatory liability in the amount of $2.544 billion and
amortized in the fourth quarter of 1999. The amortization of the regulatory
liability and additional regulatory asset amortization of $2.456 billion are
reflected in depreciation and amortization expense on Unicom's Statement of
Consolidated Operations. See Note 1, under "Regulatory Assets and
Liabilities," for additional information.
(5) Authorized Shares, Voting Rights and Stock Rights of Capital Stock. At
September 30, 2000, Unicom's authorized shares consisted of 400,000,000 shares
of common stock. The authorized shares of ComEd preferred and preference
stocks at September 30, 2000 were: preference stock--6,810,451 shares and
prior preferred stock--850,000 shares. The preference and prior preferred
stocks are issuable in series and may be issued with or without mandatory
redemption requirements.
Pursuant to a plan adopted by the Unicom Board of Directors on February 2,
1998, each share of Unicom's common stock carries the right (referred to
herein as a "Right") to purchase one-thousandth of one share of Unicom's
common stock at a purchase price of $100 per whole share of common stock,
subject to adjustment. The plan was amended on September 22, 1999 to render
the Rights inapplicable to the transactions contemplated by the Merger
Agreement. The Rights are tradable only with Unicom's common stock until they
become exercisable. The Rights become exercisable upon the earlier of ten days
following a public announcement that a person (an "Acquiring Person") has
acquired 15% or more of Unicom's outstanding common stock or ten business days
(or such later date as may be determined by action of the Board of Directors)
following the commencement of a tender or exchange offer which, if
consummated, would result in a person or group becoming an Acquiring Person.
The Rights are subject to redemption by Unicom at a price of $0.01 per Right,
subject to certain limitations, and will expire on February 2, 2008. If a
person or group becomes an Acquiring
22
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
stock at a 50% discount from the then current market price. If Unicom is
acquired in a merger or other business combination transaction in which Unicom
is not the survivor, or 50% or more of Unicom's assets or earning power is
sold or transferred, each holder of a Right shall then have the right to
receive, upon exercise, common stock of the acquiring company at a 50%
discount from the then current market price of such common stock. Rights held
by an Acquiring Person become void upon the occurrence of such events.
(6) Common Equity. In January 2000, Unicom physically settled the forward
share repurchase arrangements it had with financial institutions for the
repurchase of 26.3 million Unicom common shares. Prior to settlement, the
repurchase arrangements were recorded as a receivable on Unicom's Consolidated
Balance Sheets based on the aggregate market value of the shares under the
arrangements. In 1999, net unrealized losses of $44 million (after-tax), or
$0.20 per common share were recorded related to the arrangements. The
settlement of the arrangements in January 2000 resulted in a gain of $113
million (after-tax), which was recorded in the first quarter of 2000. The
settlement of the arrangements resulted in a reduction in Unicom's outstanding
common shares and common stock equity effective January 2000.
Consistent with Unicom's $1 billion share repurchase commitment in the
merger agreement with PECO, Unicom has completed the repurchase of 24 million
shares of its common stock. The shares were repurchased from the open market
over the recent ten months pursuant to agreements with financial institutions.
Approximately $153 million of the share repurchases were funded with proceeds
from the 1998 issuance of transitional trust notes.
At September 30, 2000, shares of Unicom common stock were reserved for the
following purposes:
Long-Term Incentive Plan........................................ 1,041,015
Employee Stock Purchase Plan.................................... 284,940
Shareholder Rights Plan......................................... 400,000
Exchange for ComEd common stock not held by Unicom.............. 86,040
1996 Directors' Fee Plan........................................ 135,791
---------
1,947,786
=========
Common stock issued/(reacquired) for the three months, nine months and
twelve months ended September 30, 2000 and 1999 was as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
--------------------- --------------------- ---------------------
2000 1999 2000 1999 2000 1999
----------- -------- ------------ ------- ------------ -------
Shares of Common Stock
Issued/(Reacquired):
Long-Term Incentive
Plan.................. 520,842 154,971 1,190,748 388,186 1,254,063 510,850
Employee Stock Purchase
Plan.................. -- -- 38,857 45,126 83,231 86,884
Exchange for ComEd com-
mon stock not held by
Unicom................ 590 -- 1,610 (3,330) 2,486 1,727
1996 Directors' Fee
Plan.................. 1,085 739 26,668 4,087 28,102 7,088
Treasury Stock......... (7,798,100) -- (49,444,000) -- (49,444,000) --
----------- -------- ------------ ------- ------------ -------
(7,275,583) 155,710 (48,186,117) 434,069 (48,076,118) 606,549
=========== ======== ============ ======= ============ =======
23
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
----------------------------------------- ---------------------
2000 1999 2000 1999 2000 1999
---------- ------------------- -------- ----------- --------
(Thousands of Dollars)
Changes in Common Stock
Accounts:
Total shares issued.... $ 18,492 $ 3,756 $ 30,935 $ 8,533 $ 43,691 $ 14,463
Net cash settlement of
forward share repur-
chase contract........ -- -- -- (16,454) -- (16,454)
Share repurchases...... (374,434) -- (1,953,008) -- (1,953,008) --
Shares held by trustee
for Unicom Stock Bonus
Deferral Plan......... -- -- -- -- -- 7,428
Other.................. (27) 7 78 144 87 (51)
---------- ------- ----------- -------- ----------- --------
$ (355,969) $ 3,763 $(1,921,995) $ (7,777) $(1,909,230) $ 5,386
========== ======= =========== ======== =========== ========
At September 30, 2000 and December 31, 1999, 75,082 and 75,692,
respectively, ComEd common stock purchase warrants were outstanding. The
warrants entitle the holders to convert such warrants into common stock of
ComEd at a conversion rate of one share of common stock for three warrants.
(7) Stock Option Awards/Employee Stock Purchase Plan. Unicom has a
nonqualified stock option awards program under its Long-Term Incentive Plan.
The stock option awards program was adopted by Unicom in July 1996 to reward
valued employees responsible for, or contributing to, the management, growth
and profitability of Unicom and its subsidiaries. The stock options granted
expire ten years from their grant date. One-third of the shares subject to the
options vest on each of the first three anniversaries of the option grant
date. In addition, the stock options will become fully vested immediately if
the holder dies, retires, is terminated by the Company, other than for cause,
or qualifies for long-term disability. Options granted before July 22, 1998
also vest in full upon a change in control, while options granted on or after
July 22, 1998 vest in full if the option holder is terminated within 24 months
after a change of control.
Stock option transactions through September 30, 2000 are summarized as
follows:
Number of Weighted Average
Options Exercise Price
--------- ----------------
Outstanding as of December 31, 1997................ 2,291,378 $23.810
Granted during the year............................ 1,379,525 35.234
Exercised during the year.......................... (404,082) 24.244
Expired/cancelled during the year.................. (123,928) 25.715
---------
Outstanding as of December 31, 1998................ 3,142,893 28.694
Granted during the year............................ 1,853,050 35.750
Exercised during the year.......................... (313,231) 24.102
Expired/cancelled during year...................... (179,076) 33.551
---------
Outstanding as of December 31, 1999................ 4,503,636 31.723
Granted during the nine months ended September 30,
2000.............................................. 2,213,100 37.063
Exercised during the nine months ended September
30, 2000.......................................... (874,785) 27.834
Expired/cancelled during the nine months ended Sep-
tember 30, 2000................................... (140,598) 35.710
---------
Outstanding as of September 30, 2000............... 5,701,353 34.294
=========
Of the stock options outstanding at September 30, 2000, 2,075,749 had vested
with a weighted average exercise price of $30.77.
24
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:
Stock Option Grant Date
-----------------------
2000 1999 1998
------- ------- -------
Expected option life.................................... 7 years 7 years 7 years
Dividend yield.......................................... 4.30% 4.50% 4.54%
Expected volatility..................................... 21.97% 23.02% 21.95%
Risk-free interest rate................................. 6.76% 4.83% 5.58%
The estimated weighted average fair value for each stock option granted in
the first three quarters of 2000 and in 1999 and 1998 was $8.19, $6.48 and
$6.62, respectively.
The ESPP was terminated on June 28, 2000 by Unicom's Board of Directors in
anticipation of the merger with PECO. The ESPP allowed employees to purchase
Unicom common stock at a ten percent discount from market value. Substantially
all of the employees of Unicom, ComEd and their subsidiaries were eligible to
participate in the ESPP. Unicom issued 83,231 and 86,884 shares of common
stock for the twelve months ended September 30, 2000 and 1999, respectively,
under the ESPP at a weighted average annual purchase price of $35.02 and
$34.34, respectively.
Unicom has adopted the disclosure-only provisions of SFAS No. 123. For
financial reporting purposes, Unicom has adopted APB No. 25 and has taken into
consideration FASB Interpretation No. 44 of APB No. 25, and thus no
compensation cost has been recognized for the stock option awards program or
ESPP. If Unicom had recorded compensation expense for the stock options
granted and the shares of common stock issued under the ESPP in accordance
with SFAS No. 123 using the fair value based method of accounting, the
additional charge to operations would have been $4 million (after-tax), or
$0.02 per common share (diluted), and $4 million (after-tax), or $0.02 per
common share (diluted), for the twelve months ended September 30, 2000 and
1999, respectively.
(8) ComEd Preferred and Preference Stocks Without Mandatory Redemption
Requirements. During the twelve months ended September 30, 2000 and 1999, no
shares and 13,499,549 shares of preferred or preference stock without
mandatory redemption requirements were redeemed, respectively, and no shares
were issued. All of the outstanding shares of Series $1.425 preferred stock
were redeemed on August 1, 2000. The redemption price was $42 per share, plus
accrued and unpaid dividends.
(9) ComEd Preference Stock Subject to Mandatory Redemption
Requirements. During the twelve months ended September 30, 2000 and 1999, no
shares of ComEd preference stock subject to mandatory redemption requirements
were issued. During the twelve months ended September 30, 2000 and 1999,
700,000 shares and 1,056,060 shares, respectively, of ComEd preference stock
subject to mandatory redemption requirements were reacquired to meet sinking
fund requirements or were part of the early redemption in 1999. There were
700,000 shares of Series $6.875 preference stock outstanding at December 31,
1999, at an aggregate stated value of $69 million. This series was non-
callable and was redeemed on May 1, 2000.
(10) ComEd-Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely ComEd's Subordinated Debt Securities. In
September 1995, ComEd Financing I, a wholly-owned subsidiary trust of ComEd,
issued 8,000,000 of its 8.48% ComEd-obligated mandatorily redeemable preferred
securities. The sole asset of ComEd Financing I is $206.2 million principal
amount of ComEd's 8.48% subordinated deferrable interest notes due September
30, 2035. In January 1997, ComEd Financing II, a wholly-owned subsidiary trust
of ComEd, issued 150,000 of its 8.50% ComEd-obligated mandatorily redeemable
capital securities. The sole asset of ComEd
25
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Financing II is $154.6 million principal amount of ComEd's 8.50% subordinated
deferrable interest debentures due January 15, 2027. There is a full and
unconditional guarantee by ComEd of the Trusts' obligations under the
securities issued by the Trusts. However, ComEd's obligations are subordinate
and junior in right of payment to certain other indebtedness of ComEd. ComEd
has the right to defer payments of interest on the subordinated deferrable
interest notes by extending the interest payment period, at any time, for up
to 20 consecutive quarters. Similarly, ComEd has the right to defer payments
of interest on the subordinated deferrable interest debentures by extending
the interest payment period, at any time, for up to ten consecutive semi-
annual periods. If interest payments on the subordinated deferrable interest
notes or debentures are so deferred, distributions on the preferred securities
will also be deferred. During any deferral, distributions will continue to
accrue with interest thereon. In addition, during any such deferral, ComEd may
not declare or pay any dividend or other distribution on, or redeem or
purchase, any of its capital stock.
The subordinated deferrable interest notes are redeemable by ComEd, in whole
or in part, from time to time, on or after September 30, 2000, and with
respect to the subordinated deferrable interest debentures, on or after
January 15, 2007, or at any time in the event of certain income tax
circumstances. If the subordinated deferrable interest notes or debentures are
redeemed, the Trusts must redeem preferred securities having an aggregate
liquidation amount equal to the aggregate principal amount of the subordinated
deferrable interest notes or debentures so redeemed. In the event of the
dissolution, winding up or termination of the Trusts, the holders of the
preferred securities will be entitled to receive, for each preferred security,
a liquidation amount of $25 for the securities of ComEd Financing I and $1,000
for the securities of ComEd Financing II, plus accrued and unpaid
distributions thereon, including interest thereon, to the date of payment,
unless in connection with the dissolution, the subordinated deferrable
interest notes or debentures are distributed to the holders of the preferred
securities.
(11) Long-Term Debt. ComEd initiated the issuance of $3.4 billion of
transitional trust notes through its SPEs, ComEd Funding and ComEd Funding
Trust, in the fourth quarter of 1998. The current amount outstanding is as
follows:
Series Principal Amount
------------------------ ----------------------
(Thousands of Dollars)
5.29% due June 25, 2001............................ $ 254,541
5.34% due March 25, 2002........................... 258,861
5.39% due June 25, 2003............................ 421,139
5.44% due March 25, 2005........................... 598,511
5.63% due June 25, 2007............................ 761,489
5.74% due December 25, 2008........................ 510,000
----------
$2,804,541
==========
For accounting purposes, the liabilities of ComEd Funding Trust for the
transitional trust notes are reflected as long-term debt on the Consolidated
Balance Sheets of Unicom and ComEd.
The proceeds, net of transaction costs, from the transitional trust notes
were used, as required, to redeem debt and equity. During 1999, ComEd redeemed
or reacquired $1,101 million of long-term debt.
Sinking fund requirements and scheduled maturities remaining through 2004
for ComEd's first mortgage bonds, transitional trust notes, sinking fund
debentures and other long-term debt outstanding at September 30, 2000, after
deducting deposits made for the retirement of sinking fund debentures, are
summarized as follows: 2000--$86 million; 2001--$346 million; 2002--$845
million; 2003--$695 million; and 2004--$577 million.
26
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
At September 30, 2000, ComEd's outstanding first mortgage bonds maturing
through 2004 were as follows:
Series Principal Amount
-------------------------------- ----------------------
(Thousands of Dollars)
7 3/8% due September 15, 2002...................... $200,000
6 5/8% due July 15, 2003........................... 100,000
5 3/10% due January 15, 2004....................... 26,000
--------
$326,000
========
Other long-term debt outstanding at September 30, 2000 is summarized as
follows:
Principal
Debt Security Amount Interest Rate
- ---------------------------------------- ---------- ------------------------------------------
(Thousands
of
Dollars)
Unicom--
Loans Payable:
Loan due January 1, 2003 $ 4,212 Interest rate of 8.31%
Loan due January 1, 2004 5,021 Interest rate of 8.44%
Loan due January 15, 2009 5,228 Interest rate of 8.30%
Loan due January 15, 2009 6,568 Interest rate of 8.55%
Loan due January 15, 2010 3,632 Interest rate of 8.65%
Loan due January 15, 2010 6,880 Interest rate of 8.88%
Loan due July 15, 2010 8,703 Interest rate of 7.98%
----------
$ 40,244
----------
ComEd--
Notes:
Senior note due September 30, 2002 $ 200,000 Interest rate of 7.158%
Senior note due September 30, 2003 250,000 Interest rate of 7.284%
Medium Term Notes, Series 3N due vari-
ous dates through October 15, 2004 156,000 Interest rates ranging from 9.17% to 9.20%
Notes due January 15, 2004 150,000 Interest rate of 7.375%
Notes due October 15, 2005 235,000 Interest rate of 6.40%
Notes due January 15, 2007 150,000 Interest rate of 7.625%
Notes due July 15, 2018 225,000 Interest rate of 6.95%
----------
$1,366,000
----------
Purchase Contract Obligation
due April 30, 2005 $ 254 Interest rate of 3.00%
----------
Total ComEd $1,366,254
----------
Unicom Enterprises--
Notes:
Unicom Thermal Guaranteed Senior Note
due January 31, 2020 $ 28,000 Interest rate of 9.09%
Northwind Midway Guaranteed Senior Note
due June 30, 2023 11,423 Interest rate of 7.68%
Unicom Thermal Obligation due April 1,
2015 1,124 Interest rate of 8.00%
Unicom Mechanical Services Notes
due various dates through July 15,
2003 156 Interest rate ranging from 8.50% to 9.25%
----------
Total Unicom Enterprises $ 40,703
----------
Total Unicom $1,447,201
==========
27
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Long-term debt maturing within one year has been included in current
liabilities.
ComEd's outstanding first mortgage bonds are secured by a lien on
substantially all property and franchises, other than expressly excepted
property, owned by ComEd.
Unicom Thermal redeemed the $115.8 million outstanding balance of the 7.38%
unsecured guaranteed senior Note on July 12, 2000. Unicom Thermal recorded an
extraordinary loss related to early redemption premiums paid and the write-off
of unamortized debt expenses, which reduced Unicom's net income on common
stock by approximately $3.5 million (after-tax) in the third quarter of 2000.
In May 2000, Northwind Chicago issued $28 million of 9.09% guaranteed senior
Notes due January 31, 2020, the proceeds of which will be used primarily to
finance certain project construction costs. The Notes were guaranteed by
Unicom and included certain covenants with respect to Unicom and Northwind
Chicago's operations. Pursuant to Unicom's merger with PECO, Exelon assumed
Unicom's guarantee obligation with respect to the Notes as a matter of law.
In June 1999, Northwind Midway issued $11.4 million of 7.68% guaranteed
senior Notes due June 2023, the proceeds of which will be used primarily to
finance certain project construction costs. The Notes were guaranteed by
Unicom and include certain covenants with respect to Unicom and Northwind
Midway's operations. Such covenants include, among other things, a requirement
that Unicom and its consolidated subsidiaries own no less than 65% of the
voting membership interest of Northwind Midway. Pursuant to Unicom's merger
with PECO, Exelon assumed Unicom's guarantee obligation with respect to the
Notes as a matter of law.
(12) Lines of Credit. ComEd had total unused bank lines of credit of $800
million at September 30, 2000. Of that amount, $500 million expires on
December 15, 2000 and $300 million expires on December 17, 2002. The interest
rate is set at the time of a borrowing and is based on several floating rate
bank indices plus a spread which is dependent upon the credit rating of
ComEd's outstanding first mortgage bonds or on a prime interest rate. ComEd is
obligated to pay commitment and facility fees with respect to the line of
credit.
(13) Disposal of Spent Nuclear Fuel. Under the Nuclear Waste Policy Act of
1982, the DOE is responsible for the selection and development of repositories
for, and the disposal of, spent nuclear fuel and high-level radioactive waste.
ComEd, as required by that Act, has entered into a contract with the DOE to
provide for the disposal of spent nuclear fuel and high-level radioactive
waste from ComEd's nuclear generating stations. The contract with the DOE
requires ComEd to pay the DOE a one-time fee applicable to nuclear generation
through April 6, 1983 of $277 million, with interest to date of payment, and a
fee payable quarterly equal to one mill per kilowatthour of nuclear-generated
and sold electricity after April 6, 1983. Pursuant to the contract, ComEd has
elected to pay the one-time fee, with interest, just prior to the first
delivery of spent nuclear fuel to the DOE. The liability for the one-time fee
and the related interest is reflected on the Consolidated Balance Sheets. The
contract also provided for acceptance by the DOE of such materials to begin in
January 1998; however, that date was not met by the DOE and is expected to be
delayed significantly. The DOE's current estimate for opening a facility to
accept such waste is 2010. This extended delay in spent nuclear fuel
acceptance by the DOE has led to ComEd's consideration of additional dry
storage alternatives. On July 30, 1998, ComEd filed a complaint against the
United States in the United States Court of Federal Claims seeking to recover
damages caused by the DOE's failure to honor its contractual obligation to
28
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
begin disposing of spent nuclear fuel in January 1998. On September 14, 2000,
the Judge hearing ComEd's case lifted a stay originally imposed on November 5,
1999. The court further ordered the government to file a response to ComEd's
motion for summary judgment on the issue of the DOE's liability for breaching
its contract with ComEd.
(14) Fair Value of Financial Instruments. The following methods and
assumptions were used to estimate the fair value of financial instruments
either held, or issued and outstanding. The disclosure of such information
does not purport to be a market valuation of Unicom and subsidiary companies
as a whole. The impact of any realized or unrealized gains or losses related
to such financial instruments on the financial position or results of
operations of Unicom and subsidiary companies is primarily dependent on the
treatment authorized under future ComEd ratemaking proceedings.
Investments. Securities included in the nuclear decommissioning funds have
been classified and accounted for as "available for sale" securities. The
estimated fair value of the nuclear decommissioning funds, as determined by
the trustee and based on published market data, as of September 30, 2000 and
December 31, 1999 was as follows:
September 30, 2000 December 31, 1999
-------------------------------- --------------------------------
Unrealized Unrealized
Gains/ Gains/
CostBasis (Losses) Fair Value Cost Basis (Losses) Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Short-term investments.. $ 33,583 $ -- $ 33,583 $ 41,362 $ 95 $ 41,457
U.S. Government and
Agency issues.......... 244,797 8,761 253,558 245,399 (1,993) 243,406
Municipal bonds......... 394,946 6,027 400,973 383,816 (940) 382,876
Corporate bonds......... 212,357 (2,416) 209,941 196,942 (5,699) 191,243
Common stock............ 911,799 677,324 1,589,123 832,802 732,893 1,565,695
Other................... 162,879 11,963 174,842 125,072 (3,209) 121,863
---------- -------- ---------- ---------- -------- ----------
$1,960,361 $701,659 $2,662,020 $1,825,393 $721,147 $2,546,540
========== ======== ========== ========== ======== ==========
At September 30, 2000, the debt securities held by the nuclear
decommissioning funds had the following maturities:
Cost Basis Fair Value
---------- ----------
(Thousands of
Dollars)
Within 1 year....................................... $ 31,303 $ 31,627
1 through 5 years................................... 325,139 326,986
5 through 10 years.................................. 222,319 226,044
Over 10 years....................................... 425,776 429,513
29
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The net earnings of the nuclear decommissioning funds, which are recorded in
the accumulated provision for depreciation, for the three months, nine months
and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------ ---------------------- ---------------------
2000 1999 2000 1999 2000 1999
-------- --------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Gross proceeds from
sales of
securities............. $359,346 $ 399,024 $1,263,586 $1,241,887 $1,786,700 $1,637,011
Less cost based on spe-
cific
identification......... 332,394 386,970 1,198,132 1,205,155 1,711,128 1,598,484
-------- --------- ---------- ---------- ---------- ----------
Realized gains/(losses)
on sales of
securities............. $ 26,952 $ 12,054 $ 65,454 $ 36,732 $ 75,571 $ 38,527
Other realized fund
earnings, net of
expenses............... 12,126 12,186 30,113 43,002 50,038 59,983
-------- --------- ---------- ---------- ---------- ----------
Total realized net earn-
ings of the funds...... $ 39,078 $ 24,240 $ 95,567 $ 79,734 $ 125,609 $ 98,510
Unrealized
gains/(losses)......... 6,056 (135,210) (19,488) (46,472) 128,494 142,147
-------- --------- ---------- ---------- ---------- ----------
Total net earnings of
the funds............. $ 45,134 $(110,970) $ 76,079 $ 33,262 $ 254,103 $ 240,657
======== ========= ========== ========== ========== ==========
Securities held by certain trusts, which were established to provide for
supplemental retirement benefits and executive medical claims, have been
classified and accounted for as "available for sale." The estimated fair value
of these securities, as determined by the trustee and based on published
market data, as of September 30, 2000 was as follows:
Cost Unrealized Fair
Basis Gain Value
------- ---------- -------
(Thousands of Dollars)
Short-term investments.............................. $ 279 $ -- $ 279
Registered investment companies..................... 21,955 13,258 35,213
------- ------- -------
$22,234 $13,258 $35,492
======= ======= =======
Current Assets. Cash, temporary cash investments, cash held for redemption
of securities and other cash investments, which include U.S. Government
obligations and other short-term marketable securities, and special deposits,
are stated at cost, which approximates their fair value because of the short
maturity of these instruments. The securities included in these categories
have been classified as "available for sale" securities.
Capitalization. The estimated fair values of ComEd preferred and preference
stocks, ComEd-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely ComEd's subordinated debt securities,
transitional trust notes and long-term debt were obtained from an independent
consultant. The estimated fair values, which include the current portions of
redeemable preference stock and long-term debt but exclude accrued interest
and dividends, as of September 30, 2000 and December 31, 1999 were as follows:
September 30, 2000 December 31, 1999
-------------------------------- ---------------------------------
Unrealized Unrealized
Carrying Gains/ Carrying Gains/ Fair
Value (Losses) Fair Value Value (Losses) Value
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
ComEd preferred and
preference stocks...... $ -- $ -- $ -- $ 71,265 $ 58 $ 71,323
ComEd-obligated
mandatorily redeemable
preferred securities of
subsidiary trusts
holding solely ComEd's
subordinated debt
securities............. $ 350,000 $(21,467) $ 328,533 $ 350,000 $ (10,595) $ 339,405
Transitional trust
notes.................. $2,794,121 $(98,119) $2,696,002 $3,057,112 $(163,600) $2,893,512
Long-term debt.......... $4,690,093 $ 6,925 $4,697,018 $4,810,108 $ (23,136) $4,786,972
30
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Current Liabilities. The carrying value of notes payable, which consists of
commercial paper and bank loans maturing within one year, approximates the
fair value because of the short maturity of these instruments. See
"Capitalization" above for a discussion of the fair value of the current
portion of long-term debt and redeemable preference stock.
Other Noncurrent Liabilities. The carrying value of accrued spent nuclear
fuel disposal fee and related interest represents the settlement value as of
September 30, 2000 and December 31, 1999; therefore, the carrying value is
equal to the fair value.
(15) Pension and Postretirement Benefits. As of September 30, 2000, ComEd
had a qualified non-contributory defined benefit pension plan which covers all
regular employees of ComEd and certain of Unicom's subsidiaries. Benefits
under this plan reflect each employee's compensation, years of service and age
at retirement. Funding is based upon actuarially determined contributions that
take into account the amount deductible for income tax purposes and the
minimum contribution required under the Employee Retirement Income Security
Act of 1974, as amended. The September 30, 2000 and December 31, 1999 pension
liabilities and related data were determined using the January 1, 1999
actuarial valuation. Additionally, ComEd maintains a nonqualified supplemental
retirement plan which covers any excess pension benefits that would be payable
to management employees under the qualified plan but which are limited by the
Internal Revenue Code. In 1998, Indiana Company's qualified defined benefit
pension plan was merged into ComEd's pension plan as a result of the sale of
Indiana Company's State Line Station and the transfer of its remaining
employees to ComEd.
ComEd and certain of Unicom's subsidiaries provide certain postretirement
medical, dental and vision care, and life insurance for retirees and their
dependents and for the surviving dependents of eligible employees and
retirees. Generally, the employees become eligible for postretirement benefits
if they retire no earlier than age 55 with ten years of service. The liability
for postretirement benefits is funded through trust funds based upon
actuarially determined contributions that take into account the amount
deductible for income tax purposes. The health care plans are contributory,
funded jointly by the companies and the participating retirees. The September
30, 2000 and December 31, 1999 postretirement benefit liabilities and related
data were determined using the January 1, 1999 actuarial valuations.
31
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
Reconciliations of the beginning and ending balances of the projected
pension benefit obligation and the accumulated postretirement benefit
obligation, and the funded status of these plans for the nine months ended
September 30, 2000 and twelve months ended December 31, 1999 were as follows:
Nine Months Ended Twelve Months Ended
September 30, 2000 December 31, 1999
-------------------------- --------------------------
Other Other
Pension Postretirement Pension Postretirement
Benefits Benefits Benefits Benefits
---------- -------------- ---------- --------------
(Thousands of Dollars)
Change in benefit
obligation
- -----------------
Benefit obligation at
beginning of period.... $4,124,000 $1,169,000 $4,326,000 $1,236,000
Service cost............ 53,000 25,000 120,000 41,000
Interest cost........... 232,000 66,000 285,000 82,000
Plan participants' con-
tributions............. -- 3,000 -- 4,000
Actuarial loss/(gain)... 6,000 (1,000) (428,000) (170,000)
Benefits paid........... (195,000) (43,000) (241,000) (51,000)
Special termination ben-
efits.................. -- 6,000 62,000 27,000
---------- ---------- ---------- ----------
Benefit obligation at
end of period......... $4,220,000 $1,225,000 $4,124,000 $1,169,000
---------- ---------- ---------- ----------
Change in plan assets
- ---------------------
Fair value of plan as-
sets at beginning of
period................. $4,270,000 $ 948,000 $4,015,000 $ 865,000
Actual return on plan
assets................. 78,000 20,000 493,000 106,000
Employer contribution... 4,000 -- 3,000 24,000
Plan participants' con-
tributions............. -- 3,000 -- 4,000
Benefits paid........... (195,000) (43,000) (241,000) (51,000)
---------- ---------- ---------- ----------
Fair value of plan as-
sets at end of period. $4,157,000 $ 928,000 $4,270,000 $ 948,000
---------- ---------- ---------- ----------
Plan assets
greater/(less) than
benefit obligation..... $ (63,000) $ (297,000) $ 146,000 $ (221,000)
Unrecognized net actuar-
ial gain............... (305,000) (479,000) (534,000) (538,000)
Unrecognized prior serv-
ice cost/(asset)....... (10,000) 38,000 (11,000) 41,000
Unrecognized transition
obligation/(asset)..... (71,000) 261,000 (79,000) 276,000
---------- ---------- ---------- ----------
Accrued liability for
benefits.............. $ (449,000) $ (477,000) $ (478,000) $ (442,000)
========== ========== ========== ==========
The assumed discount rate used to determine the benefit obligation as of
September 30, 2000 and December 31, 1999 was 7.75%. The fair value of plan
assets excludes $26 million and $25 million held in grantor trust as of
September 30, 2000 and December 31, 1999, respectively, for the payment of
benefits under the supplemental plan and $9 million and $9 million held in a
grantor trust as of September 30, 2000 and December 31, 1999, respectively,
for the payment of postretirement medical benefits.
32
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of pension and other postretirement benefit costs, portions
of which were recorded as components of construction costs, for the three
months, nine months and twelve months ended September 30, 2000 were as
follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
-------------------- -------------------- --------------------
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
(Thousands of Dollars)
Pension Benefit Costs
- ---------------------
Service cost............ $ 12,000 $ 31,000 $ 53,000 $ 94,000 $ 79,000 $ 116,000
Interest cost on pro-
jected benefit obliga-
tion................... 78,000 71,000 232,000 213,000 304,000 278,000
Expected return on plan
assets................. (98,000) (90,000) (295,000) (271,000) (386,000) (356,000)
Amortization of transi-
tion asset............. (3,000) (3,000) (8,000) (9,000) (12,000) (12,000)
Amortization of prior
service asset.......... 1,000 (1,000) (1,000) (3,000) (2,000) (4,000)
Recognized loss/(gain).. (3,000) 1,000 (5,000) 3,000 (5,000) 4,000
Curtailment loss........ -- -- -- -- 16,000 --
--------- --------- --------- --------- --------- ---------
Net periodic benefit
cost.................. $ (13,000) $ 9,000 $ (24,000) $ 27,000 $ (6,000) $ 26,000
========= ========= ========= ========= ========= =========
Other Postretirement
Benefit Costs
- --------------------
Service cost............ $ 9,000 $ 10,000 $ 25,000 $ 31,000 $ 35,000 $ 42,000
Interest cost on accumu-
lated benefit
obligation............. 22,000 21,000 66,000 62,000 86,000 84,000
Expected return on plan
assets................. (21,000) (19,000) (64,000) (56,000) (84,000) (73,000)
Amortization of transi-
tion obligation........ 5,000 6,000 15,000 17,000 20,000 22,000
Amortization of prior
service cost........... 1,000 1,000 3,000 3,000 4,000 4,000
Recognized gain......... (5,000) (3,000) (16,000) (9,000) (21,000) (9,000)
Severance plan cost..... 6,000 -- 6,000 1,000 6,000 5,000
Curtailment loss........ -- -- -- -- 35,000 --
--------- --------- --------- --------- --------- ---------
Net periodic benefit
cost.................. $ 17,000 $ 16,000 $ 35,000 $ 49,000 $ 81,000 $ 75,000
========= ========= ========= ========= ========= =========
In accounting for the pension costs and other postretirement benefit costs
under the plans, the following weighted average actuarial assumptions were
used for the periods during 2000, 1999 and 1998:
Other
Postretirement
Pension Benefits Benefits
----------------- -----------------
2000 1999 1998 2000 1999 1998
----- ----- ----- ----- ----- -----
Annual discount rate....................... 7.75% 6.75% 7.00% 7.75% 6.75% 7.00%
Annual long-term rate of return on plan as-
sets...................................... 9.50% 9.25% 9.50% 9.23% 8.97% 9.20%
Annual rate of increase in future compensa-
tion levels............................... 4.00% 4.00% 4.00% -- -- --
The pension and other postretirement benefit curtailment losses for the
twelve months ended September 30, 2000 represent the recognition of prior
service costs and transition obligations, and an increase in the benefit
obligations resulting from special termination benefits, related to the
reduction in the number of employees due to ComEd's December 1999 sale of the
fossil stations.
The health care cost trend rates used to measure the expected cost of the
postretirement medical benefits are assumed to be 7.5% for pre-Medicare
recipients and 5.5% for Medicare recipients for 2000. Those rates are assumed
to decrease in 0.5% annual increments to 5% for the years 2005 and 2001,
respectively, and to remain level thereafter. The health care cost trend
rates, used to measure the expected cost of postretirement dental and vision
benefits, are a level 3.5% and 2.0% per year, respectively. Assumed health
care cost trend rates have a significant effect on the amounts reported
33
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
for the health care plans. A one percentage point change in the assumed health
care cost trend rates would have the following effects:
1 Percentage 1 Percentage
Point Increase Point Decrease
-------------- --------------
(Thousands of Dollars)
Effect on total annual service and interest cost
components...................................... $ 23,000 $ (18,000)
Effect on postretirement benefit obligation as of
September 30, 2000.............................. 195,000 (155,000)
In addition, an employee savings and investment plan is available to
eligible employees of ComEd and certain of its and Unicom's subsidiaries.
Under the plan, each participating employee may contribute up to 20% of such
employee's base pay and the participating companies match the first 6% of such
contribution equal to 100% of the first 2% of contributed base salary, 70% of
the next 3% of contributed base salary and 25% of the next 1% of contributed
base salary. The participating companies' contributions were $7 million and $9
million for the three months ended September 30, 2000 and 1999, respectively,
$23 million and $24 million for nine months ended September 30, 2000 and 1999,
respectively, and $31 million and $32 million for the twelve months ended
September 30, 2000 and 1999, respectively.
(16) Separation Plan Costs. O&M expenses included $33 million and $2 million
for the three months ended September 30, 2000 and 1999, respectively, $47
million and $7 million for the nine months ended September 30, 2000 and 1999,
respectively, and $50 million and $23 million for the twelve months ended
September 30, 2000 and 1999, respectively, for costs related to voluntary
separation offers to certain employees of ComEd, other than costs related to
the fossil plant sale, as well as certain other employee-related costs. Such
costs resulted in charges of $20 million (after-tax), or $0.11 per common
share (diluted) and $1 million (after-tax), or less than $0.01 per common
share (dilutive) for the three months ended September 30, 2000 and 1999,
respectively, $28 million (after-tax), or $0.15 per common share (diluted),
and $4 million (after-tax), or $0.02 per common share (diluted), for the nine
months ended September 30, 2000 and 1999, respectively, and $30 million
(after-tax), or $0.16 per common share (diluted), and $14 million (after-tax),
or $0.06 per common share (diluted), for the twelve months ended September 30,
2000 and 1999, respectively. See Note 4 regarding employee separation costs
related to the fossil plant sale.
(17) Income Taxes. The components of the net deferred income tax liability
at September 30, 2000 and December 31, 1999 were as follows:
September 30, December 31,
2000 1999
------------- ------------
(Thousands of Dollars)
Deferred income tax liabilities:
Accelerated cost recovery and liberalized deprecia-
tion, net of removal costs........................ $2,632,492 $2,815,972
Overheads capitalized.............................. 152,271 159,836
Deferred gain on sale of fossil stations........... 458,472 --
Involuntary conversion............................. 613,449 --
Repair allowance................................... 213,020 221,502
Regulatory assets recoverable through future rates. 701,714 688,946
Deferred income tax assets:
Postretirement benefits............................ (378,449) (376,538)
Unamortized investment tax credits................. (154,588) (161,756)
Regulatory liabilities to be settled through future
rates............................................. (580,991) (596,157)
Nuclear plant closure.............................. (5,455) (5,456)
Other--net......................................... (271,428) (321,522)
---------- ----------
Net deferred income tax liability................... $3,380,507 $2,424,827
========== ==========
34
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The components of net income tax expense charged to continuing operations
for the three months, nine months and twelve months ended September 30, 2000
and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
-------------------- ------------------ --------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- ---------- --------
(Thousands of Dollars)
Operating income:
Current income taxes... $ 128,058 $ 193,103 $308,230 $405,482 $1,665,029 $380,183
Deferred income taxes.. (82,288) (11,449) (170,157) (100,217) (1,473,022) (26,052)
Investment tax credits
deferred--net......... (5,499) (7,021) (16,498) (21,063) (21,263) (27,856)
Other (income) and
deductions:
Current income taxes... 24,497 (5,809) 37,378 (4,057) 41,139 5,160
Deferred income taxes.. 852 6,159 13,694 12,238 27,287 23,787
Investment tax credits. (2,153) (2,153) (6,458) (6,133) (52,064) (10,768)
--------- --------- -------- -------- ---------- --------
Net income taxes charged
to continuing opera-
tions.................. $ 63,467 $ 172,830 $166,189 $286,250 $ 187,106 $344,454
========= ========= ======== ======== ========== ========
Provisions for current and deferred federal and state income taxes and
amortization of investment tax credits resulted in the following effective
income tax rates for the three months, nine months and twelve months ended
September 30, 2000 and 1999:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
-------------------- ------------------ --------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Net income before
extraordinary items.... $ 166,631 $ 279,752 $509,276 $496,366 $ 610,155 $607,554
Net income taxes charged
to continuing
operations............. 63,467 172,830 166,189 286,250 187,106 344,454
Provision for dividends
on ComEd preferred and
preference stocks...... 534 1,830 2,773 20,170 6,359 33,991
--------- --------- -------- -------- --------- ---------
Pre-tax income before
extraordinary items and
provision for
dividends.............. $ 230,632 $ 454,412 $678,238 $802,786 $ 803,620 $ 985,999
========= ========= ======== ======== ========= =========
Effective income tax
rate................... 27.5% 38.0% 24.5% 35.7% 23.3% 34.9%
========= ========= ======== ======== ========= =========
35
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
The principal differences between net income taxes charged to continuing
operations and the amounts computed at the federal statutory rate of 35% for
the three months, nine months and twelve months ended September 30, 2000 and
1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------- ------------------ --------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Federal income taxes
computed at statutory
rate................... $ 80,721 $ 159,045 $237,384 $280,975 $ 281,267 $ 345,100
Amortization of
investment tax credits,
net of deferred income
taxes.................. (5,234) (5,907) (15,702) (17,525) (46,391) (24,782)
State income taxes, net
of federal income
taxes.................. 8,961 21,958 22,612 37,394 31,137 44,566
Net gain on forward
share repurchase
contract............... -- 6,130 (39,575) (5,566) (18,619) (5,566)
Earnings on non-tax
qualified
decommissioning fund... (1,505) (951) (2,637) (3,719) (7,833) (3,719)
Differences between book
and tax accounting,
primarily property-
related deductions..... (19,476) (7,445) (35,893) (5,309) (52,455) (11,145)
-------- --------- -------- -------- --------- ---------
Net income taxes charged
to continuing
operations............. $ 63,467 $ 172,830 $166,189 $286,250 $ 187,106 $ 344,454
======== ========= ======== ======== ========= =========
(18) Taxes, Except Income Taxes. Provisions for taxes, except income taxes,
for the three months, nine months and twelve months ended September 30, 2000
and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------- ------------------ --------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- --------- ---------
(Thousands of Dollars)
Illinois public utility
revenue................ $ -- $ (601) $ (3,685) $ 1,296 $ (4,000) $ 8,365
Illinois electricity
distribution tax....... 31,267 32,942 77,985 87,615 104,611 116,061
Municipal utility gross
receipts............... 24,752 29,832 74,002 80,418 93,285 98,811
Real estate............. 18,325 33,801 94,853 97,034 113,028 122,916
Municipal compensation.. 23,781 23,714 64,702 60,515 77,536 78,821
Energy assistance and
renewable energy
charge................. 8,629 8,117 26,079 25,562 34,940 33,753
Other--net.............. 31,856 16,986 72,421 54,846 88,125 76,520
--------- --------- -------- -------- --------- ---------
$ 138,610 $ 144,791 $406,357 $407,286 $ 507,525 $ 535,247
========= ========= ======== ======== ========= =========
See Note 21 for additional information regarding Illinois invested capital
taxes.
(19) Lease Obligations of Subsidiary Companies.
Future minimum rental payments at September 30, 2000 for operating leases of
equipment and real property are estimated to aggregate to $280 million,
including $7 million in 2000, $29 million in 2001, $27 million in 2002, $26
million in 2003, $25 million in 2004 and $166 million in 2005-2043.
(20) Joint Plant Ownership. ComEd has a 75% undivided ownership interest in
the Quad Cities nuclear generating station. Further, ComEd is responsible for
75% of all costs which are charged to appropriate investment and O&M accounts,
and provides its own financing. ComEd's net plant investment, including
construction work in progress, in Quad Cities Station on the Consolidated
Balance Sheets was $39 million at September 30, 2000.
36
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
(21) Commitments and Contingent Liabilities. Purchase commitments,
principally related to construction, nuclear fuel, and coal in support of
certain power purchase agreements approximated $839 million at September 30,
2000, comprised of $769 million for ComEd, $11 million for UT Holdings, $50
million for Unicom Energy Services, $1 million for Unicom Distributed Energy
and $8 million for Unicom Power Holdings. In addition, ComEd has substantial
commitments for expected capacity payments and fixed charges related to power
purchase agreements. Upon completion of the fossil plant sale with EME, ComEd
entered into arrangements to assign or settle a substantial portion of its
coal purchase commitments and entered into purchase power agreements with EME.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," subcaption "Liquidity and Capital Resources--UTILITY
OPERATIONS--Construction Program," for additional information regarding
ComEd's purchase commitments.
ComEd is a member of NEIL which provides insurance coverage against property
damage and associated replacement power costs occurring at members' nuclear
generating facilities. All companies insured with NEIL are subject to
retrospective premium adjustments if losses exceed accumulated reserve funds.
Capital has been accumulated in the reserve funds such that ComEd would not be
liable for any single incident. However, ComEd could be subject to assessments
in any policy year for each of three types of coverage provided. The maximum
assessments are approximately $32 million for primary property damage, $20
million for excess property damage and $7 million for replacement power.
The NRC's indemnity for public liability coverage under the Price-Anderson
Act is supported by a mandatory industry-wide program under which owners of
nuclear generating facilities could be assessed in the event of nuclear
incidents. Based on the number of nuclear reactors with operating licenses,
ComEd would currently be subject to a maximum assessment of $969 million in
the event of an incident, limited to a maximum of $110 million in any calendar
year.
In addition, ComEd participates in the American Nuclear Insurers Master
Worker Program, which provides coverage for worker tort claims filed for
bodily injury caused by the nuclear energy hazard. This program was modified,
effective January 1, 1998, to provide coverage to all workers whose "nuclear-
related employment" began on or after the commencement date of reactor
operations. ComEd will not be liable for a retrospective assessment under this
new policy. However, ComEd is still subject to a maximum retroactive
assessment of up to $36 million in the event losses incurred under the small
number of policies in the old program exceed accumulated reserves.
Three of ComEd's wholesale municipal customers filed a complaint and request
for refund with the FERC alleging that ComEd failed to properly adjust their
rates, as provided for under the terms of their electric service contracts, to
track certain refunds made to ComEd's retail customers in the years 1992
through 1994. In the third quarter of 1998, the FERC granted the complaint and
directed that refunds be made, with interest. ComEd filed and was granted a
request for rehearing for purposes of reconsideration with the FERC. If the
order is upheld, ComEd must make refunds within 15 days of the resolution for
rehearing. ComEd's management believes an adequate reserve has been
established in connection with this case.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that Cotter has permitted radioactive and other
hazardous material to be released from its mill into areas owned or occupied
by the plaintiffs resulting in property damage and potential adverse health
effects. With
37
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
respect to Cotter, in 1994 a federal jury returned nominal dollar verdicts
against Cotter on eight plaintiffs' claims in the 1989 cases, which verdicts
were upheld on appeal. The remaining claims in the 1989 actions have been
settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge
vs. Cotter (United States District Court for the District of Colorado, Civil
Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991
cases. The verdict against Cotter and in favor of the plaintiffs, after an
amended judgement was issued March 11, 1999, totaled approximately $6 million,
including compensatory and punitive damages, interest and medical monitoring.
Cotter appealed. On February 11, 2000, the Tenth Circuit Court of Appeals
agreed with Cotter, found that the trial judge had erred in critical rulings
and reversed the jury verdict, remanding the case for new trial. A trial
involving the next group of twelve plaintiffs is currently underway in federal
district court in Denver. Although this trial and the other 1991 cases will
necessarily involve the resolution of numerous contested issues of law and
fact, it is ComEd's assessment that these actions will not have a material
impact on its financial position or operations.
In August of 1999, three class action lawsuits were filed against the
Company related to a series of service interruptions. The two primary events
occurred on July 30 through August 2, 1999. Another significant outage
occurred on August 12, 1999. The outages of July 30, 1999, described as the
Northwest Substation events, began during a period of intense heat and
humidity. On August 12, 1999, in what is described as the Jefferson Substation
event, ComEd interrupted service to customers on the near north and near west
side of the Loop. While major commercial customers were affected, all service
was restored in this event on the same date. The combined effect of these
events resulted in over 168,000 customers losing service for more than 4
hours. The class action complaints have been consolidated and seek to recover
damages for personal injuries and property damage, as well as economic loss
for these events. Further, ComEd initiated expedited claim settlements for
those with primarily food spoilage claims and has paid over $4 million to
date. Conditional class certification has been approved by the Court for the
sole purpose of exploring settlement talks. For purposes of such discussions,
the outage described above, as well as lesser events through August 31, 1999,
will be considered. If talks are not productive, either side can withdraw
unilaterally. The Company has repeatedly declared that it will pay no economic
damages and will vigorously defend against such claims. The lawsuits are
pending in the Circuit Court of Cook County. ComEd filed a motion challenging
the legal sufficiency of the consolidated complaints. On July 21, 2000, the
judge dismissed two of the counts with prejudice, and four others with leave
to replead. The plaintiffs filed an amended complaint on August 29, 2000.
ComEd has again filed a motion seeking dismissal of the pleadings. The
plaintiffs have not yet responded. The next status before the Court is set for
November 10, 2000. Argument on the motion to dismiss will likely occur in
December 2000. A portion of any settlement or verdict may be covered by
insurance and discussions with the carrier are ongoing. ComEd's management
believes adequate reserves have been established in connection with these
cases.
Following the summer 1999 service interruptions, the ICC opened a three-
phase investigation of the design and reliability of ComEd's transmission and
distribution system. At the conclusion of each phase of the investigation, the
ICC will issue reports that will include specific recommendations for ComEd
and a timetable for executing the recommendations. Although the
recommendations are not legally binding on ComEd, the ICC may enforce the
recommendations through litigation. The report on Phase I of the investigation
was released the week of January 3, 2000, which focused on the outages of July
and August 1999. The first and second of five reports on Phase II and Phase
III, focusing on the transmission and distribution system, were released
during the weeks of June 5 and June 17, respectively. The third report is
anticipated later this year. The investigation is expected to conclude by
early 2001. Since summer 1999, the Company has devoted significant resources
to
38
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
improving the reliability of its transmission and distribution system. The
Company believes that the likelihood of a successful material claim resulting
from this investigation is remote. The investigation is expected to conclude
by early 2001.
In 1996, several developers of non-utility generating facilities filed
litigation against various Illinois officials claiming that the enforcement
against those facilities of an amendment to Illinois law removing the
entitlement of those facilities to state-subsidized payments for electricity
sold to ComEd after March 15, 1996 violated their rights under the federal and
state constitutions, and against ComEd for a declaratory order that their
rights under their contracts with ComEd were not affected by the amendment. On
August 4, 1999, the Illinois Appellate Court held that the developers' claims
against the State were premature, and the Illinois Supreme Court denied leave
to appeal that ruling by Order dated December 1, 1999. On April 14, 2000, the
developer of one such facility requested leave to amend its complaint to
allege claims for damages against ComEd based on breach be ComEd of an alleged
contractual obligation to pay for electricity purchased from that developer at
the state-subsidized rate. ComEd has objected to the developer's request for
leave to amend, and intends vigorously to contest any assertion by such
developer that it is entitled to any payment in excess of ComEd's avoided
costs.
ComEd is involved in administrative and legal proceedings concerning air
quality, water quality and other matters. The outcome of these proceedings may
require increases in future construction expenditures and operating expenses
and changes in operating procedures. ComEd and its subsidiaries are or are
likely to become parties to proceedings initiated by the U.S. EPA, state
agencies and/or other responsible parties under CERCLA with respect to a
number of sites, including MGP sites, or may voluntarily undertake to
investigate and remediate sites for which they may be liable under CERCLA.
ComEd generally did not operate MGPs as a corporate entity but did, however,
acquire MGP sites as part of the absorption of smaller utilities.
Approximately half of these sites were transferred to then Northern Illinois
Gas Company (Nicor Gas) as part of a general conveyance in 1954. ComEd also
acquired former MGP sites as vacant real estate on which ComEd facilities have
been constructed. To date, ComEd has identified 44 former MGP sites for which
it may be liable for remediation. In the fourth quarter of 1999, ComEd re-
evaluated its environmental remediation strategies. As a result of this re-
evaluation, ComEd's estimate of its cost of former MGP site investigation and
remediation was increased by $68 million in the fourth quarter of 1999.
ComEd's current best estimate of its costs of former MGP site investigation
and remediation is $89 million (2000) dollars (reflecting an estimated
inflation rate of 3.0% and a discount rate of 6.5%). Such estimate, reflecting
an estimated inflation rate of 3% and before the effects of discounting, is
$176 million and is included in other liabilities on the Consolidated Balance
Sheets as of September 30, 2000. It is expected that the costs associated with
investigation and remediation of former MGP sites will be substantially
incurred through 2012, however monitoring and certain other costs are expected
to be incurred through 2042. The increase in ComEd's estimated costs of former
MGP sites of $68 million in the fourth quarter of 1999 was included in O & M
expenses on Unicom and ComEd's Statements of Consolidated Operations. In
addition, as of September 30, 2000 and December 31, 1999, a reserve of $7
million and $8 million, respectively, has been included in other noncurrent
liabilities on the Consolidated Balance Sheets, representing ComEd's estimate
of the liability associated with cleanup costs of sites other than former MGP
sites. These cost estimates are based on currently available information
regarding the responsible parties likely to share in the costs of responding
to site contamination, the extent of contamination at sites for which the
investigation has not yet been completed and the cleanup levels to which sites
are expected
39
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Continued
to have to be remediated. While ComEd may have rights of reimbursement under
insurance policies, amounts that may be recoverable from other entities are
not considered in establishing the estimated liability for the environmental
remediation costs.
The IDR has issued Notices of Tax Liability to ComEd alleging deficiencies
in Illinois invested capital tax payments for the years 1988 through 1997. The
alleged deficiencies, including interest and penalties, totaled approximately
$54 million as of September 30, 2000. ComEd has protested the notices, and the
matter is currently pending before the IDR's Office of Administrative
Hearings. Interest will continue to accumulate on the alleged tax
deficiencies.
(22) Segment Reporting. Unicom's reportable operating segments as determined
under SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information include its regulated electric utility and its unregulated
business operations. Unicom's reportable segments are managed separately
because of their different regulatory and operating environments. Unicom
evaluates their performance based on net income.
ComEd is an electric utility which is engaged in the generation, purchase,
transmission, distribution and sale of electric energy in Northern Illinois.
ComEd's rates and services are subject to federal and state regulations.
Unicom's unregulated business operations, including energy services and
development of new business ventures, are not subject to utility regulation by
federal or state agencies. As a result of the December 1999 fossil plant sale,
as described in Note 4, the assets of unregulated businesses exceeded 10% of
Unicom's total assets and, as such, constitute a reportable segment. The
assets of the unregulated businesses include approximately $1.6 billion of
investments in leases at September 30, 2000 as discussed in Note 1.
40
UNICOM CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO FINANCIAL STATEMENTS--Concluded
The accounting policies of the segments are the same as those described in
Note 1. Unicom's financial data for business segments are as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
---------------------- ---------------------- ----------------------
2000 1999 2000 1999 2000 1999
---------- ---------- ---------- ---------- ---------- ----------
(Thousands of Dollars)
Operating Revenue:
Electric Utility....... $2,039,961 $2,060,217 $5,274,100 $5,266,647 $6,764,910 $6,824,708
Unregulated Businesses. 180,328 24,237 411,571 41,325 460,736 46,932
Intersegment Revenue... 46,873 8,998 82,012 14,675 88,864 21,509
Elimination............ (46,873) (8,998) (82,012) (14,675) (88,864) (21,509)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $2,220,289 $2,084,454 $5,685,671 $5,307,972 $7,255,646 $6,871,640
========== ========== ========== ========== ========== ==========
Depreciation,
Amortization and
Decommissioning:
Electric Utility....... $ 225,951 $ 200,284 $ 821,662 $ 695,387 $ 962,420 $ 923,216
Unregulated Businesses. 4,263 1,825 10,197 5,001 12,299 6,515
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $ 230,214 $ 202,109 $ 831,859 $ 700,388 $ 974,719 $ 929,731
========== ========== ========== ========== ========== ==========
Interest and Dividend
Income:
Electric Utility....... $ 54,632 $ 10,241 $ 176,859 $ 41,110 $ 195,980 $ 48,924
Unregulated Businesses. 35,055 1,000 114,325 2,827 121,019 3,716
Elimination............ (74,298) (1,298) (189,052) (1,891) (197,966) (2,179)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $ 15,389 $ 9,943 $ 102,132 $ 42,046 $ 119,033 $ 50,461
========== ========== ========== ========== ========== ==========
Interest Expense--Net:
Electric Utility....... $ 124,661 $ 135,945 $ 381,156 $ 413,824 $ 512,684 $ 524,109
Unregulated Businesses. 91,012 5,257 219,663 14,202 234,478 17,973
Elimination............ (74,298) (1,298) (189,052) (1,891) (197,966) (2,179)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $ 141,375 $ 139,904 $ 411,767 $ 426,135 $ 549,196 $ 539,903
========== ========== ========== ========== ========== ==========
Income Tax
Expense/(Benefit):
Electric Utility....... $ 91,726 $ 184,992 $ 237,658 $ 322,868 $ 267,012 $ 400,325
Unregulated Businesses. (22,759) (5,418) 213,313 85,587 256,875 152,340
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $ 68,967 $ 179,574 $ 450,971 $ 408,455 $ 523,887 $ 552,665
========== ========== ========== ========== ========== ==========
Net Income/(Loss):
Electric Utility....... $ 196,246 $ 287,049 $ 579,965 $ 511,435 $ 691,259 $ 643,283
Unregulated Businesses. (32,582) (7,297) (77,823) (42,648) (88,238) (63,308)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $ 163,664 $ 279,752 $ 502,142 $ 468,787 $ 603,021 $ 579,975
========== ========== ========== ========== ========== ==========
Capital Expenditures:
Electric Utility....... $ 324,746 $ 262,946 $ 899,072 $ 736,654 $1,245,816 $1,021,602
Unregulated Businesses. (5,048) 8,975 15,353 15,960 39,486 21,133
---------- ---------- ---------- ---------- ---------- ----------
Consolidated Unicom..... $ 319,698 $ 271,921 $ 914,425 $ 752,614 $1,285,302 $1,042,735
========== ========== ========== ========== ========== ==========
September 30, December 31,
2000 1999
------------- ------------
Total Assets:
Electric Utility................................... $21,877,441 $23,160,265
Unregulated Businesses............................. 8,310,774 3,720,376
Elimination........................................ (7,605,580) (3,474,608)
----------- -----------
Consolidated Unicom................................. $22,582,635 $23,406,033
=========== ===========
41
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Changes in the Electric Utility Industry
Unicom and its predominant business, electric energy generation,
transmission and distribution, are in a period of fundamental change. These
changes are attributable to changes in technology and regulation. Federal law
and regulations have been amended to provide for open transmission system
access, and various states, including Illinois, are considering, or have
adopted, new regulatory structures to allow access by some or all customers to
energy suppliers, in addition to the local utility.
Electric Utility Industry. The electric utility industry historically has
consisted of vertically integrated companies which combine generation,
transmission and distribution assets; serve customers within relatively
defined service territories; and operate under extensive regulation with
respect to rates, operations and other matters. Utilities have operated under
a regulatory compact with the state, with a statutory obligation to serve all
of the electricity needs within their service territory in a nondiscriminatory
manner. Historically, investment and operating decisions have been made based
upon the utilities' respective assessment of the current and projected needs
of their customers. In view of this obligation, regulation has focused on
investment and operating costs, and rates have been based on recovery of some
or all of such prudently incurred costs plus a return on invested capital.
Such rate regulation, and the ability of utilities to recover investment and
other costs through rates, have provided the basis for recording certain costs
as regulatory assets. These assets represent costs which are allocated over
future periods reflecting related regulatory treatment, rather than expensed
in the current period.
Federal Regulation. The Federal Energy Policy Act of 1992, among other
things, empowered the FERC to introduce a greater level of competition into
the wholesale marketplace for electric energy. Under FERC Order No. 888,
utilities are required to file open access tariffs with regard to their
transmission systems. These tariffs set forth the terms, including prices,
under which other parties and the utility's wholesale marketing function may
use the utility's transmission system. ComEd has an approved open access
tariff with the FERC. A companion FERC rule, Order No. 889, requires the
separation of the transmission operations and wholesale marketing functions so
as to ensure that unaffiliated third parties have access to the same
information as to system availability and other requirements. The FERC Order
further requires utilities to operate an electronic bulletin board to make
transmission price and access data available to all potential users. A key
feature of FERC Order No. 888 is that it contemplates full recovery of a
utility's costs "stranded" by competition. These costs are "stranded" or
"strandable" to the extent market-based rates would be insufficient to allow
for their full recovery. To recover stranded costs, the utility must show that
it had a reasonable expectation that it would continue to serve the customer
in question under its regulatory compact. In addition, some governmental
entities, such as cities, may elect to "municipalize" a utility's distribution
facilities through condemnation proceedings. Such municipalities would then be
able to purchase electric power on a wholesale basis and resell it to
customers over the newly acquired facilities. The FERC Order provides for the
recovery of a utility's investment stranded by municipalization.
The 1997 Act. In December 1997, the Governor of Illinois signed into law the
1997 Act, which established a phased process to introduce competition into the
electric industry in Illinois under a less regulated structure. The 1997 Act
was amended in June 1999.
As a result of the 1997 Act and FERC rules, prices for the supply of
electric energy are expected to change from cost-based, regulated rates to
rates determined by competitive market forces. Accordingly, the 1997 Act
provides for, among other things, gradual customer access to other electric
suppliers or a power purchase option which allows the purchase of electric
energy from ComEd at
42
market based prices, and the collection of a CTC from customers who choose to
purchase electric energy from a RES or elect the power purchase option during
a transition period that extends through 2006. Effective October 1, 1999, the
CTC was established in accordance with a formula defined in the 1997 Act. The
CTC, which is applied on a cents per kilowatthour basis, considers the revenue
which would have been collected from a customer under tariffed rates, reduced
by the revenue the utility will receive for providing delivery services to the
customer, the market price for electricity and a defined mitigation factor,
which represents the utility's opportunity to develop new revenue sources and
achieve cost savings. The CTC allows ComEd to recover some of its costs which
might otherwise be unrecoverable under market-based rates. Nonetheless, ComEd
will need to take steps to address the portion of such costs which are not
recoverable through the CTC. Such steps may include cost control efforts,
developing new sources of revenue and asset dispositions. See "Response to
Regulatory Changes" and "Fossil Plant Sale" below for additional information.
As of June 1, 2000, more than 62,000 non-residential customers are eligible
to choose a new electric supplier or elect the purchase power option. As of
September 30, 2000, over 7,800 non-residential customers, representing
approximately 18 percent of ComEd's retail kilowatthour sales for the twelve
months prior to the introduction of open access, elected to receive their
electric energy from a RES or chose the purchase power option. The impact of
customer choice on results of operations will depend on various factors,
including the extent to which customers elect to receive energy from a RES or
the purchased power option, the development of a competitive market, the
market price for energy, the extent to which ComEd develops new sources of
revenue and the results of cost control efforts. Because of the inherent
uncertainty in these factors, ComEd is unable to predict the long term impact
of customer choice on results of operations. However, ComEd does not expect
customer choice to have a material effect in the near term as a result of the
collection of CTCs as provided by the 1997 Act.
Utilities are required to continue to offer delivery services, including the
transmission and distribution of electric energy, such that customers who
select a RES can receive electric energy from that supplier using existing
transmission and distribution facilities. Such services will continue to be
offered under cost-based, regulated rates. The ICC issued orders in August and
September 1999 approving, with modifications, ComEd's delivery service
tariffs.
The 1997 Act also provides for a 15% residential base rate reduction which
became effective August 1, 1998 and an additional 5% residential base rate
reduction in October 2001. ComEd's operating revenues were reduced by
approximately $170 million in 1998 due to the 15% residential base rate
reduction. The 15% rate reduction further reduced ComEd's operating revenues
by approximately $226 million in 1999, compared to 1998 rate levels.
Notwithstanding the rate reductions and subject to certain earnings tests, a
rate freeze will generally be in effect until at least January 1, 2005. During
this period, utilities may reorganize, sell or assign assets, retire or remove
plants from service, and accelerate depreciation or amortization of assets
with limited ICC regulatory review. A utility may request a rate increase
during the rate freeze period only when necessary to ensure the utility's
financial viability. Under the earnings provision of the 1997 Act, if the
earned return on common equity of a utility during this period exceeds an
established threshold, one-half of the excess earnings must be refunded to
customers. The threshold rate of return on common equity is based on the 30-
Year Treasury Bond rate, plus 5.5% in the years 1998 and 1999, and plus 8.5%
in the years 2000 through 2004. The utility's earned return on common equity
and the threshold return on common equity are each calculated on a two-year
average basis. The earnings sharing provision is applicable only to ComEd's
earnings. In accordance with the provisions of the 1997 Act, increased
amortization of regulatory assets may be recorded, thereby reducing the earned
return on common equity, if earnings otherwise would have exceeded the maximum
allowable rate of return. The potential for earnings sharing or increased
amortization of regulatory assets could limit earnings in future periods.
ComEd's returns on average common equity
43
for the years 1999 and 1998 were 11.56% and 10.86%, respectively. The average
return of 11.21% for the two year period ended December 31, 1999 equaled the
threshold return for that period under the earnings provisions of the 1997
Act. ComEd does not currently expect to trigger the earnings sharing
provisions of the 1997 Act in the years 2000 through 2004.
The 1997 Act also allows a portion of ComEd's future revenues to be
segregated and used to support the issuance of securities by ComEd or a SPE.
The proceeds, net of transaction costs, from such security issuances must be
used to refinance outstanding debt or equity or for certain other limited
purposes. In December 1998, ComEd initiated the issuance of $3.4 billion of
transitional trust notes through its SPEs, ComEd Funding and ComEd Funding
Trust. See "Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--
Capital Resources" below, and Notes 3 and 6 of Notes to Financial Statements,
for additional information regarding the redemptions and repurchases of debt
and equity.
The 1997 Act also requires utilities to establish or join an ISO that will
independently manage and control utility transmission systems. Additionally,
the 1997 Act includes the leveling of certain regulatory requirements to
permit operational flexibility, the leveling of certain regulatory and tax
provisions as applied to various electric suppliers and a new, more stringent,
reliability requirement applicable to ComEd in the event of a major outage.
See "Response to Regulatory Changes" below for additional information.
See Notes 1, under "Regulatory Assets and Liabilities," and 3 of Notes to
Financial Statements for the accounting effects related to the 1997 Act.
Response to Regulatory Changes. Unicom has announced several business and
operational objectives designed to focus efforts in responding to the energy
market changes that are expected to develop from the 1997 Act. Among other
things, these strategic objectives call for a focus on operations to: (1)
provide a reliable supply of electricity as the competitive marketplace
evolves, (2) become a top quartile operator of competitive nuclear plants, (3)
deliver competitive earnings while restructuring the balance sheet to reflect
the realities of the marketplace, (4) expand the offering of energy-related
products and services, and (5) transform the corporate culture of Unicom.
Under the 1997 Act, the role of electric utilities in the supply and
delivery of energy is expected to change. Utilities, such as ComEd,
traditionally have been responsible for providing both adequate supply and
reliable delivery of electricity to customers within their service areas. In
the future, ComEd will continue to be obligated to provide a reliable delivery
system. However, ComEd will be obligated to supply electricity only to those
customers that it continues to serve under tariffs for electricity, but not
for those customers who choose to rely on the marketplace. Nonetheless, during
the transition period to a competitive supply marketplace, ComEd must provide
both an adequate supply and reliable delivery of electricity. Given the tight
capacity situation in ComEd's market, ComEd will be working to maintain its
available capacity, as well as working to assist in the development of a
competitive supply marketplace in Illinois.
ComEd has a significant commitment to, and investment in, nuclear generating
capacity. ComEd has installed a management team responsible for improving
nuclear operations. Such improvements are aimed at increasing levels of energy
generation, or capacity factors, at ComEd's nuclear generating units while
simultaneously improving ComEd's record of meeting NRC requirements and INPO
performance standards. Increased capacity factors generally result in lower
unit production costs and an improved opportunity to generate and sell
electricity in a competitive marketplace. Efforts are also being made to
control capital and operating costs through increased efficiencies, such as
the reduction of downtime and expenses associated with generating unit
maintenance and refueling outages.
44
In December 1999, FERC issued an order known as "Order 2000" requiring
jurisdictional utilities to file a proposal to form an RTO meeting certain
governance, operational, and scope and scale requirements articulated in the
order or, alternatively, to describe efforts to participate in or work toward
participating in an RTO or explain why they were not participating in an RTO.
Order 2000 is generally designed to separate the governance and operation of
the transmission system from generation companies and other market
participants. RTOs may be organized in a variety of ways, including so-called
independent system operators or "ISOs" (such as the Midwest Independent System
Operator or "MISO"), which are generally not-for-profit entities and which
would operate but not own transmission facilities, as well as independent for-
profit transmission companies, and other structures. ComEd has been a member
of the MISO and has participated with other utilities in evaluating the
formation of an independent transmission company operating within the
oversight of the MISO.
As a result of that evaluation, and in consideration of the recently
completed transaction in which Exelon Corporation was formed as the holding
company for ComEd and PECO, ComEd believes that continued participation in the
MISO is not in its best interests given circumstances as they now stand.
Consequently, on October 31, 2000, ComEd notified the MISO of its intention to
withdraw and to join the Alliance Regional Transmission Organization, an RTO
being established by American Electric Power, Consumers Energy, Detroit
Edison, Virginia Electric & Power and FirstEnergy. ComEd's withdrawal from the
MISO is subject to regulatory approval. As a result of the Exelon transaction,
ComEd believes that Exelon has the right to withdraw ComEd's facilities from
participation in the MISO as of October 31, 2001, subject to FERC approval,
and that its responsibility for start-up costs associated with the Midwest
MISO under the transmission owners' agreement will not be material. The MISO
is expected to oppose this view and has argued, among other things, that the
provision allowing earlier withdrawal in the case of a merger is not
applicable to the Exelon transaction and that the earliest applicable date for
ComEd's withdrawal is the end of the year following the fifth anniversary of
ComEd's execution of the transmission owners' agreement, which would be
December 31, 2002, unless the Federal Energy Regulatory Commission permits
earlier withdrawal. MISO may also dispute ComEd's view of its responsibility
for costs MISO has and will continue to incur. If ComEd's view of its right to
withdraw and responsibility for costs is challenged and does not prevail, then
the costs associated with ComEd's withdrawal may be material.
Merger Agreement. On October 19, 2000, Unicom and PECO received approval
from the Securities and Exchange Commission under the Public Utilities Holding
Company Act of 1935, the last regulatory approval, to complete their merger to
form Exelon Corporation. The companies completed the merger on October 20,
2000 and began trading as Exelon Corporation (NYSE: EXC) on October 23, 2000.
Upon completion of the merger, PECO and ComEd became the principal utility
subsidiaries of Exelon. This result was achieved by a mandatory exchange of
the outstanding common stock of PECO for common stock of Exelon, and a
subsequent merger of Unicom with and into Exelon wherein holders of Unicom
common stock received 0.875 shares of Exelon common stock plus $3.00 in cash
for each of their shares of Unicom common stock. The merger transaction will
be accounted for as a purchase of Unicom by PECO.
45
Consistent with Unicom's $1 billion share repurchase commitment in the
merger agreement with PECO, Unicom has completed the repurchase of 24 million
shares of its common stock. The shares were repurchased from the open market
over the recent ten months pursuant to agreements with financial institutions.
Approximately $153 million of these share repurchases were funded with
proceeds from the 1998 issuance of transitional trust notes. The remaining
share repurchases will be funded from available funds, including funds
ultimately resulting from the fossil plant sale. These share repurchases are
in addition to 26.3 million shares of Unicom common stock that Unicom
repurchased in January 2000 upon settlement of certain forward purchase
contracts. See Notes 6 and 23 of Notes to Financial Statements for additional
information.
ComEd and PECO are undertaking steps to transfer their generating assets and
wholesale power marketing operations to subsidiaries following the
consummation of the merger. Subsequent to those transfers, these subsidiaries
will be transferred to Exelon and ultimately will be combined into a single
power generation and marketing company, which will be a direct subsidiary of
Exelon ("Genco"). In ComEd's case, the transfer will include its Braidwood,
Byron, Dresden, LaSalle and Quad Cities nuclear generating stations
representing an aggregate generating capability of 9,566 megawatts, its Zion
station, its rights and obligations under various power purchase agreements,
the assets constituting its nuclear decommissioning trusts and its wholesale
power marketing business. Genco will enter into a power purchase agreement
with ComEd in which Genco will undertake to supply ComEd's full requirements
for electric energy through 2004 and all of ComEd's requirements up to the
available capacity of the nuclear generating stations in 2005 and 2006. On
August 3, the NRC approved the request of ComEd and PECO to transfer licenses
for both companies' nuclear plants from ComEd and PECO to Exelon Generating
Company to be formed in connection with the proposed merger.
As part of the transfer of the nuclear generating stations, Genco is to
assume responsibility for the decommissioning of those stations, including
Zion Station and Dresden Unit 1, subject to an obligation of ComEd to continue
to collect decommissioning-related charges from its customers. In May 2000,
ComEd filed a petition with the ICC seeking approval to revise its existing
decommissioning rider to its rates. Under the proposed revision, ComEd would
collect approximately $121 million annually for a period of six years, after
which the decommissioning rider and collection of decommissioning funds would
end. On October 25, 2000, an ICC hearing examiner issued a proposed order
denying ComEd's petition on the basis that existing law does not allow the ICC
to authorize ComEd to continue to collect funds for decommissioning nuclear
generating plants that it no longer owns. ComEd believes that the proposed
order is wrong as a matter of law and that the ICC has the statutory authority
to grant ComEd's petition. The ICC is not bound by the proposed order and may
accept or reject it, in whole or in part, in preparing its final order in the
proceedings. Responses from the parties to the proceedings regarding the
proposed order are due in early November and a final order is expected before
year-end. ComEd is evaluating the effect of the proposed order on the proposed
structure of the Genco transaction. The transfer of the nuclear assets,
including the decommissioning trust funds, are subject to satisfactory
resolution of significant regulatory and tax issues.
The Amended and Restated Agreement and Plan of Exchange and Merger, dated as
of January 7, 2000, was filed on January 13, 2000 by Unicom with the SEC as an
exhibit to a Form 8-K, and reference to that filing is made for more detailed
information.
Fossil Plant Sale. In December 1999, ComEd completed the sale of its fossil
generating assets to EME for a cash purchase price of $4.8 billion. The fossil
plant assets represent an aggregate generating capacity of approximately 9,772
megawatts.
Just prior to the consummation of the fossil plant sale, ComEd transferred
these assets to an affiliate, Unicom Investment. In consideration for the
transferred assets, Unicom Investment paid ComEd consideration totalling
approximately $4.8 billion in the form of a demand note in the amount
46
of approximately $2.4 billion and an interest-bearing Note with a maturity of
twelve years. Unicom Investment immediately sold the fossil plant assets to
EME, in consideration of which Unicom Investment received approximately $4.8
billion in cash from EME. Immediately after its receipt of the cash payment
from EME, Unicom Investment paid the $2.4 billion aggregate principal due to
ComEd under the demand note. Unicom Investment will use the remainder of the
cash received from EME to fund other business opportunities. Of the cash
received by ComEd, $1.5 billion has been used to pay the costs and taxes
associated with the fossil plant sale including ComEd's contribution of $250
million to an environmental trust as required by the 1997 Act. The remainder
of the demand note proceeds will be available to ComEd to fund, among other
things, transmission and distribution projects, nuclear generation station
projects, and environmental and other initiatives. See Note 1 of Notes to
Financial Statements, under "Investment in Leases," for additional
information.
The sale produced an after-tax gain of approximately $1.6 billion, after
recognizing commitments associated with certain coal contracts ($350 million),
recognizing employee-related costs ($112 million) and contributing to the
environmental trust. The coal contract costs include the amortization of the
remaining balance of ComEd's regulatory asset for unrecovered coal reserves of
$178 million and the recognition of $172 million of settlement payments
related to the above-market portion of coal purchase commitments ComEd
assigned to EME at market value upon completion of the fossil plant sale. The
severance costs included pension and post-retirement welfare benefit
curtailment and special termination benefit costs of $51 million and
transition, separation and retention payments of $61 million. A total of 1,730
fossil station employee positions were eliminated upon completion of the
fossil plant sale on December 15, 1999. The employees whose positions were
eliminated have been terminated. Consistent with the provisions of the 1997
Act, the (pre-tax) gain on the sale of $2.587 billion resulted in a regulatory
liability, which was used to recover regulatory assets. Therefore, the gain on
the sale, excluding $43 million of amortization of investment tax credits, was
recorded as a regulatory liability in the amount of $2.544 billion and
amortized in the fourth quarter of 1999. The amortization of the regulatory
liability and additional regulatory asset amortization of $2.456 billion are
reflected in depreciation and amortization expense on Unicom's Statement of
Consolidated Operations and resulted in a net reduction to depreciation and
amortization expense of $88 million.
As part of the sale transaction, ComEd entered into transitional, limited
term power purchase agreements with the buyer. Such purchase power agreements
will increase ComEd's purchased power costs.
Liquidity and Capital Resources
UTILITY OPERATIONS
Construction Program. ComEd's construction program for the year 2000
principally covers improvements to its nuclear production, transmission and
distribution facilities. The amount shown below for transmission and
distribution expenditures reflects a current reevaluation of the level of
expenditures required this year to support ComEd's ongoing intensive efforts
to improve the reliability of its transmission and distribution systems. A
significant portion of the transmission and distribution expenditures reflects
management decisions to adopt new design criteria that will improve
reliability and reduce the number and duration of power outages, and to
accelerate the pace of certain projects that had been scheduled for completion
after 2000. Current estimates of construction expenditures (excluding nuclear
fuel expenditures of approximately $260 million) are as follows:
2000
------
(Millions
of Dollars)
Nuclear................................................. $ 210
Transmission and Distribution........................... 764
General................................................. 159
------
$1,133
======
47
The construction expenditures in the above table reflect an increase of
approximately $26 million from previously reported levels. The increased
transmission and distribution expenditures will be used to fund infrastructure
improvement projects, including the expansion of substation and line capacity
in Chicago and suburban locations, upgrading transmission lines and the
installation of monitoring equipment that is designed to identify distribution
problems faster and restore power to customers more quickly. ComEd has
experienced improved reliability of its distribution system during the past
twelve months as measured by a reduction in the number and duration of power
outages.
ComEd is currently evaluating its construction expenditures for the years
2001 and 2002 and expects expenditures for transmission and distribution
construction to remain above historic expenditure levels in order to attain
additional improvements in overall system reliability.
Purchase commitments for ComEd, principally related to construction, nuclear
fuel and coal in support of certain power purchase agreements approximated
$769 million at September 30, 2000. In addition, ComEd's estimated commitments
for expected capacity payments and fixed charges related to power purchase
agreements were as follows:
Commitments(1)
Period ($Millions)
------ --------------
2000 (Oct. through Dec.)........... $ 87
2001............................... 700
2002............................... 585
2003-2004.......................... 927
2005-2012.......................... 917
------
$3,216
======
--------
(1) Capacity payments may be adjusted based on certain conditions. No
estimate of future cost escalation has been made.
See "Changes in the Electric Utility Industry," subcaptions "The 1997 Act"
and "Fossil Plant Sale" above, for additional information.
Capital Resources. In December 1998, ComEd initiated the issuance of $3.4
billion of transitional trust notes through its SPEs, ComEd Funding and ComEd
Funding Trust. The proceeds from the transitional trust notes, net of
transaction costs, were, as required, used to redeem $1,101 million of long-
term debt and $607 million of preference stock in 1999 and reduce by $500
million ComEd's outstanding short-term debt. During the year 1999, ComEd
recorded an extraordinary loss related to the early redemptions of such long-
term debt, which reduced net income on common stock by approximately $28
million (after-tax), or $0.13 per common share (diluted). ComEd also recorded
$12 million (after-tax), or $0.05 per common share (diluted), for premiums
paid in connection with the redemption of such preference stock. The
preference stock premiums were included in the provision for dividends for
preference stocks of ComEd on the Statements of Consolidated Operations.
Unicom has also repurchased shares of its common stock using $1,104 million of
proceeds it received from ComEd's repurchase of its common stock held by
Unicom. The balance of proceeds were used for the payment of fees and other
debt issuance costs totaling $23 million and a $17 million collateral
requirement related to the transitional trust notes.
In January 2000, Unicom physically settled the forward share repurchase
arrangements it had with financial institutions for the repurchase of 26.3
million Unicom common shares. Prior to settlement, the repurchase arrangements
were recorded as a receivable on Unicom's Consolidated Balance Sheets based on
the aggregate market value of the shares under the arrangements. In 1999, net
unrealized losses of $44 million (after-tax), or $0.20 per common share were
recorded related to the arrangements. The settlement of the arrangements in
January 2000 resulted in a gain of $113 million (after-tax), which was
recorded in the first quarter of 2000. The settlement of the arrangements
resulted in a reduction in Unicom's outstanding common shares and common stock
equity, effective January 2000.
48
Consistent with Unicom's $1 billion share repurchase commitment in the
merger agreement with PECO, Unicom has completed the repurchase of 24 million
shares of its common stock. The shares were repurchased from the open market
over the recent ten months pursuant to agreements with financial institutions.
Approximately $153 million of these share repurchases were funded with
proceeds from the 1998 issuance of transitional trust notes.
During the third quarter of 2000, Unicom borrowed $1.2 billion under a
credit agreement with several banks. Unicom expects to use $1.2 billion of
lease prepayments, scheduled to be received in the fourth quarter of 2000, to
repay the amounts borrowed pursuant to the credit agreement. See Note 1 of
Notes to Financial Statements, under "Investment in Leases", for additional
information
Proceeds from the credit agreement were used to fund the August 7, 2000
termination payment for Unicom Enterprises' $400 million credit facility of
which $341 million was used as of August 7, 2000. The remaining proceeds from
the credit agreement were used to fund share repurchases and other general
corporate purposes.
ComEd forecasts that internal sources will provide approximately three-
fourths of the funds required for ComEd's 2000 construction program and other
capital requirements, including nuclear fuel expenditures, contributions to
nuclear decommissioning funds, sinking fund obligations and scheduled debt
maturities. See Notes 9 and 11 of Notes to Financial Statements for the
summaries of the annual sinking fund requirements and scheduled maturities for
ComEd preference stock and long-term debt, respectively.
See "Changes in the Electric Utility Industry," subcaption "Fossil Plant
Sale" above, for a description of ComEd's planned uses of the fossil plant
sale proceeds.
The type and amount of external financing will depend on financial market
conditions and the needs and capital structure of ComEd at the time of such
financing. ComEd had total unused bank lines of credit of $800 million at
September 30, 2000, which may be borrowed at various interest rates. Of that
amount, $500 million expires on December 15, 2000 and $300 million expires on
December 17, 2002. The interest rate is set at the time of a borrowing and is
based on several floating rate bank indices plus a spread, which is dependent
upon the credit ratings of ComEd's outstanding first mortgage bonds or on a
prime interest rate. See Note 12 of Notes to Financial Statements for
additional information concerning lines of credit. See the Statements of
Consolidated Cash Flows for the construction expenditures and cash flow from
operating activities for the three months, nine months and twelve months ended
September 30, 2000 and 1999.
As of September 30, 2000, ComEd has an effective "shelf" registration
statement with the SEC for the future sale of up to an additional $280 million
of debt securities and cumulative preference stock for general corporate
purposes of ComEd, including the discharge or refund of other outstanding
securities.
On October 20, 2000, following the announcement of the SEC's approval of the
merger of Unicom and PECO, Moody's and Fitch affirmed their ratings of ComEd's
securities. On October 18, 2000, S&P raised their ratings of ComEd's
securities. The current ratings are as follows:
Standard
Moody's & Poor's Fitch
------- -------- -----
First mortgage and secured pollution control bonds...... Baa1 A- A-
Publicly-held debentures and unsecured pollution control
obligations............................................ Baa2 BBB+ BBB+
Convertible preferred stock............................. baa3 BBB BBB
Preference stock........................................ Baa2 BBB BBB
Trust Securities........................................ baa3 BBB BBB
Commercial paper........................................ P-2 A-2 F-2
49
ComEd Funding Trust's securities are currently rated by three principal
securities rating agencies as follows:
Standard
Moody's & Poor's Fitch
------- -------- -----
Transitional trust notes........................... Aaa AAA AAA
Capital Structure. ComEd's ratio of long-term debt to total capitalization
has increased to 59.2% at September 30, 2000 from 55.2% at December 31, 1999,
primarily due to the repurchase of common stock in the first nine months of
2000. As of September 30, 2000 and December 31, 1999, $1,210 million and $852
million, respectively, of retained earnings had been appropriated for ComEd's
future dividend payments.
New Customer Information and Billing system. In July 1998, ComEd began a
transition to a new customer information and billing system. The new system
was implemented to achieve a number of strategic objectives as the electric
industry enters into a more competitive environment. Following the July 1998
initial implementation, ComEd experienced delays in issuing bills on a timely
basis to a portion of its commercial and industrial customers. ComEd also
temporarily suspended credit activities from late in the third quarter of 1998
until the end of the first quarter of 1999 as a result of system
implementation issues. The system stabilized gradually throughout 1999 such
that by the fourth quarter of 1999 substantially all customers were being
billed on a current basis. Operating results for twelve months ended September
30, 1999 were adversely affected by increased labor and overtime costs
incurred to address the billing issues, and by increased charges for
uncollectible accounts of approximately $35 million resulting from the billing
and collection delays and the temporary suspension of credit activities. Cash
flows from operations were adversely affected in the twelve months ended
September 30, 1999 and positively affected in the twelve months ended
September 30, 2000 as a result of the billing delays experienced due to
implementation. Receivables from customers as of September 30, 2000 and
December 31, 1999 include $53 million and $103 million, respectively, for
estimated unbilled revenues for service that has been provided to customers
but for which bill issuance was delayed beyond the normal date of issuance.
See "Results of Operations," subcaption "Operation and Maintenance Expenses"
below, and Note 1 of Notes to Financial Statements, under "Customer
Receivables and Revenues" and "Use of Estimates," for additional information.
Market Risks. ComEd is exposed to market risk due to changes in interest
rates and the market price for electricity. Exposure for interest rate changes
relates to its long-term debt and preferred equity obligations. Exposure to
electricity market price risk relates to forward activities taken to manage
effectively the supply of, and demand for, the electric generation capability
of ComEd's generating plants. ComEd has implemented an integrated risk
management framework to manage such risks. A corporate Risk Management
Committee defines the Company's risk tolerance and establishes appropriate
position limits, and corporate policies and procedures have been implemented
to minimize the exposure to market risk. ComEd does not currently utilize
derivative commodity or financial instruments for trading or speculative
purposes.
See "Energy Risk Management Contracts" in Note 1 of Notes to Financial
Statements regarding the accounting for energy risk management contracts.
Market Price Exposure. ComEd's energy purchases from other suppliers have
increased as a result of reductions in owned generating capability and system
load growth. The market price of energy is subject to price volatility
associated with changes in supply and demand in the electric supply markets.
In the normal course of business, ComEd utilizes contracts for the forward
sale and purchase of energy to assure system reliability and manage
effectively the utilization of its available generating capability. ComEd also
utilizes put and call option contracts and energy swap
50
arrangements to limit the market price risk associated with the forward
commodity contracts. The estimated September 30, 2000 fair value of the
forward contracts, including options, for the purchase and sale of energy for
the years 2000 through 2007, was approximately $10 million. The estimated fair
value is based on the estimated net settlement value of the contracts derived
from forward price curves and market quotes, discounted at a 10% rate. A 10%
increase in the forward price of electricity would decrease the September 30,
2000 fair value of the forward energy contracts for the years 2000-2007 by
approximately $100 million, of which approximately $50 million is for
contracts for the period 2000-2002. Likewise, a 10% decrease would increase
the fair value of the energy contracts by approximately $100 million.
Notwithstanding these price risk management activities, an unexpected loss of
generating capability or reduction in demand could increase ComEd's exposure
to market price risks and could have a material adverse effect on operating
results.
Unicom Energy Inc., has entered into gas sales contracts which are hedged
with gas supply contracts at lower prices. Unicom Energy Inc.'s margin per
therm of gas delivered is not significantly affected by the market price of
gas. Unicom Energy Inc. has also entered into electricity contracts for which
the mark-to-market at September 30, 2000 is not material.
UNREGULATED OPERATIONS
Unicom Enterprises is engaged, through subsidiaries, in energy service
activities which are not subject to utility regulation by federal or state
agencies. One of these subsidiaries, UT Holdings, provides district cooling
and related services to offices and other buildings in the central business
district of the City and in other cities in North America, generally working
with local utilities. District cooling involves, in essence, the production of
chilled water at one or more central locations and its circulation to
customers' buildings through a closed circuit of supply and return piping.
Such water is circulated through customers' premises primarily for air
conditioning. This process is used by customers in lieu of self-generated
cooling.
Unicom Energy Services, another subsidiary of Unicom Enterprises, is engaged
in providing energy services, including gas services, performance contracting,
distributed energy and energy management systems. Through an alliance with
AlliedSignal Power Systems, Inc., a subsidiary of Honeywell, Unicom Energy
Services is an exclusive distributor for the Parallon 75(TM) TurboGenerator
system, which was developed by AlliedSignal to provide customers with on-site
electricity production. Unicom Energy Services' exclusive territory for
distributing the Parallon 75(TM) system encompasses 12 Midwest states,
Ontario, Canada and Puerto Rico.
Unicom Energy Inc., a subsidiary of Unicom Energy Services, is currently
engaged in providing retail gas services to commercial and industrial
customers in the Midwest region. Unicom Energy Inc. also provides retail
electric services as a RES.
Unicom Mechanical Services Inc., a subsidiary of Unicom Enterprises,
designs, installs and services through various subsidiaries heating,
ventilating and air conditioning facilities and building control systems for
commercial and industrial customers located in the Midwest.
Construction Program and Purchase Commitments. Unicom Enterprises estimate
of construction expenditures for its unregulated operations is $150 million
for the year 2000, excluding expenditures for acquisitions contemplated by
subsidiaries of Unicom Enterprises.
Unicom Enterprises' construction expenditures include $48 million for the
expansion of UT Holdings' Chicago district cooling facilities and the related
distribution piping and plants in other cities.
51
Unicom Power Holdings purchased approximately 440 MW of combustion turbine
generators and auxiliary equipment for approximately $165 million. It was
determined that the equipment was no longer needed and is being marketed for
sale.
Unicom Enterprises purchase commitments, principally related to equipment
purchases and the expansion of UT Holdings' district cooling facilities and
the related distribution piping in Chicago and other cities, approximated $60
million at September 30, 2000.
Capital Resources. Unicom's primary source of funds for investment in its
unregulated subsidiaries have been the fossil plant sale proceeds, dividends
received on its ComEd common stock and from borrowings. The availability of
ComEd's dividends to Unicom is dependent on ComEd's financial performance and
cash position, as well as legal restrictions on the payment of dividends by
public utilities. These legal restrictions come from the Federal Power Act and
the Illinois Public Utilities Act, which generally prohibit payment of
dividends in the absence of earnings and earned surplus in the absence of
regulatory authorization. The "Uniform System of Accounts Prescribed for
Public Utilities and Licensees Subject to the Provisions of the Federal Power
Act" provides a mechanism whereby utilities with insufficient retained
earnings balances may nontheless pay dividends out of current earnings as long
as current earnings have been appropriated. Other forms of financing by ComEd
or the unregulated subsidiaries of Unicom, such as additional loans or
additional equity investments, which are not expected, would be subject to
prior approval by the ICC.
The fossil plant sale proceeds received by Unicom Investment, after the
payment of the demand note to ComEd, were used to fund share repurchases and
to invest in new business opportunities. See "Changes in the Electric Utility
Industry" subcaption "Fossil Plant Sale" above, and Notes 1 and 23 of Notes to
Financial Statements for additional information.
Unicom Thermal redeemed the $115.8 million outstanding balance of the 7.38%
unsecured guaranteed senior Note on July 12, 2000. Unicom Thermal recorded an
extraordinary loss related to the early redemption premiums paid and the
write-off of unamortized debt expenses, which reduced Unicom's net income on
common stock by approximately $3.5 million (after-tax) in the third quarter of
2000.
In May 2000, Northwind Chicago issued $28 million of 9.09% guaranteed senior
Notes due January 31, 2020, the proceeds of which will be used primarily to
finance certain project construction costs. The Notes were guaranteed by
Unicom and included certain covenants with respect to Unicom and Northwind
Chicago's operations.
In June 1999, Northwind Midway issued $12 million of 7.68% guaranteed senior
Notes due June 2023, the proceeds of which will be used primarily to finance
certain project construction costs.
Capital Structure. Unicom's ratio of long-term debt to total capitalization
has increased to 63.8% at September 30, 2000 from 55.6% at December 31, 1999,
primarily due to the repurchase of common stock in the first nine months of
2000. As of September 30, 2000 and December 31, 1999, $1,009 million and $716
million, respectively, of retained earnings had been appropriated for Unicom's
future dividend payments.
Regulation
ComEd and Indiana Company are subject to federal and state regulation in the
conduct of their respective businesses. Such regulation includes rates,
securities issuance, nuclear operations, environmental and other matters.
Particularly in the cases of nuclear operations and environmental matters,
such regulation can and does affect operational and capital expenditures.
52
Rate Matters. See "Changes in the Electric Utility Industry," subcaption
"The 1997 Act" above, for information regarding the effect of the 1997 Act on
rate matters.
Nuclear Matters. Nuclear operations have been, and remain, an important
focus of ComEd. ComEd operates five nuclear plants--Braidwood, Byron, Dresden,
LaSalle and Quad Cities Stations, and is committed to safe, reliable and
efficient operation.
On May 6, 1999, ComEd's LaSalle Station was officially removed from the
NRC's listing of plants that require increased regulatory scrutiny. LaSalle
Station had been on this list since January 1997. Concurrent with the LaSalle
Station action, the NRC announced the formal removal of the Quad Cities
Station from its list of plants with declining performance trends. Quad Cities
Station had been on the declining trend list since January 1998. With these
actions, all of ComEd's nuclear plants are now placed in the NRC's "routine
oversight" category.
The NRC and representatives of ComEd's management have met, and will
continue to meet periodically as part of the NRC's normal oversight process,
to discuss the overall performance of the ComEd nuclear program.
Based on ComEd's most recent study, decommissioning costs are estimated to
be $5.6 billion in current-year (2000) dollars, including a contingency
allowance. These expenditures are expected to occur primarily during the
period from 2007 through 2034. All such costs are expected to be funded by the
external decommissioning trusts, which ComEd established in compliance with
Illinois law and into which ComEd has been making annual contributions. Future
decommissioning cost estimates may be significantly affected by the adoption
of, or changes to NRC regulations, as well as changes in the assumptions used
in making such estimates, including changes in technology, available
alternatives for the disposal of nuclear waste and inflation.
Since 1995, ComEd has collected decommissioning costs from its ratepayers in
conjunction with a rider to its tariffs. The rider allows annual adjustments
to decommissioning cost collections outside the context of a traditional rate
proceeding and will continue under the 1997 Act. See Note 1 of Notes to
Financial Statements, under "Depreciation, Amortization of Regulatory Assets
and Liabilities, and Decommissioning," for additional information regarding
decommissioning costs.
Environmental Matters. ComEd is involved in administrative and legal
proceedings concerning air quality, water quality and other matters. The
outcome of these proceedings may require increases in future construction
expenditures and operating expenses and changes in operating procedures. See
Note 21 of Notes to Financial Statements for additional information.
Results of Operations
Unicom's basic and diluted earnings per common share for three months, nine
months and twelve months ended September 30, 2000 and 1999 were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------- ----------------- ---------------------
2000 1999 2000 1999 2000 1999
--------- --------- -------- -------- ---------- ----------
Basic Earnings per Com-
mon Share.............. $ 0.94 $ 1.29 $ 2.78 $ 2.16 $ 3.17 $ 2.67
========= ========= ======== ======== ========== ==========
Diluted Earnings per
Common Share........... $ 0.93 $ 1.28 $ 2.76 $ 2.15 $ 3.16 $ 2.66
========= ========= ======== ======== ========== ==========
Substantially all of the results of operations for Unicom are the results of
operations for ComEd. As such, the following section generally discusses, in
more detail, the effect of ComEd's operations on Unicom's financial results.
EPS computations for the recent three, nine and twelve month periods were
positively affected by reductions in Unicom's outstanding shares as a result
of share repurchases. All EPS computations shown below reflect the impact on
Unicom's diluted EPS.
53
Net Income for the Three Months Ended September 30, 2000. The decrease in
Unicom's net income in the recent three-month period reflects, among other
factors, ComEd's increased energy costs, higher O&M expenses and increased
regulatory asset amortization, partially offset by improved nuclear operating
performance.
Net Income for the Nine Months Ended September 30, 2000. The increase in
ComEd's net income in the recent nine-month period reflects, among other
factors, the continued improvement of ComEd's nuclear fleet, increased
kilowatthour sales, lower O&M expenses, lower financing costs and a reduction
in Unicom's outstanding shares partially offset by higher energy costs.
Net Income for the Twelve Months Ended September 30, 2000. The increase in
earnings for the twelve-month period was primarily due to increased off-system
kilowatthour sales, the sale of ComEd's fleet of fossil stations, lower
financing costs, a reduction in Unicom's outstanding common shares, partially
offset by increased regulatory asset amortization, higher energy costs and
higher O&M expenses.
Operating Revenues. ComEd's electric operating revenues reflect revenues
from sales to ultimate consumers (including residential, commercial and
industrial customers within its service territory) and revenues from sales for
resale (i.e., sales to wholesale customers, principally other electric
utilities). Operating revenues are affected by kilowatthour sales and rate
levels. Kilowatthour sales, in turn, are affected by weather, the level of
economic activity within ComEd's service area, and off-system or wholesale
sales to other utilities. Off-system sales are affected by a number of
factors, including nuclear generating station availability and performance.
See Note 1 of Notes to Financial Statements, under "Use of Estimates" and
"Customer Receivables and Revenues", for additional information.
ComEd's operating revenues increased $17 million for the three months ended
September 30, 2000, compared to the three months ended September 30, 2000,
primarily due to a $120 million increase in off-system sales and other
revenues offset by a $103 million reduction in sales to retail customers.
ComEd's operating revenues increased $71 million for the nine months ended
September 30, 2000, compared to the nine months ended September 30, 2000,
primarily due to a $354 million increase in off-system sales and other
revenues partially offset by a $284 million reduction in sales to retail
customers. ComEd's operating revenues increased $7 million for the twelve
months ended September 30, 2000, compared to the twelve months ended September
30, 2000 due to a $378 million increase in off-system sales and other revenues
partially offset by a $353 million reduction in sales to retail customers.
Unicom's unregulated businesses' operating revenues increased $19 million,
$307 million and $347 million in the three months, nine months and twelve
months ended September 30, 2000, respectively, compared to the three months,
nine months and twelve months ended September 30, 2000. The increase is
primarily due to the acquisition of new businesses during the recent 12-month
period and increased revenues related to performance contracting and district
cooling services.
54
Energy Costs. Energy costs are currently affected primarily by system load,
the cost of nuclear fuel consumed, the availability and net generation of
ComEd's nuclear generating units, the PPAs ComEd entered into upon the sale of
its fossil stations, the availability and cost of power from other utilities
and the costs of gas supply contracts entered into by Unicom's unregulated gas
services subsidiaries. Prior to the sale of ComEd's fossil stations, energy
costs were also affected by changes in the cost of fossil fuels consumed and
changes in the mix of fuel sources of electric energy generated. Energy costs,
electricity available for sale and fuel sources of kilowatthour generation
were as follows:
Three Months Ended Nine Months Ended Twelve Months Ended
September 30 September 30 September 30
------------------------------ ---------------------------------- ----------------------------------
2000 1999 2000 1999 2000 1999
-------------- -------------- ---------------- ---------------- ---------------- ----------------
Cost Cost Cost Cost Cost Cost
Energy per Energy per Energy per Energy per Energy per Energy per
Costs Kwh Costs Kwh Costs Kwh Costs Kwh Costs Kwh Costs Kwh
-------- ---- -------- ---- ---------- ---- ---------- ---- ---------- ---- ---------- ----
(000's) (000's) (000's) (000's) (000's) (000's)
Cost of energy:
Electric (ComEd)
Fuel
Nuclear........... $ 97,207 0.48c $107,455 0.53c $ 294,046 0.49c $ 287,778 0.52c $ 386,758 0.49c $ 371,987 0.52c
Coal.............. -- -- 160,893 2.19 -- -- 431,719 2.30 94,177 2.08 589,151 2.37
Oil............... -- -- 4,475 5.69 -- -- 6,659 5.07 1,195 9.09 8,276 5.81
Natural gas....... -- -- 29,358 2.80 -- -- 70,498 2.98 12,524 5.91 80,285 3.11
Purchased power.... 689,629 5.82 249,375 7.74 1,287,018 4.34 419,358 5.81 1,419,235 4.17 520,987 5.52
-------- -------- ---------- ---------- ---------- ----------
Total electric
energy cost...... $786,836 2.45c $551,556 1.73c $1,581,064 1.76c $1,216,012 1.46c $1,913,889 1.63c $1,570,686 1.45c
======== ======== ========== ========== ========== ==========
Gas (Unregulated
operations)
Supply contracts... $ 46,265 $ -- $ 123,863 $ -- $ 125,588 $ --
-------- -------- ---------- ---------- ---------- ----------
Total energy cost.. $833,101 $551,556 $1,704,927 $1,216,012 $2,039,477 $1,570,686
======== ======== ========== ========== ========== ==========
Electricity
available for sale
(millions of
kilowatthours)
Generation--net... 20,223 28,627 60,293 76,319 83,659 99,021
Purchased power... 11,851 3,222 29,684 7,215 34,030 9,445
-------- -------- ---------- ---------- ---------- ----------
Total available
for sale......... 32,074 31,849 89,977 83,534 117,689 108,466
======== ======== ========== ========== ========== ==========
Sources of
kilowatthour
generation
available for
sale:
Fuel
Nuclear........... 63% 64% 67% 66% 67% 66%
Coal.............. -- 23 -- 22 4 23
Oil............... -- -- -- -- -- --
Natural gas....... -- 3 -- 3 -- 2
Purchased power... 37 10 33 9 29 9
-------- -------- ---------- ---------- ---------- ----------
100% 100% 100% 100% 100% 100%
======== ======== ========== ========== ========== ==========
Higher energy costs for the three months, nine months and twelve months
ended September 30, 2000 resulted primarily from the effects of the PPAs ComEd
entered into upon the sale of its fleet of fossil stations which increase
purchased power costs but are offset by lower depreciation and O&M expenses.
Costs associated with Unicom Energy's gas supply contracts also contributed to
higher
55
energy costs for the recent three, nine and twelve months ended September 30,
2000. See "Regulation," subcaption "Nuclear Matters" above, for information
regarding ComEd's nuclear generating stations. For additional information
concerning ComEd's purchase power commitments see "Liquidity and Capital
Resources," subcaption "UTILITY OPERATIONS--Construction Program," above and
Note 21 of Notes to Financial Statements.
The market price for electricity is subject to price volatility associated
with changes in supply and demand in the electric supply markets. ComEd
utilizes energy put and call option contracts and energy swap arrangements to
limit market price risk associated with forward commodity contracts. See
"Liquidity and Capital Resources," subcaption "UTILITY OPERATIONS--Market
Risks" above, for additional information.
Operation and Maintenance Expenses. O&M expenses include the expenses
associated with operating and maintaining ComEd's generation, transmission and
distribution assets, as well as administrative overhead and support, and the
expenses associated with Unicom's unregulated businesses. Given the variety of
expense categories covered, there are a number of factors which affect the
level of such expenses within any given period. A major component of such
expenses, however, is the cost associated with operating and maintaining
ComEd's nuclear generating facilities. Generating station expenses are
affected by the cost of materials, regulatory requirements and expectations,
the age of facilities and cost control efforts.
During the three months, nine months and twelve months ended September 30,
2000, the aggregate level of O&M expenses increased 12%, decreased 2% and
increased 1%, respectively, compared to the same periods ended September 30,
1999.
O&M expenses associated with nuclear generating stations increased $21
million, and decreased $62 million and $100 million during the three months,
nine months and twelve months ended September 30, 2000, respectively, compared
to the same periods ended September 30, 1999. The increase in the recent
three-month period is due to refueling outages which began in mid-September.
There were no refueling outages in the third quarter of 1999. The decreases in
the recent nine-month and twelve-month periods were due to shorter refueling
outages and fewer forced outages.
O&M expenses associated with ComEd's fossil generating stations sold in
December 1999 were $51 million for the three months and $183 million for the
nine months ended September 30, 1999 and $37 million and $248 million for the
twelve months ended September 30, 2000 and September 30, 1999, respectively.
O&M expenses associated with ComEd's transmission and distribution system
increased $13 million, $85 million and $104 million for the three months, nine
months and twelve months ended September 30, 2000, respectively, compared to
the same periods ended September 30, 1999. The increases for the recent three-
month, nine-month and twelve-month periods were primarily due to ComEd's
intensive efforts to improve the reliability of its transmission and
distribution systems. O&M expenses associated with customer related activities
decreased $16 million, $15 million and $2 million for the three months, nine
months and twelve months ended September 30, 2000, respectively, compared to
the same periods ended September 30, 1999. The decrease in the recent three-
month, nine-month and twelve-month periods were primarily due to increased
credit and collection activity and lower overtime and labor costs incurred
during the three-month, nine-month and twelve-month periods ended September
30, 1999 to address billing problems encountered following the implementation
of a new customer information and billing system in July 1998.
O&M expenses for the twelve months ended September 30, 2000 reflect an
increase of $68 million in ComEd's estimated environmental liability for the
remediation of former manufactured gas plant sites compared to the same period
ended September 30, 1999. O&M expenses for the nine and twelve
56
months ended September 30, 1999 also reflect increased charges of $25 million
and $35 million, respectively, for uncollectible accounts resulting from
billing and collection delays experienced following the ongoing implementation
of a new customer information system and the temporary suspension of credit
activities in the last half of 1998 and early 1999.
O&M expenses also include employee benefits expenses. Since 1995, ComEd has
reduced the size of its workforce by offering incentives for employees to
leave the company voluntarily. Such incentives included both current payments
and earlier eligibility for postretirement health care benefits, in addition
to certain other employee-related costs, resulting in charges of $33 million
and $2 million for the three months ended September 30, 2000 and 1999,
respectively, $47 million and $7 million for the nine months ended September
30, 2000 and 1999, respectively, and $50 million and $23 million for the
twelve months ended September 30, 2000 and 1999, respectively, other than
costs related to the fossil plant sale.
Other ComEd employee benefits expenses, excluding the effects of employee
separation plans and certain other employee-related costs increased
$18 million and decreased $20 million and $29 million for the three months,
nine months and twelve months ended September 30, 2000, respectively, compared
to the same periods ended September 30, 1999. The increase for the recent
three-month period was primarily due to higher accruals for incentive
compensation. The decreases for the recent nine-month and twelve-month periods
were primarily due to a reduction in pension costs and medical costs for
active and retired employees.
O&M expenses also include increases of $9 million, $26 million and $26
million for the recent three, nine and twelve months ended September 30, 2000,
respectively, for expenses, other than severance, incurred in connection with
the merger with PECO.
O&M expenses included a $25 million charge for the nine months and twelve
months ended September 30, 1999 as a result of a franchise related settlement
agreement between ComEd and the City.
O&M expenses also include increases of $28 million, $52 million and $52
million for the recent three, nine and twelve months ended September 30, 2000,
respectively, for the rental of gas and diesel peaking units.
O&M expenses decreased $47 million, $76 million and $51 million for the
three, nine and twelve months ended September 30, 2000, compared to the same
periods ended September 30, 1999, due to lower administrative and general
costs.
O&M expenses associated with Unicom's unregulated businesses increased $67
million, $165 million and $195 million for the three months, nine months and
twelve months ended September 30, 2000, respectively, compared to the same
periods ended September 30, 1999. The increase is primarily related to (more
to come).
Depreciation, Amortization and Decommissioning. Depreciation, amortization
and decommissioning expense increased $28 million, $131 million and $45
million for the three months, nine months and twelve months ended September
30, 2000, respectively, compared to the same periods ended September 30, 1999
primarily due to increased regulatory asset amortization. The regulatory asset
amortization recorded for the three months, nine months and twelve months
ended September 30, 2000 represent amounts calculated in accordance with the
earnings cap provisions of the 1997 Act. Consistent with the provisions of the
1997 Act, the (pre-tax) gain on the fossil plant sale of $2.587 billion
resulted in a regulatory liability, which was used to recover regulatory
assets. Therefore, the gain on the sale, excluding $43 million of amortization
of investment tax credits, was recorded as a regulatory liability in the
amount of $2.544 billion and amortized in the fourth quarter of 1999. The
amortization of the regulatory liability and additional regulatory asset
amortization of $2.456 billion
57
are reflected in depreciation and amortization expense on Unicom's Statements
of Consolidated Operations and resulted in a net reduction to depreciation and
amortization expense of $88 million for the twelve months ended September 30,
2000. See Note 1 of Notes to Financial Statements, under "Depreciation,
Amortization of Regulatory Assets and Liabilities, and Decommissioning," for
additional information.
Interest on Debt. Changes in interest on long-term debt and notes payable
for the three months, nine months and twelve months ended September 30, 2000,
compared to the same periods ended September 30, 1999, were due to changes in
average interest rates and in the amounts of long-term debt and notes payable
outstanding. Changes in interest on ComEd's long-term debt also reflected new
issues of debt, the retirement and early redemption of debt, and the
retirement and redemption of issues which were refinanced at generally lower
rates of interest. See Notes 3 and 6 of Notes to Financial Statements for
information regarding the redemptions and repurchases of debt and equity. The
average amounts of ComEd's long-term debt and notes payable outstanding and
average interest rates thereon were as follows:
Nine Months
Three Months Ended Ended Twelve Months Ended
September 30 September 30 September 30
-------------------- -------------- --------------------
2000 1999 2000 1999 2000 1999
--------- --------- ------ ------ --------- ---------
Long-term debt outstand-
ing:
Average amount
(millions)............ $ 7,163 $ 7,998 $7,360 $8,227 $ 7,469 $ 7,671
Average interest rate.. 7.12% 6.77% 6.96% 6.76% 6.90% 7.01%
Notes payable outstand-
ing:
Average amount
(millions)............ $ 437 $ 381 $ 271 $ 298 $ 300 $ 311
Average interest rate.. 6.87% 5.50% 6.75% 5.84% 6.44% 5.59%
Other Items. The amounts of AFUDC reflect changes in the average levels of
investment subject to AFUDC and changes in the average annual capitalization
rates as discussed in Note 1 of Notes to Financial Statements, under "AFUDC
and Interest Capitalized." In accordance with SFAS No. 34, Capitalization of
Interest Cost, ComEd capitalized $2 million and $4 million for the three
months ended September 30, 2000 and 1999, respectively, $4 million and $16
million for the nine months ended September 30, 2000 and 1999, respectively,
and $10 million and $31 million for the twelve months ended September 30, 2000
and 1999, respectively, of interest costs on its generation-related
construction work in progress and nuclear fuel in process. AFUDC and interest
capitalized do not contribute to the current cash flow of Unicom or ComEd.
ComEd's ratios of earnings to fixed charges for the twelve months ended
September 30, 2000 and December 31, 1999 were 2.48 and 2.45, respectively.
ComEd's ratios of earnings to fixed charges and preferred and preference stock
dividend requirements for the twelve months ended September 30, 2000 and
December 31, 1999 were 2.44 and 2.32, respectively.
Business corporations, in general, have been adversely affected by inflation
because amounts retained after the payment of all costs have been inadequate
to replace, at increased costs, the productive assets consumed. Electric
utilities, in particular, have been especially affected as a result of their
capital intensive nature and regulation which limits capital recovery and
prescribes installation or modification of facilities to comply with
increasingly stringent safety and environmental requirements. Because the
regulatory process limits the amount of depreciation expense included in
ComEd's revenue allowance to the original cost of utility plant investment,
the resulting cash flows are inadequate to provide for replacement of that
investment in future years or preserve the purchasing power of common equity
capital previously invested.
Foward-Looking Information. Except for historical data, the information
contained herein constitutes forward-looking statements. Forward-looking
statements are inherently uncertain and
58
subject to risks. Such statements should be viewed with caution. Actual
results or experience could differ materially from the forward-looking
statements as a result of many factors. Forward-looking statements in this
report include, but are not limited to: (1) statements regarding expectations
of revenue reductions and collections of future CTC revenues as a result of
the 1997 Act in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," subcaption "Changes in the Electric Utility
Industry--The 1997 Act," and in Notes 1 and 3 of Notes to Financial
Statements, (2) statements regarding estimated capital expenditures in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," subcaptions "Liquidity and Capital Resources--UTILITY
OPERATIONS--Construction Program" and "Liquidity and Capital Resources--
UNREGULATED OPERATIONS--Construction Program," and "Changes in the Electric
Utility Industry--Response to Regulatory Changes," (3) statements regarding
the costs of decommissioning nuclear generating stations in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
subcaption "Regulation--Nuclear Matters," and in Note 1 of Notes to Financial
Statements, under "Depreciation, Amortization of Regulatory Assets and
Liabilities and Decommissioning," (4) statements regarding cleanup costs
associated with MGPs and other remediation sites in Note 21 of Notes to
Financial Statements, (5) statements regarding the estimated fair value of
forward energy contracts in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," subcaption "Liquidity and Capital
Resources-- UTILITY OPERATIONS--Market Risks," (6) statements regarding the
use of fossil plant sale proceeds in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," subcaptions "Changes in the
Electric Utility Industry--Fossil Plant Sale," "Liquidity and Capital
Resources--UTILITY OPERATIONS--Construction Program," and "Liquidity and
Capital Resources--UNREGULATED OPERATIONS--Capital Resources," and in Note 4
of Notes to Financial Statements, (7) statements regarding estimates of claims
resulting from the summer of 1999 outages set forth in Note 21 of Notes to
Financial Statements, (8) statements regarding ComEd's transfer of nuclear
assets, including the decommissioning trust funds, in Notes 1 and 2 of Notes
to Financial Statements and in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" subcaption "Changes in the
Electric Utility Industry--Merger Agreement" and (9) statements regarding the
withdrawal of ComEd's facilities from the MISO and ComEd's responsibility for
start-up costs associated with the MISO under the transmission owners'
agreement. Management cannot predict the course of future events or anticipate
the interaction of multiple factors beyond management's control and their
effect on revenues, project timing and costs. The statements regarding revenue
reductions and collections of future CTC revenues are subject to unforeseen
developments in the market for electricity in Illinois resulting from
regulatory changes. The statements regarding estimated capital expenditures,
decommissioning costs and cleanup costs are subject to changes in the scope of
work and manner in which the work is performed and consequent changes in the
timing and level of the projected expenditure, and are also subject to changes
in laws and regulations or their interpretation or enforcement. The statements
regarding the fair value of forward energy contracts are subject to changes in
generating capability and reduction in the demand for electricity. The
statement regarding the use of proceeds from the fossil plant sale is subject
to the possibility that regulatory action might affect the amount and use of
such proceeds and the possibility that, due to changing market conditions,
Unicom and ComEd may determine that other uses of the proceeds may be in their
best interest. The statements regarding estimates of claims resulting from the
summer of 1999 outages are subject to the risk that the actual amount of
losses suffered by customers and restoration costs may exceed the estimated
amounts. The statements regarding ComEd's transfer of nuclear assets,
including the decommissioning trust funds, are subject to the risk of
unsatisfactory resolution of significant regulatory and tax issues. The
statements regarding the timing of withdrawal of ComEd's facilities from the
MISO and ComEd's responsibility for start-up costs associated with the MISO
are subject to resolution of legal issues raised, and expected to be raised,
by the MISO. Unicom and ComEd make no commitment to disclose any revisions to
the forward-looking statements, or any facts, events or circumstances after
the date hereof that may bear upon forward-looking statements.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On June 12, 2000, the NRC issued to ComEd an Order imposing a civil penalty
of $110,000 for a violation of NRC employee protection regulations at Zion
Station in 1997. On August 11, 2000, ComEd notified the NRC that it would not
request a hearing, although it did not agree that a violation had occurred,
and paid the civil penalty.
During 1989 and 1991, actions were brought in federal and state courts in
Colorado against ComEd and Cotter seeking unspecified damages and injunctive
relief based on allegations that Cotter has permitted radioactive and other
hazardous material to be released from its mill into areas owned or occupied
by the plaintiffs resulting in property damage and potential adverse health
effects. With respect to Cotter, in 1994 a federal jury returned nominal
dollar verdicts on eight plaintiffs' claims in the 1989 cases, which verdicts
were upheld on appeal. The remaining claims in the 1989 actions have been
settled and dismissed. On July 15, 1998, a jury verdict was rendered in Dodge
v. Cotter (United States District Court for the District of Colorado, Civil
Action No. 91-Z-1861), a case relating to 14 of the plaintiffs in the 1991
cases. The verdict against Cotter and in favor of the plaintiffs, after an
amended judgement was issued March 11, 1999, totaled approximately $6 million,
including compensatory and punitive damages, interest and medical monitoring.
Cotter appealed. On February 11, 2000, the Tenth Circuit Court of Appeals
agreed with Cotter, found that the trial judge had erred in critical rulings
and reversed the jury verdict, remanding the case for new trial. A trial
involving the next group of twelve plaintiffs is currently underway in federal
district court in Denver. Although this trial and the other 1991 cases will
necessarily involve the resolution of numerous contested issues of law and
fact, it is the Company's assessment that these actions will not have a
material impact on its financial position or operations.
In August of 1999, three class action lawsuits were filed against the
Company related to a series of service interruptions. The two primary events
occurred on July 30 through August 2, 1999. Another significant outage
occurred on August 12, 1999. The outages of July 30, 1999, described as the
Northwest Substation events, began during a period of intense heat and
humidity. On August 12, 1999, in what is described as the Jefferson Substation
event, ComEd interrupted service to customers on the near north and near west
side of the Loop. While major commercial customers were affected, all service
was restored in this event on the same date. The combined effect of these
events resulted in over 168,000 customers losing service for more than 4
hours. The class action complaints have been consolidated and seek to recover
damages for personal injuries and property damage, as well as economic loss
for these events. Further, ComEd initiated expedited claim settlements for
those with primarily food spoilage claims and has paid over $4 million to
date. Conditional class certification has been approved by the Court for the
sole purpose of exploring settlement talks. For purposes of such discussions,
the outages described above, as well as lesser events through August 31, 1999,
will be considered. If talks are not productive, either side can withdraw
unilaterally. The Company has repeatedly declared that it will pay no economic
damages and will vigorously defend against such claims. The lawsuits are
pending in the Circuit Court of Cook County. ComEd filed a motion challenging
the legal sufficiency of the consolidated complaints. On July 21, 2000, the
judge dismissed two of the counts with prejudice, and four others with leave
to replead. The plaintiffs filed an amended complaint on August 29, 2000.
ComEd has again filed a motion seeking dismissal of the pleadings. The
plaintiffs have not yet responded. The next status before the Court is set for
November 10, 2000. Argument on the motion to dismiss will likely occur in
December 2000. A portion of any settlement or verdict may be covered by
insurance and discussions with the carrier are ongoing. ComEd's management
believes adequate reserves have been established in connection with these
cases.
Following the summer 1999 service interruptions, the ICC opened a three-
phase investigation of the design and reliability of ComEd's transmission and
distribution system. At the conclusion of each
60
phase of the investigation, the ICC will issue reports that will include
specific recommendations for ComEd and a timetable for executing the
recommendations. Although the recommendations are not legally binding on
ComEd, the ICC may enforce the recommendations through litigation. The report
on Phase I of the investigation was released the week of January 3, 2000,
which focused on the outages of July and August 1999. The first and second of
five reports on Phase II and Phase III, focusing on the transmission and
distribution system, were released during the weeks of June 5 and June 17,
respectively. The third report is anticipated later this year. The
investigation is expected to conclude by early 2001. Since summer 1999, the
Company has devoted significant resources to improving the reliability of its
transmission and distribution system. The Company believes that the likelihood
of a successful material claim resulting from this investigation is remote.
The investigation is expected to conclude by early 2001.
In 1996, several developers of non-utility generating facilities filed
litigation against various Illinois officials claiming that the enforcement
against those facilities of an amendment to Illinois law removing the
entitlement of those facilities to state-subsidized payments for electricity
sold to ComEd after March 15, 1996 violated their rights under the federal and
state constitutions, and against ComEd for a declaratory order that their
rights under their contracts with ComEd were not affected by the amendment. On
August 4, 1999, the Illinois Appellate Court held that the developers' claims
against the State were premature, and the Illinois Supreme Court denied leave
to appeal that ruling by Order dated December 1, 1999. On April 14, 2000, the
developer of one such facility requested leave to amend its complaint to
allege claims for damages against ComEd based on breach by ComEd of an alleged
contractual obligation to pay for electricity purchased from that developer at
the state-subsidized rate. ComEd has objected to the developer's request for
leave to amend, and intends vigorously to contest any assertion by such
developer that it is entitled to any payment in excess of ComEd's avoided
costs.
CERCLA provides for immediate response and removal actions coordinated by
the U.S. EPA to releases of hazardous substances into the environment and
authorizes the U.S. Government either to clean up sites at which hazardous
substances have created actual or potential environmental hazards or to order
persons responsible for the situation to do so. Under CERCLA, generators and
transporters of hazardous substances, as well as past and present owners and
operators of hazardous waste sites, are made strictly, jointly and severally
liable for the cleanup costs of waste at sites, most of which are listed by
the U.S. EPA on the NPL. These responsible parties can be ordered to perform a
cleanup, can be sued for costs associated with a U.S. EPA directed cleanup,
may voluntarily settle with the U.S. Government concerning their liability for
cleanup costs, or may voluntarily begin a site investigation and site
remediation prior to listing on the NPL under state oversight. Various states,
including Illinois, have enacted statutes which contain provisions
substantially similar to CERCLA. ComEd and its subsidiaries are or are likely
to become parties to proceedings initiated by the U.S. EPA, state agencies
and/or other responsible parties under CERCLA with respect to a number of
sites, including MGP sites, or may voluntarily undertake to investigate and
remediate sites for which they may be liable under CERCLA. See Note 21 of
Notes to Financial Statements for information regarding costs associated with
investigating and remediating former MGP sites.
From time to time, Unicom and its subsidiaries are, or are claimed to be, in
violation of or in default under orders, statutes, rules or regulations
relating to environmental controls and other matters, compliance plans imposed
upon or agreed to by them or permits issued by various state and federal
agencies for the construction or operation of their facilities. Unicom and
ComEd does not believe, so far as they now foresee, that such violations or
defaults will have a material adverse effect on their future business and
operating results, except for events otherwise described in Unicom and ComEd's
Annual Reports on Form 10-K for the year ended December 31, 1999 or in this
Quarterly Reports on Form 10-Q for the quarterly period ended September 30,
2000, which could have such an effect.
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