ML20211Q450

Commonwealth Edison 1986 Annual Rept

ML20211Q450
Person / Time
Site:	Dresden, Byron, Braidwood, Quad Cities, Zion, LaSalle, 05000000
Issue date:	12/31/1986
From:	Oconnor J, Wisiol K COMMONWEALTH EDISON CO.
To:	Office of Nuclear Reactor Regulation
References
NUDOCS 8703030096
Download: ML20211Q450 (41)

Text

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1 In April 1887, Robert Todd Lincoln, son of the President, and 380therinvestors founded the Chicago Edison Company to supply electricity to rapidly growing Chicago. At first, the new Company provided electricity for lighting, but the convenient and clean energy soon found many other uses. The electric generators the Company installed to meet the demand had to be everlarger. A new Company, Commonwealth Electric Company, threatened to become a competitor to the Edison Company. However,before a fight for turfbroke out,the two companies worked together and finally merged in 1907.The successor was named Commonwealth Edison Company, the name by which we are known today. From its beginning, our Company has powered the commercialand industrial growth of the Chicago area. In the 1950s, that growth pushed the limits of the metropolitan area into the cornfields of northern Illinois. Nuclear power began to help satisfy the growing demand for electricity in the 1960s. 0ur Dresden station made history as the first commercial reactor built by an investor-owned utility. In the 1970s, tall office and apartment buildings began to sprout in Chicago. Today, electricity still is doing what it has always done best-powering the things that make our lives productive and enjoyable. Commonwealth Edison now serves a vibrant commercial, industrial and cultural center and supplies electricity to 3 million customers (8 million people) in Chicago and northern Illinois. In our cover and frontispiece, Mark McMahon captures some of these significant events in our Company's history. McMahon, a well known illustrator of Chicago scenes and events, lives in Lake Forest, one of the communities we serve. A lin ited supply of color reprints of the cover and frontispiece is available. If you would like to receive a reprint, sized approximately 11 Highhghts, Revenues and Sales 2 inches by 32 inches (plus border) and suitable for framing, please send letter to Shareholders 3 emenfs" Discussion and Analysis of a check or money order for 84.00 payable to Commonwealth Liison to: Reprint, Commonwealth Edison, Shareholder Services. P.O. Box 767, Financial Condition and Results of Operations 11 Reportof Management 18 Chicago,IL 60690-0767. Report of Independent Pubir Accountants to the Audit Committee is Copies of our 442-page, hard<over Edison centennial history, A Spint Consolidated Financial Statements 19 Capable,areavailabletoahareholdersatasubstantialdecountoff the ep rt o ndent M Accountants 35 Directors and Management 36 retail price. Please send a check or money order (312.40 Illinois Other Information Inside BacWer residenta, $11.60 out<f state) payable to Commonwealth Edison to: A Spirit Capable, Commonwealth Edison. P.O. Box 767, Chicago, IL 60690-0767.

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' n. cw e w ~m.. L,.~ c a s. 24 m:e,a hh 1 s ' , [ 2eectbr built by skinvestor hwned Utility. In'the )974taH oSce and W huil:Englispa t'a gr &j& N. D,' 'Today,~ electricity still is doingwhd, it lies always done best--powering the' thing the make our li,ves piochietive a ~ 1W. . s.my &4. ?::. e uf"; .y;. . M ~ ~ w % ". gg Mb .,, m o. ,. sm..e %a .3. ~.. %... my g 4 er p [h f ~N' ethayable. Commollwealth Edhs0n now serves a vibrant c0inInercial, inthistrial nd cultureI center and sqlpliesMf hMOM a [Q,s . >. n H w ., m 5 s gd, J , ~+ s; a - -1 ', electricityto3millionh' n(8imHionipeople)inChicagoandnorthernEmois., ' Rhm Jj;. Ni gr..N.i c ,,y ..,m,, - o - &- 3+ + % A. m g5 In out, cover amlIIolltI isce, Mark MCMalion, cqltutes[solne of these signi6 ~ s .y g n + b.sw ( tg w x .,~t >x n- [t, k, .a bh 7 Q y s....,. q u. m .1,> p >.., -.... 2 c. ['[ ~ m ' McMahon,awellknowniHustratorofCliicago'scenesandevents,livisinLakeF.onst,oneofthe===nitiesweserww+,. y&w y. u _s ~ m' ~., -eq ms m, ws.w ,~7, su a 3

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~ 6 ? 'i 'M) .. 1 : ; a,i ~ 1996im Review W M* . e check or mon,ey enler for $4.00 payable to Casamosseelth Edison to: s i S[/ nianas, ment's Ducussion and Analysis d .. m r s h [ Reprint,'Commonweekh Ihlissa,. Shanholder Services, P.O. Bos 767 Fmencial Conddon and Results d 0pwat ons - 11 1 7g L c y, vy-m Report d Way==4 h,[- 44 ' Chicsso,IL600s04767, 18 i hh L 18U, $c W-7 Report d Inap==i==a Public Accountants to tim Audit fb=**= 'N ConsolidatedFinancialStatements '

Copiesofour442. pass,had< overed,isoncentenmalhistory,ASpirit 19 Q$,_

i n e s]' c:: hr CapeWe,anavailabletoshenholdusatendistantialdiscountof the Reputdindgundant Nccountants W M Dutctors and Manesement 36' . ntail price. Please send a check or enseey onler ($12.40 Illinois OtherInformation Inside Back Cover 'Y m a;J asidents, $11.00 out-of.etate) payable to Commancesith Edison to: A I e. - Spirit CapeMe, Comennwealth Edison, P.O. Bo 767,Chienso,IL g J i k 80890 4 767. A ts m ,s. [ f? F L :- L ;.....tr t .3A

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2-Commonwealth Edison Highlights i 1986 Highlights Increase Over 1986 1985 1985 Net income on common stock (millions) $932.9 $839.6 11.1 % Earnings per common share $ 4.69 $ 4.45 5.4% Cash dividends paid per common share $ 3.00 $ 3.00 Common shares outstanding at year-end (millions) 202.7 194.7 4.1% Common shareholders of record at year-end (thousands) 253 272 7.0%' Totalassets (billions) $ 17.4 $ 16.3 6.7% Electric customers at year-end (thousands) 3,060 3,028 1.1% Summer peak load (million kilowatts) 15.100 13.255 13.9 % Winter peak load (million kilowatts) 11.367 11.713 3.0%

• Decrease 1986 Revenues AndSales Electric 0perating Increase Kilowatthour increase Revenues (1)

Over Sales Over (thousands) 1985 (millions) 1985 Residential $1,921,733 10.1 % 18,155 1.7% Smallcommercialand industrial 1,664,790 11.0%(2) 19,515 4.2%(2) Large commercialand industrial 1,336,765 9.8%(2) 20,160 1.1%(2) Public authorities 421,172 10.7 % 5,756 1.4%' Electric railroads 28,342 9.6% 398 0.6% Ultimate consumers $5,372,802 10.4 % 63,984 2.0% Sales for resale 65,433 1,133 Other revenues 40,276 Total $5,478,511 65,117 ' Decrease (t) Pursuant to a May 16,1986 order of the Circuit Court of Cook County. electnc operating revenues include revenues sutnect to refund of $316.343.000 for the year 1986. (2)The 1985 electnc operating revenues and kilowatthour sales were restated to reflect a reclassification of customers from small commercial and industnal to large commercial and industnal.

3 To Our sharsholders Last year I reported to you that our commitment is W.he future-to ensuring our position as a competitive energy supplier. I am pleased to report that your Company is moving toward this goal. e f Our earnings of $4.69 per share on common stock, g represented an increase of 244 or 5.4% over per share earnings in 1985. Sales of electrical energy to ultimate consumers showed good increases in 1986 and reached a record high of 64 billion kilowatthours,2.0% above 1985 sales. In the summer of 1986, our customers also set a new record for electrical demand. Warm weather and the use of air conditioning pushed our peak load to 15.1 million kilowatts,3.6% alx)ve James J. O' Conner Chairr A & Prosident the previous record. We also made progress in our construction program, which calls for completing and placing in commercial senice three nuclear generating units, Byron Unit 2 and Braidworx! Units I and 2. Work on these units is on schedule and expenditures are within established budgets. For Byron Unit 2, we received a license from the Nuclear Regulatory Commission (NRC) in November permitting us Earnings Per Share to joad fuel, activate the reactor,and operate the unit to the On Dottus) 5% power level. Fuel has been loaded, the testing program is 1988 4.69 1985 4.45 going forward and we received a full power license from the 19s4 4.43 NRC on January 30,1987. The Unit is expected to be in 1983 4.39 10s2 335 senice by mid 1987, as scheduled.

4 For Braidwood station, we are awaiting the decision by the nuclear generating units under construction and the levelof Atomic Safety and Licensing Board on our application for the Company's electric service rates.This plan, which is the an operating license. This Board examines issues related to culmination of lengthy negotiations, has been agreed to by safety of the station. The hearings in this proceeding were the Company,the Governor and the Attorney Generalof concluded in November and we anticipate receiving the the State of Illinois, the State's Attorney of Cook County Board's decision in March 1987. and others, and has been endorsed by local business and labor leaders. On February 3,1987 we filed the plan with A license for Braidwood Unit I was received from the NRC the Illinois Commerce Commission (ICC)in order to obtain in October 1986, permitting us to load fuel and conduct pre. its approval. Although under the plan the Company start up testing.This Unit also is scheduled to be in senice assumes additional risks related to sales growth and by mid.1987. Braidwood Unit 2, the last unit in our current expenses as well as the operation of our three nuclear construction program, is nearly 90% complete and generating units now under construction, the uncertainties scheduled for senice late next year. concerning completion of the Company's nuclear generating units and the level of electric service rates should be Our cost containment program, which I discussed in last substantially reduced and opportunities for improved year's Annual Report, has shown good results. Under this shareholder value should be increased if the plan is program we are reviewing all Company activities and are approved and implemented. drawing on the ingenuity ofour employes to find better and lower cost ways of doing business. Their innovative Key elements of the plan are: approaches in shouldering growing work loads is a significant factor in the success of the program. The result

• Electric service rates would be increased, effective July 1, of our efforts was a $76.0 million reduction of operation and 1987, so as to produce a net 9.6% increase in annual maintenance expenses in 1986, a decrease of 6.4% compared revenue.

with 1985.

• Edison would freeze the level of electric service rates for a Perhaps the most significant event in the history of utility period of at least five years immediately following the regulatory reatters in Illinois, and possibly the nation, is the effective das of the increase. There would be specified development of a plan to resolve state regulatory exceptions from the freeze,but they would apply only under uncertainties concerning completion of the Company's extraordinary circumstances beyond the Company's control.

5

• The ownership of the three nuclear units in our
• Also important to residential customers is the construction pmgram, Byron Unit 2 and Braidwood Units i restructuring of the summer and non-summer electric and 2, would be transferred to a new company, which would service rates to reflect a significantly smaller differential be a wholly-owned subsidiary. The units would not be than presen;ly exists.

included in the Company's rate base. The electrical output [ of the three units would be covered by a power supply This far reaching plan will require ICC approval. The agreement, giving Edison the right to purchase power from achievement of the purposes of the plan is also dependent the units for five years for a monthly capacity reservation upon the approval and other actions of the NRC, judicial fee of $55 million, plus the cost of fuel. Following the five-authorities and perhaps other governmental regulatory year period, the Company would have certain options agencies. We are making every effort to obtain the b regarding the purchase of power from the subsidiary, appropriate regulatory and judicial approvals as soon as subject to the direction of the ICC. The ICC would also possible. have the authority to direct the Company to extend the it is clear that your Company will be well positioned to freeze for an additional three-year period, in which case the provide the required electrical energy for the balance of the Company would be entitled to a specified rate increase after century and beyond. Our efforts have created a the fifth year. technologically advanced electrical generation and

• The Company would be required to provide credits to distribution system to serve our customers. With new customers under its fuel adjustment clause if specified capacity in place, we can offer our customers price stability production performance targets are not achieved by the and a competitive energy source. Finally, being sensitive to units, and would be entitled to bonuses if specified targets our customers' needs and giving superior service will are exceeded.

continue to be the cornerstone of our operating philosophy.

• With the transfer of the three units to a new subsidiary, We are proud of our Company's past 100 years ofoperation the wholesale prices charged by the sebsidiary would be and look to the future with confidence.

regulated by the Federal Energy Regulatory Commission, which has jurisdiction over wholesale energy rates.The ICC Sincerely, would retain jurisdiction over the Company's electric service rates for service to its retail customers. James J. O'Connor

• A write-off of approximately $550 million would be Chairman and President reflected as a one time reduction to the Company's net income.

February 20,1987

8 1986in Review: Operations brought on line in the U.S. in the 1985 to 1987 period. The station is located twenty-five miles south of Rockford, Blinois. Braidwood station is located fifteen miles southwest of Joliet, Illinois. The station is essentially identical to Byron station. Testing on Unit l is progressing on schedule toward Status Of Nuclear Units Under Construction a mid-1987 service date. In October 1986, authority was We expect to place Byron Unit 2 and Braidwood Unit 1 i granted by the NRC to load fuel, which was completed on service by mid 1987 and to place Braidwood Unit 2 in November 3,1986, and to conduct pre-start up testing. In service by late 1988. Each of the three units will have a net November 1986, hearings were concluded before the Atomic capability of 1,120,000 kilowatts. Construction work at Safety and Licensing Board regarding our application for Byron Unit 2 and Braidwood Unit 1 is complete and pre-an operating license for Braidwood station. We expect the start up testing at both units is progressing on schedule. At Board's decision in March 1987. Braidwood Unit 2, construction work is proceeding on schedule and nearly 90% complete at mid-February 1987. Total estimated construction cost of Braidwood station Tests which subject the unit's steam supply sistem to M5 bime $2%Ma-A operating pressures were already successfully performed in November 1986. Completing this milestone test permitted Five-Year Construction Budget us to focus attention on completion of individual Fo M 1987 W 199QW MMin component systems and on subsequent start up procedures. expenditures are $4.1 billion, representing a decline of $1.1 Construction expenditures for the Byron and Braidwood billion, or 21.2%, from the previous five-year budget for the projects are within budget. period 1986 through 1990. This reduction is due largely to the winding down of our nuclear generating station Byron Unit 2 is the twin unit of Byron Unit I which was construction program. Expenditures for Braidwood station placed in service in April 1985. On November 6,1986, we will decline from $950.5 million in 1986 to $669.7 million received an operating license from the Nuclear Regulatory in 1987, including Allowance for Funds Used During Commission (NRC) authorizing the loading of fuel and the Construction. Estimated annual expenditures by year are conducting of start up tests up to the 5% power level. Fuel $1,500 million in 1987,8950 millionin 1988,$600 millionin loading was completed on November 12,1986 and the 1989, $550 million in 1990, and $500 million in 1991. reactor was activated for the first time on January 9,1987. On January 30,1987, we were granted a full power license for the reactor by the NRC. Testing is proceeding on Ferocasted schedule to meet a service date by the end of May 1987. Construction costs of both units at Byron station are ,( 5 19es 600 expected to total $4.53 billion, or $2,046 per kilowatt, 1988 950 among the lowest cost per kilowatt of nuclear capacity 1987 1500

7 New Ped Imd and Record Output New Business Activity Following several days of hot and humid weather and Last year,1986, was a good year in terms of adding new widespread use of air conditioners and other cooling customers to our lines. The number of new meters installed equipment, our customers' electrical requirements in 1986 increased 29% over the number installed in 1985. established a new all-time re:k load of 15.10 million This included almost 28,000 single family homes, some kilowatts on July 17,1986. This record peak load, which 17,000 apartment unita, and over 12,000 commercial or exceeded a record established the day before, surpassed by industrial establishments. Capital expenditures for 3.6% the previous peak load of 14.57 million kilowatts distribution facilities to serve these customers increased reached on August 29,1984. The 1986 peak load was 13.9% 14% over the prior year and represented 60% of capital greater than that set in 1985. expenditures for distribution construction. Also on July 17,1986, the electrical output of our system One of our key marketing objectives is to increase the reached a new record of 301.6 million kilowatthours electric share of market of the space heating business. Our outstripping the previous daily output record, set only the efforts were successful, particularly with respect to the day before, and the all-time record set in July 1980, over six commercial and industrial market, where electric heat years ago, by some 5.6%. garnered a 46% share of market of new construction. Cost Containment Program Innovative Plan In October 1985, we intensified our cost containment On February 3,1987, the Company fded with the Illinois program. Under this program, all Company functions are Commerce Commission (ICC) a plan to resolve the subject to review and re+ valuation for the purpose of uncertainties concerning completion of the Company's reducing expenses consistent with corporate goals. The nuclear generating units and the level of the Company's program includes a hiring freeze, a 1986 salary freeze for electric service rates. The plan was negotiated with, and upper and middle management, organizational agreed to by, the Governor of the State of Illinois, the restructuring. and other expense reduction measures. As of Attorney General of the State of Illinois, the State's December 31,1986, the hiring freeze has resulted in a Attorney of Cook County, the Governor's Office of reduction of 727 employe positions,(utting our work force Consumer Services, the Small Business Utility Advocate, by 3.9% since October 1985. Operation and maintenance and the Illinois Industrial Energy Consumers Group. expenses in 1986 were under ' udget by $48.3 million, about Various other parties, including leaders of business and o 4.1%, and under 1985 actual expenses by $76.0 million, labor, and consumer and public interest groups, were about 6.4%. These expense reductions were achieved invited to comment upon and join in endorsing the plan. without any reduction in our service standards. Under the plan, the Company would assume additional risks with respect to the level of sales, operations and Operation & Maintenance Expensas inflation, than would attend traditional utility ratemaking. On Meons Of Dollus) The plan would, however, remove the cloud of uncertainty 1988 1820 1985 1198 concerning completion of the Company's nuclear generating 1984 1083 unita under construction and the level of the Company's 1983 964 1982 884

8 electric service rates, and avoid costly wx f ng ainut the in the Company's rate base. The electrical output of the i price of electricity, future generating crpaciif nee 6 in three units wnuH be covered by a power supply agreement Illinois and other issues. Moreover, the Company believes between the Company and the subsidiary giving the the plan wmid produce an environment more favorabla for Compan?.' the, ;ight to purchan, all of the output of the units the corduct of its btain ss than would otherwise occur and for the neri five years. For this, the Company would pay the provide opportunities to dance shareholder value in the subsihy a mor.thly capacity resen ation fee of $55 million bng-term. plus the co,t of fuel. Following the five-year period, the Company would have certain options related to the Under this plan, an electric service rate increase of about purchase of power from the subsidiary, to be exercised at 13% sould go W,a effeet on July 1,1987.This rate inmase, the direction of the ICC. The ICC would also have the however, would be ofiset somewhat by lower fuel authority to direct the Company to extend the freeze for an adjustment charges resulting fromlow cwt nuclear fx! ased additional three-year perkd, in ahich case the Company in the operation d these units. Overall, the net increase in would be entitled to a necEiod rate increase after the fifth annual revenue would be approximately 9.6%. The increase year. The Company would be required to provide credita to for some residential customers would be even less a; e custoraers under v s fuel adjustment clause if specified consequence of the proposed restructuring of the summer productio.,,erfomance targets are oc,t achieved by the and non-summer electric service rates, providing a units, and would be cetitled to bonas if specified targets sigmficantly smaller differential than presently exists. are exceeded. ' The Company would freeze the level of electric service rates The wholesale prices charged by the new subsidiary, as tor a period of at least five years immediati.y following the invided for in the plan, would be regulated by the Feckral effective date of the rate increase. There would be specified Energy Regulato;y Commission,which hasjurisdiction over exceptions from the fren4. but they wcald g+nerally apply wholesale energy rates. The ICC would retain jurisdiction only under extraorditury circumstances beyond tite over the Company's electric service rates for service to its Compar./s control. After this period has expired, the retailcustomers. Company would not seek to recover any revenue shortfallit may believe occurred. In connection with the transfer of the units to the new subsidi& y,.i write-(ff of approximately $550 million would Ownership of three nuclear units, Hyron Unit 2 and be reflected as a one-time reduction to the Company's net Braidwood Units I and 2, wotJd be transferred to a wholly. income. osvned sih idiary and they would, therebre, not be included The plan also provides for the resolution of other major Nuclear Fuel Savings vs. tow-5p rr.r Coal unresolved regulatory issues pending be fore the 100. The (in Means Of Dollars) achievement of the purposes of the plan is dependent t;on ~ ICC cppmal and the approval and other actns of the 5 - es0 1984 m== 890 NEC, judicial authorities, and perhaps other governnwtal 19H

=== 700 1982 820 sgencits. Because prompt implementation it important, every effort is being made to obtain regulatory and judicial approvals as soon as possihk l ~ .r

g 1986 in Review: Financial Eilowatthour sales to residential cu::baars ine:wd 1.7%, sales to small commercial and industrial customers were up 4.2% and sales tolarge commercial andindustrialcustomers were up 1.1%. Industrial sales were held down by reduced production at several of our large steel industry customers. Earnings and Cash Flow These sales increases and the increase in electric service Earnings per share ofcommon stock were $4.69 in 1986,up rates, approved by the 100 in October 1985, raised revemies from $4.45 in 1985. Earnings improved because ofincreased by 10.4% over the 1985 level. kilowatthour sales, higher electric service rates, and lower operation and maintenance expenses.These positive factorr ChangesIn FederalTax Laws were offset to some extent by lower construction-related Durmg the year, Congress passed and the President signed credits, increased interest and depreciation expenses and a into law the Tax Reform Act of 1986 which includes greater average number of common shares outstanding. 9

g g

g dramatic changes in federal income tax law since its Internally generated funds, after reductions for cash inception. These changes include, among others, a dividends declared on capital stock, were $951 million in ,.de ation hp'm h@ 1986, up from $665 mi!!iot in 1985, and provided 65% of repeal of the investment tax credit, the lengthening of the 1986 construction expnditures as compared to 47% in f time period over which most utility property is depreciated, 1985. This increase, resulting p. imarily from improved and the adoption of a new corpor te alternative minimum earnings, reduced our external fina.,cing requirements tax. Taken together, the impact of these changes on the below the amount that otherwise weJd have been required. Company will be a reduction in cash flow from that which would ha e occurred, and an increase in income tax n and Revenun payments, including payments for the year 1986 as a result Kilowatthour sales to ultirsate consumersincreased 2.0% in of the January l,1986 e!!ective date for modifications 1986 over 1985, reflecting clost to normal munmer and pertaining to the investment tax credit.The Company's winter temperatures and modcrrJe growth in economic d deik , ;g ;. activity in our service area. electric service rates to reflect changes in federal tax law specified in the Tax Reform Act of 1986. Seles Te listieste Ceasemers (in Bdhons Of IGowatthours) 97th Year of Consecutive Dividends asas st.s With the November 1,1986 payment, common stock isse s2.3 issa. - as.2 dividends have been paid by the Company for 388 issa som consecutive quarters or for a period of 97 years, without interruption.

i s 18 i Common stock divends paidla 1986 were $3.00 per share; Future Financings ) the quarterly rate was 754 per share. The $3.00 divend in 1987, our capital requirements will decrease primarily rate produced a yk ki to the stockho&r of 9.3% per year at due to an increase in the amount of internally generated a common stock market price of $32% per share, the cash and declining construction expenditures. We plan to average of the high price and the low price in the year. raise about $650 million through various financmss in 1987 to finance construction, refinance maturing obligations and All divends paid in 1986 on enamon, preferre(and reduce short term debt. preference stocks represent currently taxable divioends for federalincome tax purposes. Management Changes Durmg the year, Vice Presents Preston B. Kavanagh and 1986 Financings Robert J. Schultz retired; Harlan M. Dellsy was elected a Our capital requirements needed to finance construction V!ce Present; and David A. Scholz was appointed an expenditures and refinance other obligations were provided Assistant Vice President. In addition, Robert Beckwith was from internally generated funds, and from external made Manager of Fuel, replacing John D. Jacobson, who financmgs totaling $1,500 million, as follows: retired; Bennie B. Stephenson became Manager of Nuclear Amount Safety, replacing Frank A. Palmer who retired; and By Month @mhns) Nicholas J. Kalivianakis, formerly Station Manager of s February 10%% Fi'st Mortgage Bonds 8 150 Quad-Cities station, was named Division Vice May 8%% and9%% First Present-Nuclear Stations. Mortgage Bonds 300 July Long-Term Bank loans 100 August 8%% and 9%% First - Mortgage Bonds 250 November long-TermBankloans 215 (Various) Sale /Imaseback of Nuclear Fuel 260 (Various) Divand Reinm.tment and Employe Stock Plans 225 Total $1,500 Under the dividend reinvestment and employe stock plans, about 7.6 million shares of common stock were issued in s 198E commes stock merest price per shore-Vser Eed (In Dollars) ISOS 33 % 1985 a 20% 1984 -- 21% 1983 - 28 a 1982 25% i t

11 Managem:nt's Discussion And Analysis Of Financial ofcompleted construction projects and a levelofearnings sufficient to pay C:ndition And Results Of Operations for that portion of the construction program to be financed from internal sources and to maintain debt and preferred and prefeer;ce s.'ock coverages and common stock equity earnings which will permit the issuance of additional securities of the Company on reasonable terms. (Reference is made to " Nuclear Plant Construction Program and Rates.") The construction program, coupled with additional costs imposed by environmentalcompliance requirements, regulatory delays and difficulties ~ encountered in meeting design and construction schedules, has required the Company to seek large amounts of new capital and has resulted in Liquidity and Capital Resources lower ratings of the Company's securities and higher costs of funds from [ Capital Budgets. The Company and its electric utility subsidiary, the sale of debt and equity securities. Commonwealth Edison Company of Indiana, Inc., are engaged in a The current ratings of the Company's securities by three principal rating contmum_ g construction program which has been and will be modified as agencies are as follows: necessary for adaptation to changing economic conditions, timeliness of rate relief and other relevant factors.The construction program for the Standard Duff & five-year per od 1987-91 includes expenditures to complete and place in hioody's & Poor's Phelps \\ i service three nuclear generating units with an aggregate net capability of First mortgage and secured pollution 3,300,000 kilowatts. The program calls for electric plant and equipment control bonds A3 A 7 (excluding nuclear fuel) expenditures of approximately $4,100 million, Publicly-held debentures and including $1,500 million in 1987, $950 million in 1988, $600 million in unsecured pollution control 1989, $550 million in 1990 and $500 million in 1991. These estimated obligations Baal A-8 expenditures include $2,345 million for production facilities, $1,580 Convertible preferred stock baal A-8 million for transmission and distribution facilities and $175 million for Preference stock baa2 BBB+ 9 general plant. Construction costs are based on a 6% annual escalation Commercialpaper P1 A1 Duff 1-rate. Purchase commitments, principally related to construction and nuclear fuel, approximated $1,538 million at December 31,1986. In On July 9,1986, Afoody's issued a press release stating that it had placed addition, there are substantial commitments for the purchase of coal and the Company's securities under review for a possible downgrading. As a oilunderlong-term contracts, result of the Company's December 19,1986 announcement that it had Capital Resources. Of the funds required for the 1987-91 construction reached an agreement in principle to resolve uncertainties regarding its MC af pM construction pmgram and rates, Mood /s announced on program and other capital requirements, including refinancing, it is December 24,1986, that it will continue to review the Company's presently estimated that, assuming the October 1985 rate orders rema.m securities for a rating change, with the direction of the change uncertain. m effect and the Company does not receive an adverse order with respect In August 1986, Duff & Phelps advised the Company that it had placed to recovery of its investment in Byron Unit 2 or Braidwood Unit I or 2 h Cowfs securities on its " watch list" and lowered the Company's (reference is made to " Nuclear Plant Construction Program and Rates"), commercial paper rating from Duff 1 to Duff 1. and assuming further adequate and timely rate relief, approximately two-thirds of the funds should be provided from internal sources, with the If the October 1985 rate increase is rolled back or the Company receives major portion of the remaining external financing requirements expected an adverse order with respect to recovery ofits investment in Byron Unit in 1987. The type and amount of financing will depend on prevailing 2 or Braidwood Unit 1 or 2 (reference is made to " Nuclear Plant market conditions and the amount of rate relief granted during the five. Construction Program and Rates"), the Company's securities ratings year period. A portion of the Company's financing will be provided would be in danger of being lowered by the securities rating agencies. If through the sale andleaseback of nuclear fuel. In arranging the remaining the October 1985 rate increase is rolle#ack,it may also be necessary for financing, the Company will consider its long-run goal to reduce the debt the Company to raise additional cah, at consequently higher capital portion of its capitalization to approximately that of AA rated electric costs, to replace the lost revenues. Reference is made to Notes 2,3 and 4 utilities. heference is made to the Statements of Consolidated Changes in of Notes to Financial Statements. Financial Position for the construction expenditures and funds provided Federal Tax Changes. The Tax Reform Act of 1986 (the Act) mternally from current operations m 1984,1% and 1986. Reference,si significantly modifid many provisions of the federal income tax law. The made to "1986 Financings on page 10 of this Annual Report for a modifications include the reduction in the regular corporate income tax discussion of the funds provided from external financings totaling $1,500 rate from 46 percent to 40 percent for the year 1987 and to 34 percent for million. In addition, the Company has an effective " shelf" registration 3.dM 198W W of Mvmed@ statement on file with the Securities and Exchange Commirion for the proposed sale of 5,000,000 shares of common stock and has authonzation lengthening of lives for depreciation of most utility property and the adoption of a new corporate alternative minimum tax. There are several from the Illmois Commerce Commission (ICC) to issue up t $385,000,000 of debt securities for the purpose of dischargmg or other provisions that will have an adverse impact cn the Company. However, there are transitional rules that phase in some of the Act's refunding outstanding obligations. unfavorable provisions, such as the repeal of the investment tax credit. The Company's continued ability to finance the construction program, as The Act also provides that generally the portion of accumulated deferred well as its continued viability, are dependent upon adequate and timely federal income taxes recorded in prior years at an income tax rate greater rate relief. Such rate reliefis necessary to provide for the recovery of costs than 40% for 1987 and 34% for later years related to liberalized

12 depreciation is to h2 floced back to income not faster than over the The Company currently faces and expects that it will continue to face remaining depreciable life of the related property. The amount of the oppoaition to its efforts to complete the Braidwood units, as well as to its flowback to income of accumulated deferred federal income taxes related efforts to increase its rates to provide for recovery of and return on its to other timing differences which have been recorded in prior years at investments in each of the three units still under construction. income tax rates greater than 40% for 1987 and 34% for later years will Plan Regarding Nuclear Plant Construction Program and Rates. On depend greatly on the treatment authorized in ratemaking proceedings February 3,1987, the Company and the Governor of the State of Illinois, during future periods. the Attorney Generalof the State ofIllinois,the State's Attorney of Cook Generally, the modifications have an adverse impact on the Company's County, Illinois, other government officials and a group of industrial cash flow. Although most of the modifications of the Act were effective customers executed a Memorandum of Understanding (the Plan) which is January 1,1987, the investment tax credit was repealed and the intended to resolve uncertainties concerning completion of the parcentage of investment tax credits which can be utilized to offset Company's nuclear generating units currently under construction and the current income taxes was reduced effective January 1,1986. As a result of level of the Company's electric rates. The Plan was filed with the ICC on the Act, the Company's income tax liability for the year 1986 increased by February 3,1987, together with a petition seeking the ICC's approval of about $30 million.The magnitude of the adverse impact on the the actions required by the Plan. Other parties to the Plan have filed a Company's cash flow for years after 1986 will depend greatly on the level petition with the ICC seeking a determination that the rate increase of electric service rates that will be in effect during such years. Several of provided for in the Plan is reasonable. Certain provisions of the Plan are the modifications, such as the repeal of the investment tax credit, will summutzed as follows: have an adverse impact on the Company's future construction program. On October 1,1986, the Office of Public Counsel of the State of Illmots Regulation of the Units; Related Write Off. The Company would transfer filed a pe ition requesting the ICC to mitiate a proceeding to requin its Byron Unit 2 and Braidwood Units l and 2 (collectively, the Units) to certain Ihmois utilities, meluding the Company, to justify maintammg a wholly-owned subsidiary (the Subsidiary). The Company would their current levels of rates m light of the Act. The Office of Pubhc complete and operate the Units and, for operating purposes, would treat Counsel in its petition asserts that the Act should result in lower them on the same basis as its own units. The Company would be provisions for federal income taxes than were allowed m each utility's last responsible for ensuring that the Units are operated and maintained general rate case before the ICC and, therefore, that the rates of each. safely and in accordance with all requirements of the Nuclear Regulatory utility should be correspondingly reduced.The Office of Public Counselin Commission (NRC). The Company would commence depreciation (and its petition estimates that the Company's rates should be reduced so as t cease capitalization of carrying charges) for Byron Unit 2 and Braidwood reduce its annual revenues by approximately $241,000,000 effective Unit I no later than July 1,1987 and for Braidwood Unit 2 no later than January 1,1987. The ICC has not acted on the petition. October 1,1988.The Subsidiary would not be subject to regulation by the The Company received a request from the Chief Accountant, Rate Review ICC except as provided in the affiliated interest provisions of the Illinois Department, Public Utilities Division of the ICC, similar to that received Public Utilities Act and would not be subject to the audit provisions of by other Illinois utilities, that the Company file by January 30,1987 with that Act. The Subsidiary's rates would be subject to regulation by the the ICC a rider, effective March l 1987, for all tariffs which will state the Federal Energy Regulatory Commission (FERC). In connection with the percentage by which all utility rates must be reduced *o reflect the use of a transfer to the Subsidiary, the Company would write-ofIat least $550 40% tax rate as prescribed for 1987 by the Act.The request states that the million of its investment in the Units for ratemaking purposes, resulting percentage will be calculated based on the Company's most recent rate in a one-time reduction in the Company's net income of approximately order. The request further states that the percentage reduction contained $550 million. in the tariff will be applied to all utility billings, that the amount will be accrued in a deferred credit account with an offsetting debit to revenue (2) Rate Moratorimn. The Company would not seek a general rate and that the deferred credit account will continue to accrue until a final increase for five years except under extraordinary circumstances. The ICC determination is made by the ICC as to whether cunent earnings, when w uld have the authority to direct the Company to extend this period to adjusted to reflect all aspects of the new tax law, are excessive. If such a eight years, as described below under " Options After Five Years." (Such determination is made, lefunds would be made from the deferred credit five-year or eight-year period is referred to herein as the " Rate M ratorium Period.") account. The request also provides that if the filing is not received by January 30,1987, the ICC may be forced to reduce the Company's rates (3) Rate Increase. Effective as of July 1,1987, the Company would immediately.The Company has filed a response to the Chief Accountant's increase its base retail electric rates so as to receive a revenue increase of request indicating the Company's intention to file for a rate increase in approximately $660 million, exclusive of revenue taxes. For the period the near future and that, since the rate filing would raflect the effect of the during which the rates prescribed by the Plan are in effect, the fuel costs Act, the Company did not file such rider. of the Units would be included in the Company's computations under its Capital Structure. The Company's ratio of long. term debt to to'al fuel adjustment clause in the same manner as though the Units were capitalization has increased to 45.9% at December 31,1986 from 45.1% at owned by the Company. Parties to the Plan would not be prevented from December 31,1985. seeking a reduction in rates where a relaxation of governmentally imposed e sts creates a significant windfall for the Company. Nuclear Plant Construction Program and Rates The Company's current construction program provides for placing two (4) Power Supply Agreement. The Company would enter into a Power nuclear generating units, Byron Unit 2 and Braidwood Unit 1,into service Supply Agreement with the Subsidiary whereby the Company would have in 1987 and a third nuclear generating unit, Braidwood Unit 2, into the right to purchase all of the output of the Units for five years. In service in 1988. Each of these units is to have a net capability of 1,120,000 exchange for tha right to buy electricity, the Company would pay a fixed kilowatts. monthly fee of $55 million to the Subsidiary. During the five. year period

13 ending June 30,1992, the Company would also pay the cost of fuel, plus matters so that the Ocmpany may charge the rates provided for in the any bonus amounts as described below, for the electricity it buys from Plan and consummate the transactions described in the Plan and is not the Subsidiary. required to make any refunds in respect of past charges (including the Output Guarantee-If the Subsidiary is unable to produce energy from Braidwood construction proceedings, investigation into the effect on the the Units at certain cumulative target levels specified in the Plan, the Company of the Tax Reform Act of 19%, inquiry regarding excess Company would be required to compensate ratepayers for the excess costs capacity, pending fuel reconciliation proceedings, pending audits of replacement power over the fuel costs of the Units, provided that the pertaining to the Units, and uniform fuel clause proceedings); (B) timely Company would not be obligated to absorb more than $660 million of granting of NRC approval of transfer of the Units and their licenses to the Feplacement power cost in respect of a shortfall in any of the years 1988 Subsidiary; (C) timely granting of any necessary FERC approval of the through 1991,or $330 million in respect of1987 or 1992. lfin any year the rates and transactions provided for in the Plan; and (D) judicial action Subsidiary produces energy from the Units in excess of 110hf the having the effect of affirming in their entirety the ICC's July 1984 and 1 annual target level for such year, the Company would be entitled to a October 1985 rate orders granting increased rates to the Company. honus based on the savings related to all energy produced in excess of (7) Termination. The Plan will terminate if all regulatory and judicial 110% of the target output. Any such credits or bonuses would be reflected action contemplated by tne Plan has not occurred prior to July 1,1987, in rates through the operation of the fuel adjustment clause. provided that the Company has the right to extend the deadline for any Capacity Guarantee-If, as of July 1,1992, either Byron Unit 2 or such action to not later than December 31,1987 or to waive any such Braidwood Unit I has produced less than 20% of its share of the action, subject to certain limitations. The Plan does not prevent the I cumulative target level specified in the Plan and, as of such date, the Unit Company from filing for a rate increase in respect ofits investment in and has become inoperable and it reasonably appears that the Unit will not operating and maintenance costs asacciated with the Units prior to July operate in the foreseeable future, the Company would be obligated to 1,1987. Any such application for an increase will be withdrawn if the pmvide additional credits against costs used in computing fuel adjustment necessary regulatory and judicial action has taken place by the July 1, charges under the Company's retail rates. In no event, however, may the 1987 deadline or an extension thereof. The obligations of the parties to sum of the output credits and the capacity credits exceed the aggregate the Plan are also conditioned upon the establishment and continued amount of fixed monthly fees paid pursuant to the Power Supply effectiveness of rates consistent with the Plan throughout the period for Agreement. which rates are providedin the Plan. (5) Options After Five Years. The Subsidiary would grant the Company The ability of the parties to the Plan to achieve the purposes of the Plan the following options, to be exercised by the Company only as directed by is dependent upon the approval and other actions of various regulatory the ICC, relating to the Company's right to purchase power from the and judicial authorities, whose approvals and actions may be opposed by Subsidiary following June 30,1992: (a) the Company may purchase power persons who are not parties to the Plan. There can be no assurance that from the Subsidiary when and as available for a period of 20 years and such approvals will be obtained or that necessary regulatory and judicial have certain " favored nations" rights which would entitle it to purchase action will occur. Various private groups have indicated that they will such power oc terms at least as favorable as those provided to any third oppose the Plan. The Citizens Utility Board has petitioned the ICC to party; or (b) the Company may contract to purchase not less than the initiate an investigation into the reasonableness of the Company's rates. entire output of Byron Unit 2 and such amount ofpower from Braidwood The petition seeks a reduction in the Company's rates which would Unit I as it shall designate at the time of election of such option, in each reduce its annual revenue by at least $400 million, due to an alleged case over the remainder of the Unit's useful life, and, subject to certain decrease in the cost of equity and the lowering of the federal corporate conditions, may purchase not less than the entire output of Braidwood income tax rate under the Tax Reform Act of 1986. Unit 2 during the period January 1,2000 through the remainder of its The transfer of the Units to the Subsidiary is not expected to result in the usefullifc; or (c) the Company may defer the election of option (a) or (b) removal of significant amounts of property from the lien of the until July 1,1994,in which case the Rate Moratorium Period would be Company's Mortgage. extended through June 30,1995 and the Company would be entitled to a Under the Plan, the Company assumes additional risks with respect to one-time retail rate increase beginning on July 1,1992. The percentage the level of sales, operations and inflation than would occur under increase would be the lesser of(i) one-half of the cumulative increase in traditional utility ratemaking, including the risk that it will be able to the Consumer Price Index for All Urban Consumers, for Chicago, lilmots-Northwestern Indiana, for April 1,1987 to April 1,1992 or (ii) complete the Units and operate them at levels which will avoid the output and capacity penalties provided for in the Plan, and that, following the 4.5%. If the Company elects option (c), the $55 milh,on monthly fee payable to the Subsidiary pursuant to the Power Supply Agreement would Rate Moratorium Period, the Subsidiary willbe able to generate powerin amounts, and sell it at prices, sufficient to provide the Compeny with an be adjusted to reflect the increase, and the output and capacity guarantee adequate recovery of and return on its mvestment in the Units. Under the provisions of the Plan would not apply during the extension period. Plan the Company's return on common equity during the Rate The prices for power purchased from the Subsidiary pursuant to the Moratorium Period is expected to be lower than that which would occur options would be subject to FERC jurisdiction. under traditional utility ratemaking if the costs of all three Units were (6) Necessary Regulatory and Judicial Actions. The Company's included in rate base. The Company believes that these risks would be obligations under the Plan are dependent upon certain regulatory and offset by the removal from the Company of the regulatory uncertainty judicial actions, including, among others, the following- (A) lCC action- (i) concerning completion of the Company's nuclear generating units under authorizing the creation of the Subsidiary and the transfer to it of the construction and the level of the Company's electric service rates. Costly Units and related permits and licenses; (ii) approving agreements between disputes about the price of electricity, future generating capacity needs in the Company and the Subsidiary under which the Company will complete Illinois and other issues would be avoided. Moreover, the Company construction of and operate the Units and purchase power from the believes the Plan would produce an environment more favorable for the Subsidiary; (iii) approving rates reflecting the July 1,1987 rate increase conduct of the Company's business than would otherwise exist and would provided for in the Plan; and (iv) satisfactorily resohing certain ICC provide opportunities to enhance shareholder value in the long term.

14 Licensing Proceedings. Each of the three units under construction Braidwood station. In its final order the ICC stated, among other things, requires an operating license from the NRC. When a license application is that: contested, public hearings on the application are held by an Atomic "(1) the evidence, while extensive, is nonetheless unpersuasive on the Safety and Licensing Board (ASG) appointed by the NRC. An ASG proposition that both units of the Braidwood station should be either may authorize or deny the issuance of an operating license and may cancelled or completed;[and) impose conditions on the issuance of a license. Decisions of an ASG are subject to appeal within the NRC and to the courts. (2) a comprehensive evaluation of each unit individually will result in a Commission decision which better serves the ratepayers, the in October 1984, an ASG, reversing its earlier denial of the Company's shareholders, and the economy of northern Illinois..." application for operating licenses for the Byron nuclear generating station, authorized the issuance of full-power operating licenses for Byron The ICC also began a new proceedmg in which it has ordered the Units 1 and 2. The NRC issued a full-power operating license for Byron Company ".. to show cause why the Company's Braidwood Unit 2 should not be cancelled and the Certificate of Public Convenience and Unit 1 on February 14,1985 and that unit was placed in senice on April 22,1985. On November 6,1986, the Company received an operating Necessity issued for the Braidwood station should not be withdrawn or license from the NRC to load fuel and conduct certain start-up tests at altered." The ICC further stated that it " cautions the Company that.. Byron Unit 2 at power levels not in excess of 5% of rated power. On [its final order] does not imply approval or disapproval of construction of Braidwood Unit 1." January 30,1987, the NRC issued a full power license for Byron Unit 2. The Company's application for operating licenses for its Braidwood units The fmal order in the Braidwood Construction Proceeding appears to irdicate that,if the ICC were to find that a Braidwood unit should be is pending before an ASG. Several parties have intervened in the proceeding in opposition to the Company's application and one of the cancelled,it might disallow recovery in rates ofall costs associated with a cancelled unit incurred after November 30,1985, and that it would, in any intervenors succeeded in expanding the scope of the hearings with respect to quality assurance and off-site emergency planning matters. Hea ings event, disallow, for the period following a cancellation decision, recovery before the ASG have been completed and the ASG is expected to issue of any return on investment in the unit. Costs incurred for the Braidwood its decision within the next few months. Due to the slow progress of the station through December 31,1986 were $4.11 billion, of which $1.03 billion was incurred after November 30,1985. proceeding, the Company requested the ASG to authorize the issuance of a fuelload license for Braidwood Unit 1 prior to completion of the Economic studies presented by the Company in the Braidwood proceeding. In October 1956, the NRC authorized the Company to load Ccastruction Proceeding showed that completion of both units would fuel and conduct pre-start up tests at Braidwood Unit 1. Delay in the result in significant savings as compared to cancellation. However, at least issuance of a favorable decision by the ASG could result in delays in two of the assumptions which underlie the Company's studies were, for placing the Braidwood units in senice. A delay of the in-senice date of a purposes of the proceeding, rejected by the ICC. The Company's studies unit can cause a significant increase in its costs and adversely affect the assumed annual peak load and kilowatthour sales growth of 2%. The ICC econcmics of completing the unit. stated that it would be more appropriate to easume growth rates of 1% for purposes of the proceeding. The Company's studies, in accordance with ICC Construction Hearings. The additional capacity to be provided by what it believes to be general:y accepted economic principles, look to the the Braidwood station is not expected to be needed to meet minimum total costs associated with each alternative analyzed. Thus, the reserve margin requirements before 1994 in the case of Unit i and 1997 in Company's studies do not differentiate between costs which may be the case of Unit 2, based on the Company's projections of peak load ultimately borne by mvestors and those which may be ultimately borne by growth. The Company has, however, submitted economic studies to the cust mers.ThismethodologyhadpraiouslybeenacceptedbytheICC.In ICC which have consistently shown that prompt completion of the units, this case, however, the ICC indicated that it would assume that, if a um,t as opposed to postponement or cancellation, is the economically were cancelled, while at least some of the investment made in the umt preferable alternative. These studies have examined the estimated cost of w uld be recovered through rates, the rates would not provide for a return meeting customer service requirements (stated on a present value basis)

• mpan/smmhentideutGe over the estimated 35-yearlives of the units.These studies compare costs uea enam

. medasacostassociaWsu of alternative means of prosiding service and do not consider whether all of these costs will ultimately be reflected in rates or whether any of the costs will be rendered unrecoverable by regulatory action. Based on In the new proceeding, the Company filed economic studies with the ICC Company studies, the ICC entered orders in IS80, and again in 1982, with respect to Braidwood Unit 2, considered separately,which show that directing completion of both Braidwood units in as timely and economic a completion of that unit is economically preferable to cancellation. These manner as possible, as well as the other nuclear generating units then same studies, however,when altered to incorporate (i) the lower sales and under construction. load growth rate assumptions preferred by the ICC in its final order as stated above and (ii) the ICC's unorthodox methodology described above In a proceeding instituted after the ICC's 1982 Braidwood construction regarding the treatment of return on unamortized mvestment, in some determination, the ICC has, once again, considered the question of cases show levels of savings from completion which could be regarded, in completion of the Braidwood units. On July 2,1986, the ICC entered a the exercise of judgment, as too low to dictate a choice between final order m this proceeding (the Braidwood Construction Proceeding). completion and cancellation. Where the final order's growth rate The final order denied requests that the ICC enter an order rcvoking the assumptions and treatment of return on unamortized investment are Certificate of Public Convenience and Necessity which had authorized combined with other factual assumptions which the ICC in its show cause construction of the station or that it othnwise require the Company to order has requested the Company to make for sensitivity purposes, the cancel construction of the station. However, the ICC did not determine results of the Company's economic studies can in some cases be reversed. that the station should be completed. The evidence in the proceeding had The Company does not know what weight the ICC will give the studies in been directed to the question of completion or cancellation of the entire any event.

15 Taking all of the foregoing into account, the Company continues to propcing a rate mederation plan in the Braidwad Conetruction believe that completion of construction of both Braidwood units is the Proceeding. The ICC's final order takes no position on the Company's appropriate course to follow, and the Company intends to do so. In proposal. respnse to the direction of the hearing examiner in the new proceedmg-Prudence Audits. The Illinois Public Utilities Act requires the ICC, or an the parties submitted briefs in early December 1986 addressing the issue independent party appointed by the ICC,to conduct an audit and make a of the propriety of an interim order directing the Company to stop determination as to the reasonableness of costs incurred in building new construction of Braidwood Unit 2 pending issuance of a final order in the generating units, before those costs may be included in rate base. The prueedmg. The hearing examiner has not responded to the briefs. statute provides that the audit must be conducted in accordance with The Company has filed a motion with the ICC requesting that the new " generally accepted auditing standards." Byron Unit 1 is the first unit prueeding be suspended pending consideration by the ICC of the Plan owned by the Company to which the ICC applied this provision. In the described under " Plan Regarding Nuclear Plant Construction Program Byron Unit I rate case the ICC determined that $101.5 million of the and Rates." costs of mnstructing Byron Unit I should be excluded from rate base under the statute. The ICC's rate orders were appealed by various Recovery of Cosis of Completed Plant, intervenors in the case and the Circuit Court of Cook County, Illinois has General. The process of increasing rates to provide for recovery of and reversed the orders and ordered the ICC to " rollback," on a prospective veturn on a utility's investment in a new plant is commonly referred to as basis, the $494.8 million rate increase authorized by the ICC's order.That " including the plant in rate base." In October 1985, the ICC authorized a Court found, among other things, that the audit of Byron Unit I rate increase of approximately $494.8 million, or 11%, on an annualized construction costs which had been conducted for the ICC did not meet basis, principally to reflect inclusion of Byron Unit 1 in rate base. The the statutory standards and,in addition, that the amount of the rate base ICC ordered th'e Company to defer, or " phase-in," approximately $81.1 exclusion made by the ICC was inadequate. The Court stayed the million of the allowed increase over the period ending December 31,1988. effectiveness ofits order, but made collections under the new rates after The ICC's order provides for capitalization of a return on the deferred April 29,1986 subject to refund, with interest, if the Court's order is amounts and the recovery of such return during the phase-in period. upheld on appeal. The Company has appealed the Court's order and the As discussed below, the ICC's Byron Unit I rate order has been reversed appeal is now before the Illinois Supreme Court. The Company cannot on appeal by a lower court and is now pending before the Illinois Supreme predict the outcome of its appeal. The ICC, through an independent Court on appeals brought by the ICC and the Company. party, is currently conducting an audit of Byron Unit 2 and Braidwood Unit 1. None of the Company's investment in the three nuclear generating units still under construction is presently included in rate base. As of December The Company believes that it has managed the construction of the Byron 31,1986, the Company's investment in the three units was approximately and Braidwood generating stations prudently and efficiently and that it $5.91 billion (including AFUDC), and under current schedules and cost should be allowed to recover the full cost of those units through its rates. estimates that investment is expected to reach $7.12 billion in 1988, when Almost all recent cases of which the Company is aware in which the last of the three units, Braidwood Unit 2, is to be completed. The regulatory commissions have conducted " reasonableness audits" in Company currently expects that, with traditional utility ra'emaking, the c nnection with placing new generating units in rate base, however, have Company's rates would increase by approximately 28% during the period resulted in some intestment being excluded from rate base or proposed to of the Plan. be excluded from rate base. In many such cases the amounts involved were significant. Rate Moderation. In its October 1985 rate order, the ICC required the Company to present phase-in or " rate moderation" proposals for Reference is made to Notes 3 and 4 of Notes to Financia! Statements including the Company's investments in Byron Unit 2 and Braidwood c neerningtheaccountingstandardwhichrequirestheCompanytowrite Units I and 2 in rate base. Similarly, in its final order in the Braidwood off, n t later than January 1988, disallowed Byron Unit I costs, net of the Construction Proceeding, the ICC concluded that "the impact of placing inc metaxetTect,andlimitsthecapitalizationofAFUDCincertaincases the generating unita now under construction into rate base in a relatively where a disallowance of costs is reasonably possible. short time frame poses severe economic consequences for all Edison In the course of the Braidwood Construction Proceeding, the Company customers, " and directed its staff to initiate a comprehensive proposed to limit the amount of Braidwood construction costs to be investigation of the rate and other impacts of placing the three units in included ir. rate base to $5.05 billion (the Company's current budget for service. The staff was instructed to consider, among other matters, rate the units), subject to inertases attributable to future regulatory delays. In moderation plans. In February 1986, the Company filed testimony its final order in the proceeding, the ICC appears to have accepted the Summary of Selected Consolidated Financial Data (mill %ns of dollars except per share data) 1986 1985 1984 1983 1982 Electric operating revenues $ 5,479 $ 4,964 $ 4,930 $ 4,634 $ 4,130 Net scome $1,050 $ 956 $ 875 $ 802 $ 607 Earnings per common share $ 4.69 $ 4.45 $ 4.43 $ 4.39 $ 3.75 Cash dividends declared per common share $ 3.00 $ 3.00 $ 3.00 $ 3.00 $ 2.85 Total assets (at end of year) $17,405 $16,285 $14,713 $13,634 $12,582 long-term debt and preference stock subject to mandatory redemption requirements (at end of year and excluding current portion) $ 7,143 $ 6,531 $ 6.512 $ 6,329 $ 6,257

16 Company's proposal The ICC further stated, howes er, that the cap significant effect on the Company's electric operating revenues in 1986, " creates a strong presumption that any costs above the $5.05 billion 1985 and 1984 and are summarized as follows-ceiling or the prorated portion for that part of plant completed and Annual Revenue allowed in rate base, if applicable, sill be absorbed by Edison's Effective Date (millions)(a) shareholders." In addition, thc final order states that " acceptance of the October 29,1985 $494.8(b)(c) Company's voluntary cap will in no way limit this Commission from July 18,1984 $282.5(c) making further disallowances on the basis of prudency." (a) Based on twelve-amoth test permds used in rate order. M Indudes appronunately $81.i millos af rewoue induded in rates effectm January 1,1987. Other issues. In addition to rate moderation plans and prudence reviews, (c) Endudes adde revenue tum the ICC has available to it other rationales for deferring or disallowing Operating revenues increased $514.4 million in 1986, the result of cost recovery through rates, such as rate of return determmations and approximately $392.2 million from increased rates, $61.0 million from determmations as to whether plant is "used and useful. Thus, some increased base revenues derived primarily from higher kilowatthour sales mtervenors m the Company's rate proceedings have urged that somsor all to commercial and industrial customers and an increase of $61.2 million of the investment m new generatmg umts be excluded from rate base on gg the ground that the generating capacity represented by these units is unnecessary. Some of the so-called " phase-in" plans proposed by Operating revenues increased $34.5 million in 1985, the result of intervenors, including the Illinois Attorney General,in the Byron Unit I approximately $193.4 million from increased rates and an increase of rate proceeding also provided for denialof recovery of atleast some of the $21.0 million in other items, primarily from an increase in base revenues costs associated with investment in generating capacity considered by the from higher kilowatthour sales to small commercial and industrial proponents of the plans to be in excess of an appropriate reserve margm. customers, offset by a $179.9 million lower recovery of energy costs. New pmvisions of the Illinois Public Utilities Act passed in 1985 y g ggg;g igg g gg expressly authonze ICC consideration of this issue, although those approximately $145.2 million from increased rates, $70.2 million from provisionsalsoprovide,m, effect,that,forthegeneratmgumtanowunder gg y g gg; g construction by the Company, the ICC's power to deny cost recovery is g; g g,g g g limited to that power which pre-existed such new provisions. In its final higher kilowatthour sales' order in the Braidwood Construction Proceeding, the ICC specifically directed its staff to consider the issue of " capacity in excess of a fuel Costs. Fuel expense increased in 1986 as a result of an increase in net reasonable reserve margin" in connection with the staff investigation of generation of electric energy and the increased average cost of fuel rate moderation plans which the ICC has required by that order. consumed due to the change in fuel sources of electric energy generated. Fuel expense decreased in 1985 and 1984 primarily due to the lower Financial Statement Effects. Reference is made to Notes 2,3 and 4 of average cost of fuel consumed, reflecting greater nuclear generation. The Notes to Financial Statements for additional information conceming the mix of the fuel sources of electric energy generation is determined foregoing matters, including their financial statement effects. primarily by the availability of nuclear generating units, including nuclear units placed in senice in 1984 and 1985. The cost of fuel consumed, net Results of Operations generation of electric energy and fuel sources of kilowatthour generation Earnings Per Common Share. The Company's earnings per common were as follows: share were $4.69 in 1986, $4.45 in 1985 and $4.43 in 1984. Earnings per 1986 1985 1984 share have been affected by rate increases which became effective in July Cost of fuel consumed 1984 and October 1985, increased kilowatthour sales and stringert cost control efforts. However, earnings per share have been limited by (per million bt 1): Nuclear $0.74 $0.72 $0.64 increases in interest and depreciation expenses, and the average number Coal $3.00 $3.00 $3.00 of common shares outstanding, as well as lower canstruction related Oil $6.87 $6.21 $6.41 credits in 1986 and the factors discussed below. Unless higher electric senice rates are granted, future earnings per share are expected to decline Natural gas $4.86 $5.37 $5.17 as new generating units are placed in service in 1987 and 1988 and the Average all fuels $1.80 $1.76 $1.88 related construction credits terminate and additional depreciation and Net generation of electric other costs of operating the facilities are incurred. mrgy (millions of kilowatthours): 66,178 61,213 59,887 Fuel sources of kilowatthour Kilowatthour Sales. The Company's kilowatthour sales to ultimate consumers increased 2.0% in 1986 reflecting close to normal summer and gereration: Nuclear 60 % 59 % 54 % einter weather and a moderate increase in economic activity in our senice area. Kilowatthour sales to ultimate consumers increased 0.8% in Coal 36 39 42 Oil 3 1 3 1985 and were adversely affected by a sluggish economy, a much cooler than normal summer and energy conservation by consumers. Natural gas 1 1 1 Kilowatthour sales to ultimate consumers increased 3.4% in 1984, due 100 % 100 % 100 % primarily to an improved economy in our senice area. It is anticipated that upon completion of the nuclear generating units Electric Operating Recenues. Rate increases appmved by the ICC under construction a greater percent of total generation will be from lower (reference is made to Note 3 of Notes to Fi.ancial Statements) had a fuel cost nuclear generating units.

17 Purchased and Interchanged Power-Net. Amounts of purchased and rates and in the mts of long term debt and notes payable interchanged power are primarily affected by the availability of the outstanding. The averags unounts of long-term debt and notes payable Company's generating units and the availability and cost of power from outstanding and average inteat rates thereon were as follows: other utilities. Net purchased and interchanged power expense decreased 1986 1985 1984 in 1986 due to the greateroverall availability of the Company's generating units resulting in a decrease in kilowatthours purchased, and lower long-term debt: average net cost of kilowatthours purchased. Net purchased and Average amount interchanged power expense decreased in 1985 due to the greater overall utstanding (millions) $6,465.8 $6,031.9 $5,917.0 availability of the Company's generating units, an increase in Average interest rate 10.42 % 10.47 % 10.27 % interchanged power delivered to other utilities and lower cost of power Notes psyable: generated by the Ccmpanv. Net purchased and interchanged power Average amount expense increased in 1984'due to the increased availability of power from utstanding (millions) $325.4 $301.1 $322.0 other utilities at costs lower than the incremental costs of generation on Average interest rate 7.12 % 8.10 % 10.79 % de Compan/s systen OtherItems. The amounts ofAFUDC reflect changes in the average levels The number and average net cost of kilowatthours purchased and ofinvestment subject to AFUDC and changes in the average annual rates interchanged were as follows: as discussed in Note 1 of Notes to Financial Statements. AFUDC was 1986 1985 1984 e ntinued on Byron Unit I from April 22,1985, the in-senice date, until electric senice rates reflecting the inclusion of the unit in rate base Purchased and interchanged became effective on October 29,1985, as discussed in Note 3 of Notes to pown-nd Financial Statements. AFUDC does not contribute to the current cash Kilowatthours (millions) 4,395 8,465 8,422 flow of the Company. For the year 1986, the equity component of AFUDC Cost per kilowatthour 2.04c 2.31c 2.68e constituted 36% of net income and the debt component, net of income taxes, was equivalent to 13% of net income. Deferred Under or Overrecovered Energy Costs-Net. Electric operating expenses for the years 1986,1985 and 1984 reflect the net change in under The ratios of earnings to fixed charges for the years 19S6,1985 and 1984 or overrecovered allowable energy costs. Reference is made to Notes 1 and were 2.99,2.85 and 2.82, respectively. The ratios of earnings to fixed 3 of Notes to Financial Statements. charges and preferred and preference stock dividend requirements for the Operation Expenses. Operation expenses decreased for the year 1986 years 1986,1985 and 1984 were 2.31,2.15 and 2.11, respectively. primarily due to intense efforu to control costs and decreased pension expense offset by wage increases and inflation. Operation expenses Business corporations in general have been adversely affected by inflation g.ggg g; mcreased for the years 1985 and 1984 due primarily to placmg additional nuclear units in senice, annual wage and other cost increases and inadequate to replace, at increased costs, the productive asseta consumed. additional employes. Electric utilities have been especially affected as a result of their capital intensive nature and regulation which limits capital recovery and Depreciation. Depreciation expense increased for the years 1986,1985 prescribes installation or modification of facilities to comply with and 1984 due primarily to additions to plant in senice, including nuclear increasingly stringent safety and environmental requirements. generating units p' aced in senice, and higher average annual composite depreciation rates. Depreciation did not commence on Byron Unit I until Because the regulatory process limits the amount of depreciation expense electric senice rates reflecting the melusion of the umt m rate base ncluded in the Company's revenue allowance to the original cost of utility became effective on October 29,1985, as discuaed in Note 3 of Notes t lant investment, the resulting cash flows are inadequate to provide for manciamatemeh replacement of that investment in future years or preserve the purchasing power of common equity capital previously invested. Interest on Debt. Changes in interest on long-term debt and notes payable The increases in electric operating revenues and net income on common for the years 1986,1985 and 1984 were due to changes in average interest stock for the years 1986,1985 and 1984 compared to the respective prior year periods would be lower if adjusted to reflect the effects of inflation. Price Range' and Dividends Paid per Share of Common Stock 1986 (By Quarters) 1985 (By Quartus) First Second Third Fourth First Second Third Fourth Price Range: High 35 % 35 % 34 % 35 % 29 % 31 % 32% 30% Low 28 % 29 % 30% 31% 27 % 28 % 28% 27 Dividends Paid 75e 75e 75e 75c 75c 75e 75e 75c 'As reported as NYSE Composite Transactions. 'ne Company's common skx k is traded on the New York. Eteest and Paafic stock enchanges, with the trker symbol c%T. At December 31.19% there were approumately 2535aWiders of reamt of the Company's comnma ek.

18 Report Of Management To The Audit Committee Of The Board of Directors Of Commonwea!th Edison Compa:y: The management of the Company has prepared and is We have made a study and evaluation of the system of responsible for the consolidated financial statements and internal accounting control of Commonwealth Edison the related 6nancial data contained in this annual report. In Company and subsidiary companies in effeet at December its opinion, the statements have been prepared in 31,1986. Our study and evaluation was conducted in conformity with generally accepted accounting principles. accordance with standards established by the American Institute of Certified Public Accountants. To meet its responsibilities for the reliability of the financial statements and the related financial data, the The management of Commonwealth Edison Company is Company maintains a system of internal accounting control responsible for establishing and maintaining a system of and supports a program ofinternal audits. In order to assure internal accounting control. In fulfilling this responsibility, that the system is adequately designed and documented and estimates and judgments by management are required to that it is functioning as designed, the Company routinely assess the expected benefits and related costs of control reviews its system of internal accounting control. It is procedures. The objectives of a system ofinternal management's opinion that the system is adequate to accounting control are to provide management with provide reasonable assurance that assets are safeguarded reasonable assurance that assets are safeguarded against from loss or unauthorized use and that financial records are loss from unauthorized use or disposition and that reliable for preparing financial information in conformity transactions are executed in accordance with management's with generally accepted accounting principles. The concept authorization and recorded properly to permit the of reasonable assurance is based on the recognition that the preparation of financial statements in accordance with cost of a system of internal accounting control must be generally accepted accounting principles. related to the benefits derived. The balancing of those factors requires estimates and judgment. Because of inherent limitations in any system of internal accounting control, errors or irregularities may occur and The Board of Directors carries out its responsibility for the not be detected. Also, projection of any evaluation of the financial statements and the related financial data through system to future periods is subject to the risk that its Audit Committee, which is composed solely of outside procedures may become inadequate because of changes in directors. The Audit Committee meets periodically with conditions, or that the degree of compliance with the management, the internal auditor, and independent public procedures may deteriorate. accountants to ensure that each is carrying out its responsibilities, and to discuss auditing, internal accounting in our opinion, the system ofinternal accounting control of control, and financial reporting matters. Both the internal Commonwealth Edison Company and subsidiary companies auditor and the independent public accountants have free in effect at December 31,1986, taken as a whole, was access to the Audit Committee, with and without sufficient to meet the objectives stated above insofar as management present, to discuss the results of their audit those objectives pertain to the prevention or detection of work, the 6dequacy of internal accounting control and their errors or irregularitiesin amounts that would be materialin opinione on other financial matters. relation to the consolidated financial statements. h 49 9A7, W -? kr b o br/>e f James J. O'Connor Wallace B.Behnke,Jr. Chicago, Illinois Chairman and President Vice Chairman February 6,1987 i

19 Statements of Conschdated income Commonwealth idises Company and Subsidiary Companies (thousands except per share data) 1986 1985 1984 ELECTRIC 0PERATING REVENUES (Note 3) $5,478,511 $4,964,151 $4,929,671 ELECTRIC OPERATING EXPENSES AND TAXES: Fuel (Notes 1,3 and 11) 31,318,888 $1,205,784 $1,259,539 Purchased and interchanged power - net 89,604 195,934 225,702 Deferred (under)/overrecovered energy costa - net (Notes 1 and 3) 61,566 (29,464) 63,773 Operation 809,339 858,452 766,553 Maintenance 310,586 337,462 316,141 Depreciation (Notes I and 3) 556,695 455,964 390,675 Taxes (except income)(Note 15) 577,995 586,832 565,021 Income taxes (NotesIand14)- Current -Federal 213,045 154,948 162,888 - State 69,997 36,071 52,857 Deferred - Federal-net 140,478 205,313 107,625 - State - net 26,461 31,238 18,349 Investment tax credits deferred - net (Notes 1 and 14) 220,899 59,152 161,982 $4,395,553 $4.097,686 $4,091,105 ELECTRIC 0PERATING INCOME $1,082,958 8 866,465 5 838,566 OTHER INCOME AND DEDUCTIONS: Interest on long-term debt $ (673,922) $ (631,377) $ (607,792) Interest on notes payable (23,157) (24,390) (34,744) Allowance for funds used during construction (Notes t and 3) - Borrowed funds 142,203 157,961 149,339 Equity funds 380,443 436,089 388,085 Deferred return-rate phase-in plan (Note 3) 42,975 6,765 Current income tax credits applicable to nonoperating activities (Notes 1 and 14) 139,816 150,576 151,380 Miscellaneous-net (41,721) (6,353) (9,356) $ (33,363) $ 89.271 $ 36.912 NET INCOME $1,049,595 $ 955,736 $ 875,478 PROVISION FOR DIVIDENDS ON PREFERRED AND PREFERENCE STOCKS 116f54 116.111 114,316 NET INCOME ON COMMON STOCK $ 932,541 $ 839,625 $ 761,162 AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 198,928 188,746 172,013 EARNINGS PER COMMON SHARE $4.69 $4.45 $4.43 CASH DIVIDENDS DECLARED PER COMMON SHARE $3.00 $3.00 $3.00 The accompanyin0 Notes to Fmancial Statements are an integral part of the above statements. ( ) indicates deduction.

O Censolidated Balance Sheets Conseawealth tilsas Campany and Subsidiary Companies ASSETS - (thousands of dollars) December 31, 1986 1985 UTILITY PLANT (Notes 1,2,3,4,9,16 and 18): Plant and equipment, at original cost (includes construction work in progress of $6,294 million and $4,914 million, respectively) $20,894,430 $19,156,200 less - Accumulated provision for depreciation 4,021,838 3,583,661 $16,872,592 $15,572,539 Nuclear fuel, at amortized cost 934,165 953,057 $17,806,757 $16,525,596 less - Accumulated deferred income taxes (Note 14) 1,983,310 1,82S,351 $15,823,447 $14,696,245 INVESTMENTS (Note 17): Subsidiaries not consolidated (Note 1) $ 127,558 $ 145,767 Other investments,at cost 118,355 155,667 $ 245,913 $ 301,434 - CURRENTASSETS: Cash (Note 10) $ 45,803 $ 27,242 Temporary cash investments, at cost which approximates market 6,540 18,865 Specialdeposits 8,829 9,448 Receivables - Customers 407,299 390,246 Other 32,462 31,406 Provisian for uncollectible accounts (14,200) (6,000) Coa! and fbeloil, at average cost 429,713 393,539 Materials and supplies, at average cost 195,752 186,962 Prepayments 36,385 26,036 Deferred underrecovered energy costa (Notes 1 and 3) 56,165 $ 1,148,583 $ 1,133,909 DEFERREDCHARGES-Unamortized spent nuclear ful disposal fee and related interest (Notes I and Ili 8 51,678 $ 74,735 Rate phase-in plan (Note 3) 49,740 6,765 Other 85,867 71,958 $ 187,285 $ 153,458 $17,495,228 $16,285,944 h accompanying Notes to Fmancial Staternents are an integral part of the above statements. ( ) Indeates deduction.

21 LIABILITIES (thousands of dollars) December 31, 1986 1985 CAPITALIZATION (see accompanying statements): Common stock equity $ 6.106,973 $ 5,834,765 Preferred and preference stocks without mandatory redemption requirements 448,769 451,307

• rreference stock subject to mandatory redemption requirements 716,731 752,372 Iong-term debt 6,425,777 5,778,478

$13,998,250 $12,816,922 CURRENT LIABILITIES: Notespayable(Note 10)- Commercialpaper 8 93,000 $ 309,900 Bankloans 2,400 2,100 Current portion oflong-term debt, redeemable preference stock and capitalized lease obligations (Note 9) 346,557 626,235 Accounts payable 474,748 511,946 Accrued interest 207,168 190,608 Accrued taxes 257,380 174,866 Dividends payable 180,645 175,201 Customer deposits 45,003 40,704 Deferred overrecovered energy costs (Notes 1 and 3) 5,401 Other 54,018 50,077 8 1,666,320 $ 2,081,637 OTHER NONCURRENTLIABILITIES: Accrued spent nuclear fuel disposal fee and interest thereon (Note 11) $ 372,118 8 350,050 Obligations under capital leases (Note 16) 474,094 383,135 Other 104,428 84,156 $ S50,640 $ 817,341 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS (Notes 1 and 14) $ 790,018 5 569,146 COMMITMENTS AND CONTING ENT LIABILITIES (Note 19) $17,405,228 $16,285,046 The accompanying Notes to hnancial Statements are an integral part of the above statements.

22 Statements Of Consolidated Capitalization Commensealth Edison Company and Subsidiary Compasles (thousands of dollars) December 31, 1986 1985 COMMON STOCK EQUITY (Notes 5 and 6): Common stock, $12.50 par value per shan - Outstanding -202,746,115 shares and 194,743,645 sha.es, respectively 8 2,534,326 $ 2,434,295 Premium on common stock and other paid-in capital 2,024,251 1,886,265 Capitalstock and warrant expense (17,998) (17,903) Retained earnings 1,866,394 1,532.108 $ 6,446,973 $ 5,834,765 PREFERRED AND PREFERENCE STOCKS WITHOUT MANDATORY REDEMPfl0N REQUIREMENTS (Notes 5 and 7): Preference stock, cumulative, without par value - Outstanding-10,499,549 shans $ 432,320 $ 432,320 $1.425 convertible preferred stock, cumulative, without par value - Outstanding -517,262 shares and $97,084 shares, respectively 16,449 18,987 Prior preferred stock, cumulative, $100 par value per share - no shares outstanding $ 44%,769 8 451,307 PREFERENCE STOCK SUBJECT TO MANDATORY REDEMPTION REQUIREMENTS (Notes 5 and 8): Preference stock, cumulative, without par value - Outstanding -10,326,005 shares and 10,881,290 shares, nspectively $ 746,755 $ 781,666 Current redemption requirements for preference stock included in current liabilities (30,024) (29,294) $ 716,731 8 752,372 IX)NG-TERM DEBT (Notes 9 and 20): Fint mortgage bonds-Maturing 1936 through 1991, 3%% due June 1,1986 $ 40,000 5.80% Pollution Contml due July 1,1986 10,000 4%% due March 1,1987 50,000 50,000 3%% due March 1,1988 50,000 50,000 17%% due November 1,1988 150,000 150,000 1o%% due May 15,1989 100,000 14% due July 15,1989 100,000 100,000 4%% due March 1,1990 30,000 30,000 16% due March 15,1990 200,000 200,000 5% due July 1,1990 10,000 10,000 14% due January 15,1991 150,000 150,000 12%% due November 15,1991 100,000 100,000 Maturing 1%'2 through 2001 - 5%% to 14%% 1,075,000 875,000 Matwing 2002 through 2011 - 6%% to 16%% 1,320,000 1,420,000 Maturirig 2012 through 2016 - 9%% to 15%% 1,411,000 911,000 $ 4,646,000 $ 4,196,000 Debentures, due December 15,1986 - 12%% 250,000 Debentures,due March 15,1987 - 14%% 125.000 125,000 Sinking fund debentures, due 1996 through 2011 - 2%% to 15%% 989,439 1,054,0:9 Pollution control obligations, due 2000 through 2014 - 5%% to 11%% 453,200 453,200 Other (principally long-term notes) 416,579 201,672 Current maturities of long-term debt included in current liabilities (160,031) (460,031) Unamortized net debt discount and premium (Note 1) (44,410) (41,382) $ 6,425,777 5 5,778,478 $13,998,250 $12,816,922 The accompanymg Notes to Fmancial State. rants are an integral part of the above statements. ( ) indicates deduchon.

23 Statements Of Consolidated Changes in Financist Position commonwealth Edissa company ass subsidiary campanies (thousands of dollars) 1986 1985 1984 FUNDS PROVIDED BY: Current operations - Netincome $1,049,595 $ 955,736 $875,478 Depreciation and amortization 640,096 541,997 480,995 Deferred income taxes and investment tax cndits - net 374,833 299,773 294,419 Equity component of allowance for funds used during construction (380,443) (436,089) (388,085) Deferred return-rate phase-in plan (42,975) (6,765) Other non-cash items-net 25,120 305 3,667 Funds provided internally $1,666,226 $1,354,957 $1,266,474 Issuance of secunties-long-term debt 1,006,700 583,582 339,808 Capitalstock 235,537 540,924 245,046 Sale of nuclear fuel 258,848 439,648 231,637 increase (Decrease) in short-term borrowmgs (216,600) 21,100 129,400 $2,950,711 82,940,211 $2,212,365 FUNDS APPLIED TO: Construction expenditures $1,824,205 $1,834,646 $1,602,800 Nuclear fuelexpendituns 174,511 250,718 180,379 Equity component of allowance for funds used during construction (380,443) (436,089) (388,085) $1,618,273 $1,649,275 $1,335,094 Cash dividends declared on capital stock 715,309 690,317 832,926 Retirement of bonds and debentuns for cash 563,643 170,361 293,325 Retirement oflong-term notes 100,000 100,000 100,000 Redeemed or reacqmred preference stock 34,911 21,443 25,040 Termination of a nuclear fuellease 251,402 Incnase (Decrease) in investment in subsidiaries not consolidated (4,367) (5,063) (6,711) Increase (Decrease) in working capital (other than sho:t-term borrowings and curnnt portion of long-term debt, redeemable preference stock and espitalized lease obligations) (66,287) 66,437 (281,692) Other items-net (10,771) (3,961) 54,383 $2,950,711 82,940,211 $2,212,265 ( ) Indicates deduction. l

24 Statements C Consolidated Retained Earnings Commeneealth Edissa Campany and subsidiary Companies (thousands of dollars) 1986 1985 1984 BALANCE AT BEGINNING OF YEAR $1,532,108 $1,266,689 $1,024,137 NETINCOME 1,049,595 955,736 875,478 $2,581,703 $2,222,425 $1,899,615 DEDUCT-Cashdividendsdeclaredon-Common stock $ 598,959 $ 574,129 $ 518,373 Preferred and preference stocks 116,350 116,188 114,553 $ 715,309 $ 690,317 $ 632,926 BALANCE AT END OF YEAR $1.864,394 $1,532,108 $1,266,689 Statements Of Consolidated Premium On Common Stock And Other Paid-In Capital s Commonwealth Edisse Company and subsidiary companies (thousands of dollars) 1986 1985 1984 BALANCE AT BEGINNING OF YEAR $1,886,265 $1,607,553 $1,508,702 ADD - Premium on issuance of common stock and gain on reacquired preference stock 138,041 278,760 98.905 $2.024,306 $1,886,313 $1,607,607 DEDUCT -Transfer to common stock account upon exercise of warrants 55 48 54 BALANCE AT END OF YEAR $2,024,251 $1,886,265 $1,607,553 The accompartyin0 otes to Fmancial Statements are an integral part of the above statements. N

25 Notes To Financial statements prieds prior to April 1934,such rates erclude LaSalle County Unit l and the depreciation thereon that had been computed to reflect the relative degree to which the unit was operating as measured by kilowatthour output. As discussed in Note 3, depreciation on Byron Unit 1, placed in senice in April 1985, did not commence until electric senice rates relating to the inclusion of the unit in rate base became effective on October 29,1985. While the eventual cost of retiring a nuclear generating unit is uncertain at the present time, these composite depreciation rates include allowances for both interim chemical cleaning and end-of-life decommissioning. Commeneralth Edison company and Subsidiary Companies (1) Summary of Significant Accounting Policies Amortization of Nuclear fuel The cost of nuclear fuel is amortized to Principles of Consolidation. The consolidated financial statements fuel expense based on the quantity of heat produced using the unit of include the accounts of Commonwealth Edison Company (the production method. As authorized by the Illinois Commerce Commission "Compey") and its wholly-owned subsidiary, Commonwealth Edison (ICC), provisions for spent nuclear fuel disposal costs are recorded at a Company of Indi:ra. Inc., the only subsidiary engaged in the electric rate of two mills per kilowatthour of net nuclear generation which utility business. All signifbut intercompany transactions have been includes the fee payable on current nuclear generation and the balance for eliminated. recovery of the one-time fee for disposal of spent nuclear fuel, and interest thereon, related to nuclear generation prior to April 7,1983. Reference is Individual financial statements of the Company han been omitted made to Note 11 for further information concerning the disposal of spent hacause the Company is primarily an operating company ad the nuclear fuel Nuclear fuel expense, including leased fuel costs and subsidiary included in the consolidated financial statements is tota!!y-provisions for spent nuclear fuel disposal costs, for the years 1986,1985 held. Financial statements of the Company's nonconsolidated subsidiaries and 1984 were $324,943,000, $291,159,000 and $234,031,000, respectively. have been omitted because, considered in the aggregate, they would not constitute a significant subsidiary. Income Tam Deferred income taxes are provided for significant income and expense items rcengnized for financialaccounting purposes in periods incestments in Subsidiaries not Consolidated. The investments in that differ from those for income tax purposes. Income taxes deferred in subsidiaries not consolidated are accounted for in accordance with the prior years are charged or credited to income as the book / tax timing equity method of accounting. At December 31,1986,1985 and 1984, differences reverse. retained earnings include $7,973,000, $20,904,000 and $17,992,000, respctively, of undistributed earnings of subsidiaries not consolidated. Investment tax credits utilized are deferred for financial accounting The equity in earnings (losses) of subsidiaries not consolidated, which is purposes and amortized through credits to income over the lives cf the included in miscellaneous other income and deductions for the years 1986, related property. 1985 and 1984 was $(8,431,000), $6,413,000 and $2,479,000, respectively. The Company's investment in its uranium subsidiary at December 31, Prosisions for deferrals of construction related income tax benefits (e.g. 1986 includes approximately $2,422,000 representing the unamortized accelerated cost recovery and liberalized depreciation) reflect portion of the purchase cost attributable to uranium ore reserves after consumption of the plant and equipment to which they relate. taking account of the estimated net value of the subsidiary's other awts Consequently, they are similar to depreciation provisions, and the related at the date of acquisition.This amount is being amortized on the basis of accumulated deferred income taxes, like the accumulated provision for uranium concentrate produced from the reserves. depreciation, is a valuation resen e deducted from plant investment in arriving at the rate base used in ratemaking proceedings. Depreciation. Depreciation is provided on the straight-line basis by amortizing the cost of deprwiable plant and equipment over estimated Income tax credits resulting from interest charges applicable to composite senice lives. Such provisicns for depreciation were at average nonoperating activitias, p incipally construction, are classified as other annual rates of 4.03%,3.96% and 3.91% of average depreciable utility income. plant and equipment for the years 1986,1985 and 1984, respectively. For

28 Reference b made to Not.14 and " Management's Discussion and (3) Rate Mitters Analysis of Financial Condition and Results of Operations," subcaption In its rate order issued October 24,1985, as amended,the ICC authorized " Liquidity and Capital Resources" " Federal Tax Changes," for increased electric rates for the Company which became effective on additional information relating to income taxes. October 29,1985. These new rates are designed to increase operating revenues by $494.8 million, or 11.0%, on an annualized basis, excluding Allorcance for funds Used During Construction (AFUDC). In add-on revenue taxes, based on sales estimates for the year ended accordance with uniform systems of accounts prescribed by regulatory December 31,1984 used in the rate proceedmg. Collection of a portion of authorities, the Company capitalizes AFUDC, compounded semiannually, the additional revenues authorized in the October 24,1985 order of the chich represents the estimated cost of funds used to finance the ICC, as amended, was deferred pursuant to a phase-in plan which construction program. For projects on which construction commenced postponed, with respect to residential customers, recovery of return on a prior to 1983, AFUDC of approximately $485,973,000, $570,624,000 and portion of Byron Unit I costa through December 31,1986. The $523,217,000 was recorded on an after tax basis in 1986,1985 and 1984, phase-in plan provides for an initial increase in rates, which became respectively, at average annual rates (net of income tax rates) of 9.78%, effective on October 29,1985, designed to increase annual operating 10.06% and 10.08%, respectively. For projects on which construction revenues by $413.7 million and for an additional increase in rates, which commenced after 1982, AFUDC of approximately $36,673,000, became effective January 1,1987, designed to increase annual opcrating $23,426,000 and $14,207,000 was recorded on a pre-tar basis in 1986,1985 revenues by $136.2 million.The additionalincrease reflected in rates a full and 1984, respectively, at average annual rates of 12.29%,12.63% and return on the postponed portion of Byron Unit I costs and the recovery 12.80%, respectively. Reference is made to Note 3 regarding the over a two-year period of the previously deferred return and associated continuance of the capitalization of AFUDC on Byron Unit t after the in-carrymg charges. Under the phase-in plan, rates designed to decrease service date and to the first paragraph of"Other items" under the annual operating revenues by approximately $55.1 million are to become subcaption "Results of Operations" in " Management's Discussion and effective January 1,1989, to reflect completion of the recovery of the Analysis of Financial Condition and Results of Operations." deferred amounts. The Company recorded the amount of return deferred for periods prior to January 1,1987, and associated carrymg charges, as a Debt Discount, Premium and Expense. Discount, premium and expense deferred charge on the consolidated balance sheets and as otherincome in on long-term debt are being amortized over the lives of the respective the statements ofconsolidated income.The capitalized amounts are being issues. amortized over the two-year recovery period beginning January 1,1987. Although the phase-in plan deferred cash flow during the period prior to Deferred Recovery of Energy Costs. The uniform fuel adjustment clause January 1,1987, as compared to the effect of placing the full amount of adopted by the ICC provides for the recovery of changes in fossil and the rate increase into effect immediately,it did not have a significant nuclear fuel costs and the energy portion of purchased power costs as effect on the Company's net income. compared to the fuel and purchased energy costs included in base rates. As authorized by the ICC,the Company has recorded under or overrecoveries The October 1985 rate orders of the ICC also require that the Company of allowable fuel and energy costs which, under the clause, are recoverable file, either as part of its next general rate filing or as a separate petition, or refundable in subsequent months. Reference is made to the last proposals for phasing into rates its investment in Byron Unit 2 and paragraph of Note 3. Braidwood Units 1 and 2. Reference is made to Note 4 and " Management's Discussion and Analysis of Financial Conditica and (2) Plan Regarding Nuclear Plant Construction Program and Resulta of 0perations," subcaption " Nuclear Plant Constructica Program Rates and Rates," for additional information concerning phase-in plans. On February 3,1987, the Company and the Gcvernor of the State of Illinois, the Attorney General of the State of Illinois, the State's Pursuant to authorization of the ICC, the Company continued to Attorney of Cook County, Illinois, other govemment otficials and a grc,up capitalize AFUDC on Byron Unit 1, and postponed commencement of ofindustrial customers executed a Memorandum of Understarding (the depreciation on the unit from April 22,1985, the in-service date, until Plan) whicMs intended to resolve uncertainties concerning completion of electric service rates reflecting the inclusion of the unit in rate base the Company's clear generating uni's currently under construction and thelevelof theCompany'selectricrates.ThePlanwasfiledwiththeICC on February 3,1987, together with a petition seeking the ICC's approval of the actions required by the Plan Other parties to the Plan have filed a petition with the ICC seeking a determination that the rate increa3e provided for in the Plan is reason:.ble. Reference !z made to " Management's Discussion and Analysis of Financial Cedition and Results of Operations," subcaption " Nuclear Plant Corstruction Program and Rates" " Plan Regarding Nuclear Plant Construction Program ed Rates," for additional information concerning the Plan. I

27 became effective on Octobr 29,1985. The osder granting such On May 16,1986, the Circuit Court entered an order which, among other authorization has been appealed by intervenors to the Circuit Court of things, stayed the Circuit Court Order pending appeal by the Company. Ccok Cocnty, Illinois (the " Circuit Court"). The amounts of additional The May 16 order requires the Company to " create a separate account on AFUDC and postponed depreciation were $117.8 million and $47.4 its books to reflect the difference between the revenues collected by million, respectively. Under the October 1985 rate order, these amounts Edison subsequent to April 29,1986 and the amounts which would have aie bing recovered in electric service rates over the remaining service life been collected under rates without Byron 1 included in rate base.... " of the unit. The May 16 arder provides that if the Circuit Court Order is affirmed the Company shall pay refunds to its customers in an aggregate amount equal Pursuant to Illinois law, an audit of the construction expenditures and to the amount recorded in the separate account required by the order, plus management practices at the Byron station was conducted by an interest.The May 16 order also pmvides that if the Circuit Court Order is indep2ndent party and was introduced as evidence in the proceeding in affirmed in part and reversed in part the Company shallpay refunds to its connection with the Company's October 1985 rate increase. in its related customers, plus interest, in amounts to be determined by the Circuit rate orders, the ICC disallowed return and depreciation on $101.5 million Court.The Company has appealed the Circuit Court Order and the appeal of Byron Unit I costs. In December 1986, the Financial Accounting is now before the Illinois Supreme Court. Standards Board (the "FASB") issued an accounting standard related to disallowances of plant costs which requires the Company at some future Electric operating revenues of $316.3 million for the year 1986 were date, not later than January 1988, to write off disallowed Byron Unit I collected subject to refund undeithe terms of the May 16 order of the costs, net of the income tax effect, through a cumulative adjustment to Circuit Court. The deferred return and associated carrying charges income or a restatement of prior year financial statements. recorded pursuant to the phase-in plan for the years 1985 and 1986 of $49.7 million, may not be recoverable, and amounts collected pursuant to The Illinois Attorney General and other parties appealed the ICC's the phase-in plan may be required to be refunded,if the Circuit Court October 1985 rate orders to the Circuit Court. On April 29,1986 the Order is affirmed on appeal. The Company cannot predict the outcome of Circuit Court entered an order (the " Circuit Court Order") reversing the the appeal of the Circuit Court Order. October 1985 rate orders of the ICC. The Circuit Court Order remanded the rate proceeding to the ICC and directed the ICC to order new rates for The Company believes, however, that it would be unreasonable to the Company within 30 days. The Circuit Court ordered that the new anticipate that rate relief ultimately obtained will be insufficient to Fates shall exclude the approximately $2.22 billion presently incorporated provide for at least the recovery of its investment in Byron Unit 1, in the Company's rate base related to Byron Unit l and shall, accordingly, together with related interest costs, and therefore believes that no " rollback," on a prospective basis, the $494.8 million rate increase of material write off of its investment in Byron Unit 1 is currently required. October 1985. The Circuit Court concluded that the ICC's decision did However, as previously stated, the FASB has adopted an accounting not comply with applicable legal requirements, including a provision of standard which would require the Company to write off any disallowed the Illinois Public Utilities Act which requires the ICC to conduct an plant costs, net of the income tax effect, at some future date, not later audit prior to including a new generating plant in a utility's rate base. The than January 1988, through a cumulative adjustment to income or a Circuit Court concluded that the audit of Byron Unit 1 performed for the restatement of prior year financial statements. ICC did not meet the statutory standards and, in addition, that the ICC's considerations and determinations as to whether or not certain of the For additional information concerning the foregoing matters, reference is costa of Byron Unit 1 should be included in rate base were incorrect in made to Note 4 and to " Management's Discussion and Analysis of certain respects.The Circuit Court ordered that such defects be corrected Financial Condition and Results of Operations," subcaption " Nuclear by the ICC in the conduct of further proceedings relating to Byron Unit 1 Plant Construction Program and Rates." plant costs and in ordering future rates for the Company which incorporate Byron Unit 1 plant costs. The Circuit Court stated that the The Illinois Public Utilities Act requires the ICC to hold annual public ICC disallowance of return on and depreciation of $101.5 million of Byron hearings to determine whether each utility's fuel adjustment clause Unit I costa should have been $203 million and that only a portion of the retlects actual costs of fuel prudently purchased and to reconcile amounts Byron station common plant of $675 million (estimated by the Company collected with actual costs. Pursuant to this requirement, the ICC has to be approximately $800 million), rather than all of such costs, should be been conducting reconciliation proceedings with respect to the Company's included in rate base with Byron Unit 1. 1983 fuel costs. In November 1985,an ICC staff witness in the proceedmg recommended that the Company refund to customers $81.5 million in electric energy production costs incurred by the Company and collected

28 through the fuel c!jetment clause in 1983, because of allegedly avoidable requests that the ICC enter an order revoking the Certificate of Public forced outages of the Company's nuclear generating stations and slow Convenience and Necessity which had authorized construction of the start-up of Unit I at the Company's LaSalle County nuclear generating station or that it otherwise require the Company to cancel construction of station. On November 24,1986, the hearing examiner in the proceeding the station. The ICC, noting that the evidence considered by it in the issued a proposed order which, if adopted by the ICC, would require the proceeding was addressed to cancelling or completing the Braidwood Company to refund to its customers approximately $70 million plus station as a whole and did not include separate evaluations of the effects interest from the date of adoption of the order.The refund would be made of cancelling or completing each unit, stated that it "cannot reasonably by adjustments to the Company's rates, through its fuel adjustment conclude from this evidence that the two Braidwood Units as a single clause, over a one year period from the date of the order. The Company economic entity should be cancelled, especially considering that has filed a motion with the ICC requesting that this proceeding be construction of Unit 1 is more than 90% complete." The ICC further suspended pending consideration by the ICC of the Plan discussed in stated that "a comprehensive evaluation of each unit individually will " Management's Discussion and Analysis of Financial Condition and result in a Commission decision which better serves the ratepayers, the Results of Operations," subcaption " Nuclear Plant Construction Program shareholders, and the economy of northern Illinois... " The order states and Rates" " Plan Regarding Nuclear Plant Construction Program and that "The Commission cautions the Company that the Order in this Rates." The Company cannot predict what action will ultimately be taken docket does not imply approval or disapproval of construction of by the ICC. Braidwood Unit 1." (4) Braidwood Construction Hearings; Byron Unit 2 and In the cou:se of the proceeding the Company proposed that the cost of the Braidwood Unit i Prudence Audits Pc idwood units reflected in rates not exceed $5.05 billion (the in 1980 and 1982,the ICC determined that the Company should complete Company's current budget for the units), subject to increases attributable the construction of its nuclear generating units, including Braidwood to future regulatory delays. In its final order in the proceeding the ICC Units 1 and 2, in as timely and economic a manner as possible. In April appears to have accepted the Company's proposal. The ICC further 1985, the ICC began evidentiary hearings on the subject of cancelling one stated, however, that the cap " creates a strong presumption that any costs or both of the Braidwood units currently under construction. A motion above the $5.05 billion ceiling or the prorated portion for that part of was filed by participants in the hearings requesting orders of the ICC plant completed and allowed in rate base,if applicable, will be absorbed by requiring that construction of the Braidwood station be cancelled and Edison's shareholders." In addition, the final order states that revoking the Certificate of Public Convenience and Necessity authorizing " acceptance of the Company's voluntary cap will in no way limit this the construction of the station. Commission from making further disallowances on the basis of prudency." In October 1985, the ICC suspended the proceeding pending completion by the Company of its announced reexamination of the economics of The final order also requires that the Company file monthly reports completing and operating its generating units under construction and concerning the cost and status of construction of the units under ordered that the proceeding be reopened for further hearings and evidence construction and that the Company continue to record separately costs following such reexamination. The ICC also ordered the Company to for the Braidwood units incurred after November 30,1985. record separately costs for Braidwood station incurred after November 30, 1985, and stated that, in the event the ICC ultimately determines that in the final order the ICC determined that within 30 days the Company Braidwood station be cancelled. there would be a strong presumption that should be required to submit evidence in a new proceeding showing cause the Company would not Le allowed to recover such costs. Costs incurred why the Certificate of Public Convenience and Necessity for the for the Braidwood station through December 31,1986 were $4.11 billion, Braidwood station should not be withdrawn or altered with respect to of which $1.03 billion was incurred after November 30,1985. Economic Unit 2. The second order issued on July 2,1986 instituted a new stud:es t resented by the Company in the proceeding showed that proceeding and ordered the Company ".. to show cause why the completion of Braidwood station would result in significant savings as Company's Braidwood Unit 2 should not be cancelled and the Certificate compared to cancellation. of Public Convenience and Nuessity issued for the Braidwood station should not be withdrawn or altered." The Company has 6 led its evidence On Jul 2,1986, the ICC entered a tinal order in this proceeding, and a in the new proceedir.g in response to the order to show cause. y second. related, order opening a farther proceeding. The finat order denied

29 la the new proceedmg, the Company filed economic studies with the ICC the financial statements. The Company blieves that it would b with respect to Braidwood Unit 2, considered separately, which show that unreasonable to anticipate that rate relief ultimately obtained wi!I be completion of that unit is economically preferable to cancellation. These insufScient to provide for at least the recovery ofits investment in Byron same studies, however, when altered to incorporate (i) the lower sales and Unit 2 and Braidwood Unit i, together with related interest. load growth rate assumptions preferred by the ICC in its final order and (ii) an unorthodox method for treating return on unamortized investment in December 1986 the FASB issued an accounting standard which proposed by intervenors and espoused by the ICC in its final order (a requires the Company at some future date, not later than January 1988: methodology which the Company believes to be contrary to generally (1) to write off any disallowed plant costs, net of the income tax effect; accepted economic principles) in some cases show levels of savings from and, (2) with regard to units for which a prudence investigation is in co'npletion which could be regarded, in the exercise of judgment, as too process or has taken place (including Byron Unit 2 and Braidwood Unit low to dictate a choice between completion and cancellation. Where the

1) and a disallowance of costs (including subsequent AFUDC on those final order's growth rate assumptions and treatment of return on costs) is reasonably possible, to limit the subsequent capitalization of unamortized investment are combined with other factual assumptions AFUDC to amounts based on the cost ultimately expected to be allowed.

which the show cause order requested the Company to make for sensitivity purposes, the results of the Company's economic studies can in While the effects on the Company's financial position of an adverse order some cases be reversed. The Company does not know what weight the with respect to Byron Unit 2 or Braidwood Unit 1 or 2 would depend on ICC will give the studies in any event. the provisions,if any, made by the ICC for recovery by the Company of its investment in the units, such effects could be material. The final order appears to indicate that,if the ICC were to find that a Braidwood unit should be cancelled, it might disallow recovery in rates of On February 26,1986, the Company filed testimony with the ICC in the all costs associated with the cancelled unit incurrei after November 30, proceedmg which, among other things, proposed a rate moderation plan 1985, and that it would, in any event, disallow, for the period following a which pro ides for reflecting the costs associated with Byron Unit 2 and cancellation decision, recovery of any return on investment in the unit. Braidwood Units l and 2 in electric rates over a period of time.The ICC's final order takes no position on the Company's rate moderation plan. In l The Company cannot predict what determination the ICC will ultimately the final order the staff of the ICC was instructed to initiate a make as to completion of Braidwood Unit 2 and the ratemaking. comprehensive investigation of the rate and other impacts of placing treatment of the Company's investment in the unit. The results of the Byron Unit 2 and the Braidwood units into service and to consider the Company's economic studies to date continue to favor completion of issue of" capacity in excess of a reasonable reserve margin" and both Braidwood Unit 2. Because of the strong case for completion, the traditional and non-traditional methods of reflecting the units in rates Company is proceeding with construction pending an ICC decision. In including, without limitation, the rate moderation plans previously response to the direction of the hearing examiner in the new proceeding, proposed by the Company and by various inten enors in this and other the parties submitted briefs in early December 1986 addressing the issue proceedings. of the propriety of an interim order directmg the Company to stop construction of Braidwood Unit 2 pending issuance of a final order in the The FASB is currently considering various accounting issues related to proceeding. The hearing examiner has not responded to the briefs. The phase-in plans. The accounting standard previcusly proposed would have Company has filed a motion with the ICC requesting that this proceedmg limited the form and duration of any rate moderation plan. be suspended pending consideration by the ICC of the Plan discussed in " Management's Discussion and Analysis of Financial Condition and For additional information concerning the foregoing matters, reference is Results of Operations," subcaption " Nuclear Plant Construction Program made to " Management's Discussion and Analysis of Financial Condition and Rates" " Plan Regarding Nuclear Plant Construction Program and and Results of Operations," subcaption " Nuclear Plant Construction Rates." In addition, the Company cannot reasonably estimate the Program and Rates." amount, if any, of its investment in Braidwood Unit 2 which may not be recoverable if the ICC were to determine thst Braidwood Unit (5) Authorized Shares and Voting Rights of Capital Stocks 2 should be cancelled or not allowed in rate base. Because cf these At December 31,1986, the authorized shares of capital stocks were: uncertainties no wnte off of the Company's investment in Braidwood common stock-250,000,000 shares; preference stock-31,986.005 shares; Unit 2 has been reflected in the financial statements. $1.425 convertible preferred stock-51'7,262 shares; and prior preferred stock-850,000 shares. T1.e prior preferred and preference stocks are Pursuant to Illinois law, an audit of the construction expenditures and issuable in series and may be issued with or without mandatory management practices with respect to Byron Unit 2 and Braidwood Unit redemption requirements. Holders of shares at any time outstanding, 1 is being conducted by an independent party. Construction work at regardless of class, are entitled to one vote for each share held on each Byron Unit 2 and Braidwood Unit 1 is complete and the Company is matter submitted to a vote at a meeting of stockholders, with the right to performing pre-start up testing at both units. No write off of its cumulate votes in all elections for directors. investment, or discontinuance of capitalization of AFUDC on its investment,in Byron Unit 2 and Braidwood Unit I has been reflected in f l

C (4) CommonSteek during 1986,1985 and 1984. The series of preference stock without At December 31,1986, shares of common stock were reserved for the mandatory redemption requirements outstandmg at December 31,1986 followmg purposes: are summanzed as follows: Automatic Dividend Reinvestment and Stock Aggregate Involuntary Purchase Plan 2,458,732 Shares StatedValue Redemption Liquidation Employe Stock Purchase Plan 3,460,983 Series Outstanding (thousands) Price (a) Price (a) Employe Savings andInvestment Plan 1,535,841 $1.90 4,249,549 $106,239 $ 25.25 $25.00 Employe Stock Ownership Plan 1,696,595 $2.00 2,000,000 51,560 $ 26.04 $25.00 Conversion of $1.425 convertible preferred stock 527,607 $1.96 2,000,000 52,440 $ 27.11 $25.00 Conversion of warrants 57,150 $7.24 750,000 74,340 $101.00 $99.12 9,736,908 $8.40 750,000 74,175 $101.00 $98.90 $8.38 750,000 73,566 $102.15(b) $98.09 Shares of common stock, $12.50 par value per share, were issued as 10,499.549 $432,320 follows: (a) Per share phs accrued and unpaid dmdends. if any. M Through March 31.1987 and $100.16 thereafter. Public offerings 10,000,000 The outstanding shares of the $1.425 convertible preferred stock are Automatic Dividend convertible at the option of the holders thereof, at any time,into common Reinvestment and stock at the rate of 1.02 shares of common stock for each share of Stock Purchase Plan 7,131,165 7,301,450 8,080,296 convertible preferred stock, subject to future adjustment. The convertible Employe Stock Purchase Plan 317,351 420,942 476,626 preferred stock may be redeemed by the Company at $42 per share, plus Employe Savings and accrued and unpaid dividends,if any.The involuntaryliquidation price of Investment Plan 114,902 128,409 116,712 the $1.425 convertible preferred stock is $31.80 per share, plus accrued Employe Stock Ownership Plan 353,228 567,249 179,713 and unpaid dividends, if any. During 1986,1985 and 1984,79,822 shares, Conversion of $1.425 convertible 109,927 shares and 107,978 shares, respectively, of the convertible preferred stock 81,398 112,096 108,483 preferred stock were converted into common stock. Conversion of warranta 4,426 3,856 4,313 8,002,470 18.534,002 8,966,143 (8) Preference Stock Subject to Mandatory Redemption Requirements At December 31,1986 and 1985,171,451 and 184,959 common stock During 1986,1985 and 1984, no shares,350,000 shares and 400,000 purchase warrants, respectively, were outstanding. The warrants entitle shares, respectively, of preference stock subject to mandatory redemption the tolders to convert such warrants into common stock at a conversion requirements were issued. The series of preference stock subject to rate of one share of common stock for three warrants. mandatory redemption requirements outstanding at December 31,1986 are summarized as follows: (7) Preferred and Preference Stocks Without Mandatory Redemption Requirements No shares of preferred or preference stocks without mandatory redemption requirements were issued or redeemed by the Company

31 Aggregate Shares StatedValue Series Outstanding (thousands) Redemption Price (a) $2.875 1,793,200 $ 43,216 $26.50 through October 31,1989; and $25.25 thereafter $2.375 1,928,900 46,583 $25.75 through October 31,1990; and $25.25 thereafter $8.20 571,425 57,143 Non-callable prior to November 1,1987, except for sinking fund; $105 through October 31,1992; $103 through October 31,1997; and $101 thereafter $8.40 Series B 579,980 57,607 $103 through April 30,1988; and $101 thereafter $8.85 637,500 63,750 Non-callable prior to August 1,1988, except for sinking fund; $105 through July 31,1993; $103 through July 31,1998; and $101 thereafter $9.25 1,350,000 135,000 Non-callable prior to August 1,1989, except for sinking fund; $105 through July 31,1994; $103 through July 31,1999; and $101 thereafter $11.70 675,000 66,197 Non-callable prior to November l,1989, except for sinking fund; $105 through 0ctober 31,1994; $103 through October 31,1999; and $101 thereafter $12.75 450,000 44,644 $103 through July 31,1990; and $101 thereafter $15.00 340,000 34,000 Non-callable prior to August 1,1987, except for a change in taxability of dividend; $106.67 through July 31,1988; $105 through July 31,1989; $103.33 through July 31,1990; $101.67 g through July 31,1991; and $100 thereafter $13.25 500,000 50,000 Non-callable prior to November 1,1992, except for sinking fund; $103.79 through October 31, 1993; $102.84 through October 31,1994; $101.89 through October 31,1995; $100.95 through October 31,1996; and $100 thereafter $11.125 400,000 39,660 Non-callable prior to November 1,1988; $104.95 through October 31,1989; $103.71 through October 31,1990; $102.47 through 0ctober 31,1991; $101.24 through 0ctober 31,1992; and $100 thereafter $10.875 350,000 34,654 Non-callable prior to November 1,1989 when the entire series is required to be redeemed at $100 $13.25 Series B 400,000 39,616 Non. callable prior to November 1,1990; $104.42 through October 31,1991; $102.94 through October 31,1992; $101.47 through October 31,1993; and $100 thereafter $9.30 350,000 34,685 Non-callable prior to November 1,1991; $103.10 through October 31,1992; $102.07 through October 31,1993; $101.03 through October 31,1994; and $100 thereafter 10,326,005 $746,755 (a) Per she plus accrued and unpaid dmdends. if any. The annual sinking fund requirements and sinking fund and involuntary subject to mandatery redemption requircments are summanzed as liquidatica prices per share of the outstanding series of preference stock follows: Sinking Fund Involuntary Series Annual Sinking Fund Requirement Price (s) Liquidation Price (a) $2.875 150,000 shares (b) $ 25 $ 24.10 $2.375 150,000 shares (b) $25 $ 24.15 $8.20 35,715 shares $100 $100.00 $8.40 Series B 30.000 shares (b) $100 $ 99.326 $8.85 37,500 shares $100 $100.00 $9.25 75,000 shares $100 $100.00 $11.70 37,500 shares (b) $100 $ 98.07 $12.75 50,000 shares (b) $100 $ 99.21 $15.00 68,000 shares beginning in 1988(b)(c) $100 $100.00 $13.25 50,000 shares beginning in 1988(b)(d) $100 $100.00 $11.125 80,000 shares beginning in 1989tb) $100 $ 99.15 $10.875 350,000 shares in 1989(e) $100 $ 99.01 $13.25 Series B 80,000 shares beginning in 1990(b) $103 $ 99.039 $9.30 70,000 shares beginning in 1991(b) $100 $ 99.10 (a) Per ihm plus accrued and unpaid dmdends. if any. (b) The Company has a non<umulatm optro to increase the annual smkmg fund payment on each sinking fund requirement date to rettre an additional number of shms. not m ercess of the sinking fund raprement. at the apptrable redempton pnce (c) Each hnider has the nght to requue the Company to esertue its non<umulatm optam for the holder's pro rita portion of the smkmg fund requeement. (d) The ' munum number of shares allomd to be redeemed under the non<umulatm wton is 100.0n0 ihms. (e) The entire serws is required to be ndeemed m 19E

32 Annual remaining sinking fund requirements through 1991 on preference Of the unused bank lines of credit,8200,000,000,chich expires March 31, stock outstandmg at December 31,1986 wiu aggregate $30,374,000 in 1987, also may be borrowed at prevailing prime interest rates. Under these 1987, $43,870,000 in 1988, $88,872,000 in 1989, $61,872,000 in 1990 and lines of credit, the Company is obligated to pay commitment fees of % of $68,872,000 in 1991. Durmg 1986,1985 and 1984,555,285 shares,347,915 1% per annum. shares and 592,765 shares, respectively, of preference stock subject to mandatory redemption requirements were reacquired to meet sinking in addition, at December 31,1986 the Company has $56,818,000 of fund requirements. unused bank lines of credit available in connection with the nuclear fuel lease agreements discussed in Note 16. The $700,000,000 maximum Sinking fund requirements due within one year are included in current amount available under these lines of credit is reduced by the amount of liabilities, nuclear fuel lease obligations outstanding under the agreements. Of these lines of credit, $300,000,000 expires March 22,1990 and $400,000,000 On February 1,1987,the Company redeemed all of the outstanding shares expires December 1,1990, both with options for extensions, upon mutual of its $15.00 preference stock at the applicable redemption price of $100 agreements between the Company and the banks, of one or more one-year per share, plus accrued and unpaid dividends, together with additional periods until March 22,2009 and December 1,2010, respectively. sums payable m connection with such redemption. ggg d hwlbf dit willWWintemt rates. (9) Iong-Term Debt Sinking fund requirements and scheduled maturities remaining through (11) Disposalof Spent Nuclear Fuel 1991 for first mortgage bonds and debentures outstanding at December Under the Nuclear Waste Policy Act of 1982, the U. S. Department of 31,1986, after deducting debentures reacquired for satisfaction of future Energy (DOE)is responsible for the ultimate storage and disposa!of spent sinking fund requirements and annual sinking fund requirements for first nuclear fuel rem ved fr m nuclear reactors. The Company has a contract mortgage bonds to be satisfied by available property additions, are with DOE for disposal of spent nuclear fuel which requires the Company summarized as follows: 1987-$235,000,000; 1988-$260,937,000; to pay to DOE a one-time fee applicable to nuclear generation through 1989-$163,744,000; 1990-$305,356,000; and 1991-$325,302,000. April 6,1983 of approximately $277,000,000, with interest to date of At December 31,1986, the Company had long-term notes outstanding of payment, and a fee payable quarterly equal to 1 mill per kilowatthour of $100,000,000 due July 1,1987 and $100,000,000 due July 18,1988, at nuclear generation after April 6,1983. The Company has elected to pay prevailing interest rates which averaged 6.55% at December 31,1986 and the one-time fee,with interest,just prior to the first scheduled delivery of long-term notes outstanding of $215,000,000 due on various dates in spent nuclear fuel to DOE expected to occur not later than January 1998. November 1991 at fixed interest rates which average 8.31%. The Company has recorded the liability for the one-time fee and the interest accrued thereon. The unrecovered portion of the one-time fee and On December 22,1986, the Company redeemed $100,000,000 of First the interest accrued has been recorded as a Deferred Charge. The one-Mortgage 16%% Bonds, Series 42, due May 15,1989 and $100,000,000 of time fee has been recovered and the accrued interest is being recovered First Mortgage 16%% Bonds, Series 43, due May 15,2011. through amortization to nuclear fuel expense, as discussed in Note 1. Iong-term debt maturing within one year is included in current liabilities. (12) Pension Benefits long-term debt with a principal amount of $175,000,000 due within one The Company and its consolidated subsidiary (the " companies") have year was excluded fmm current maturities at December 31,1986 because non-contributory defined tenefit pension plans which cover all regular long term debt was issued to refinance the current maturities prior to the employes. Benefits under these plans reflect each employe's release of these financial statements. Reference is made to Note 20 for compensation, years of service and age at retirement. Funding is based additional information regarding the issuance of long term debt-upon actuarially determined contributions that tat: into account the amount deductible for income tax purposes and the minimum The Company's outstanding first mortgage bonds are secured by a h.enon contribution required under the Employee Retirement Income Security substantially all property and franchises, other than expressly excepted Act of 1974, as amended. The December 31,1985 and related pension property, owned by the Company. disclosures were based upen the Janaary 1,1986 actuarial valuation. The December 31,1986 and related disclosures were estimated pending (10) Lines of Credit c mpletion of the January 1,1587 valuation.The plan assets and The Company has unused bank lines of credit of $659,800,000 at December 31,1986. Borrowings may be made under these lines of credit projected benefit obligations for these plans at December 31,1986 and 1985 were as follows: on unsecured notes of the Company. 0f that amount, $459,800,000, substantially all of which expires September 30,1987, may be borrowed at December 31 prevailing prime interest rates. The Company maintains cash balances on (thousands of dollars) 1986 1985 deposit to provide operating funds, to assure availability of such lines of Fair value of plan assets, invested primarily in credit and to compensate the banks for other services they perform for the listed common stocks, U.S. Government, Company. These bank balances for the Company and its consolidated government-sponsored corporation and subsidiary are maintained at an average level of approximately 8gency securities and listed corporate $36,000,000 without formal commitments to do so. As demand deposits, obligations $1,743,000 $1,489,000 these balances may be withdrawn at any time. Projected benefit obligation 1,518,000 1,280,000 Plan assets in excess of projected benefit obligation $ 225,000 $ 209.000

33 The accumulated h2neht obligations at December 31,1986 and 1985 were through a trust fund, and the estimated cost of post retirement health $1,239,000,000 and $1,038,000,000, respectively, including vested bene 6ts care benefits is being accrued and funded over the working lives of the of $1,193,000,000 and $999,000,00), respectively. The assumed discount employes. Provisions for post retirement health care benefits for 1986, rates were 8.5% and 9.5% at December 31,1986 and 1985, respectively, 1985 and 1984 were $33,011,000, $30,083,000 and $24,877,000, and the assumed annual rates of increase in future compensation levels respectively, and were based on the aggregate cost method and were were 4.75% and 5.50%, respectively.These rates were used in determining equivalent to actuarial normal costa plus a ten-year amortization of the the actuarial present value of the projected benefit obligations and the liability at January 1,1980 for retirees and suniving spouses. The accumulated benefit obligations at the respective dates. actuarial present values of accumulated post-retirement health care benefits at January 1,1986 and 1985, the latest actuarial valuation dates, Provisions fcr pensions for 1985 and prior years were equivalent to were $233,289,000 and $228,289,000, respectively. The net assets of the actuarial normal costs based on the aggregate cost method. Beginning trust fund established for the payment of post retirement health care l January 1,1986, provisions for pensions were determined under the rules benefits at January 1,1986 and 1985 were $71,284,000 and $46,790,000, I prescribed by Statement of Financial Accounting Standards No. 87, respectively. including the use of the projected unit credit actuarial cost method. Provisions for pensions for 1986,1985 and 1984 were approximately (14) Income Taxes $3,000,000, $63,000,000 and $85,000,000, respectively. Portions of the Provisions for current and deferred federal and state income taxes and provisions were charged to construction costs. investment tax credits deferred for 1986,1985 and 1984 resulted in effective tax rates of 38.1%,33.9% and 36.4%, respectively, on pre-tax Reconciliations of the accrued liability for contributions to the trust funds book income for such years of approximately $1,694,275,000, to the plan assets in excess of the projected benefit obligation at $ 1,446,813,000 and $ 1,376,837,000, respectively. The principal differences December 31,1986 and 1985 were as follows: between these rates and the federal statutory rate of 46.0% were (i) the December 31 federal income tax effect of the exclusion from taxable income of the (thousands of dollars) 1986 1985 equity component of allowance for funds used during construction which was 10.3%,13.9% and 13.0% of pre-tax book income for 1986,1985 and Accrued liability for contributions to the trust 1984, respectively, offset by (ii) state income taxes which, net of the funds $ (3,000) $ (63,000) federal income tax effect, were 3.0%,2.5% ad 2.8% of pre-tax book Unrecognized transition amount 259,000 272,000 income for 1986,1985 and 1984, respectively. Unrecognized net loss (31,000)(a) Plan assets in excess of projected benefit Provisions for deferred income taxes on timing differences between obligation $225,000 $209.000 financial accounting and for income tax purposes, net of reversals, were (a) Reflects ch.nges in assumed annual discount rates fmm 9.5% to 8.5% and assumed annuni rites or as folloWs: increase in future campens ten leveis fnxa 5.50% to 4.75%xn December 31.1985 to December 31, imsetby.n.ctu.ierturn meice ortheerpected to. owns terari,orreturnonpi .s.et (thousands of dollars) 1986 1985 1984 Accelerated cost recovery and The components of provisions for pensions for the year 1986 were as liberalized depreciation $173,311 $161,043 $101,877 I U *S: Deferred energy costs (30,327) 14,386 (31,777) (thousands of dollars) 1986 Overheads capitalized 21,625 26,286 29,331 Senice cost $ 48,000 Repair allowance 14,565 15,311 37,706 Interest cost on projected benefit obligation 118,000 Spent nuclear fuel disposal costs and related interest (9,123) 18,999 (15,562) Actual return on plan assets (262,000) Pension costs (1,651) Unrecognized net gain on plan assets 112,000 Other items-net (14,439) 4,609 10,863 I Amortization of transition amount (13,000) $ 3.000 $153,961 $240,640 $132,438 Charged to: The effect of the change in accounting for pension costs for 1986 was an Electric operations $166,939 $236,551 $125,974 Other income and deductions (12,978) 4,089 6,464 estimated reduction of $27,000,000 in pension costs and an estimated increase in net income of $11,000.000, or $0.06 per common share, net of $153,961 $240,640 $132.438 amounts charged to construction costs and net of income tax effects. At December 31,1986, the estimated cumulative net amount of book / tax (13) Post-Hetirement IIcalth Care Benefits timing differences for property placed in senice prior to 1981 for which The companies provide certain post-retirement health care benefits for deferred income taxes have not been recorded is approximately retirees and their dependents and for the suniving dependents of eligible $402,000,000. The related deferred income taxes which have not been employes and retirees. Substantially all of the companies' employes recorded approximated $198,000,000. Except for the effect of reversals of become eligible fbr post-retirement health care benefits if they reach timing differences related to such unrecorded deferred income taxes, net retirement age while working for the companies. In 1980, the companies provisions for deferred incon e taxes have been recorded for all material began funding the liability for post retirement health care benefits income tax timing differences for 1986,1985 and 1984.

34 At December 31,1986, after reflecting the provbions of the Tax Reform (18) Joict Pla-t Ownership Act of 1986 applicable to investment tax credits, unused investment tax The Company has a 75% undivided ownership interest in the Quad-Cities credits were approximately $274,000,000, none of which will expire prior nuclear generating station. Further, the Company is responsible for 75% to 1998 if not used.The amount ofunused investment tax credits does not of all costs which are charged to appropriate investment, operation or reflect the reduction of the face value ofinvestment credits required under maintenance accounts, and provides its own financing. At December 31, the Tax Reform Act of 1986 beginning in 1987. It is currently expected 1986, for its share of ownership in the station, the Company had an that, with reasonable rate relief, the unused investment tax credits investment of $346,705,000 in production and transmission plant in remaining after the reduction in face value will be utilized by the service (before reduction of $109,543,000 for the related accumulated expiration dates. provision for depreciation) and $29,216,000 in construction work in pmgress. (15) Taxes, Except Income Taxes Provisions for taxes, except income taxes, were as follows-(19) Commitments, Contingent Liabilities and the Construction (thousands of dollars) 1986 1985 1984 Program Purchase commitments, principally related to construction and nuclear Illinois public utility revenue $188,258 $220,465 $219,797 fuel, approximated $1,538,000,000 at December 31,1986. In addition, the Illinoisinvested capital 106,409 98,834 93,223 companies have substantialcommitments for the purchase ofcoal and oil Municipal utility gross receipts 104,322 92,595 92,165 under long-term contracts. Real estate 84,407 84.996 74,366 Municipal compensation 68,826 63,679 63,554 The Company is a member of Nuclear Mutual Limited, established to Other-net 25,773 26,263 21,916 provide insurance coverage against property damage to members' nuclear $577,995 $586.832 $565.021 generating facilities. The Company would be subject to a maximum assessment of approximately $152,000,000 in the event of losses. (16) Lease Obligations Under nuclear fuellease agreements entered into in 1984 and 1985, the The Company also is a member of Nuclear Electric Insurance Limited, Company may sell and lease back nuclear fuel fmm lessors who may which provides insurance coverage against the cost of replacement power borrow an aggregate of $700,000,000 to finance the transactions. btained during certain prolonged accidental outages of nuclear Reference is made to Note 10 for information concerning lines of credit generating units and coverage for property losses in excess of $500,000,000 under the nuclear fuellease agreements. At December 31,1986, the ccurring at nuclear stations. The Company would be subject to Company's obligation to the lessors for leased nuclear fuel amounted to maximum assessments of approximately $42,000,000 and $52,000,000 in $643,182,000. The Company has agreed to make lease payments which the event oflosses under the replacement power and property damage cover the amortization of the nuclear fuel used in the Company's reactors comages, respectively. plus the lessors' related financing costs. The Company has an obligation for spent nuclear fuel disposal costs of leased nuclear fuel. In addition, the Nuclear Regulatory Commission's indemnity for public liability coverage under the Price-Anderson Act is supported by a Future minimum rental payments, net of executory costs, at December 31, mandatory industry-wide program under which owners of nuclear 1986 for allleases, are estimated'to aggregate $765,710,000, including generating facilities could be assessed in the event of nuclear incidents. $225,460,000 in 1987, $218,860.000 in 1988, $131,260,000 in 1989, Based on the number of nuclear reactors with operating licenses, the $99,010,000 in 1990, $42,090,000 in 1991 and $49,030,000 in 1992-94. The Company would currently be subject to a maximum assessment of $57,500,000 in the event of an incident, limited to a maximum of estimsted imerest component of such rental payments aggregates $92,140,000. The estimated portions of obligations due within cne year $115,000,000 in any calendar year. under capital leases are included in current liabihties and approximated $156,500,000 and $136,910,000 at December 31,1986 and 1985, The Illinois Public Utilities Act requires that an audit of the construction respectively. eIpenditures and management practices with respect to a new generatmg plant be conducted by an independent party prior to including the cost of (17) Investments in Uranium Related Properties such plant in a utility's rate base. An audit was conducted with respect to At December 31,1986, the Company and its subsidiaries had investments Byron Unit 1. Audits are in progress with respect to Byron Unit 2 and Braidwood Unit 1. Reference is made to Notes 3 and 4. of approximately $159,405,000 in uranium related properties, equipment and activities. Production from certain of the properties has been deferred due to depressed market prices for uranium. Management believes that uranium will ultimately be produced from these properties at prices which will provide for recovery of this investment in all material respects in relation to the Company's financial position and its results of operations.

35 The Company's ability to continue its construction program is depndent The Company is involved in administrative and legal proceedmgs upon adequate and timely rate relief which is necessary to provide a level concerning air quality, water quality and other matters. The outcome of of earnings sufficient to pay for that portion of the construction program these proceedings may require increases in the Company's future to h2 financed from internal sources and to maintain debt and preferred construction expenditures and operating expenses. and preference stock coverages and common stock equity earnings which will permit the issuance of additional securities of the Company on (20) Subsequent Event reasonable terms. Reference is made to Notes 3 and 4, and the third On January 15,1987 the Company issued $175,000,000 principal amount paragraph under subcaption " Liquidity and Capital Resources," and the of First Mortgage 9%% Bonds, Series 61, due January 15,2014. Proceeds subcaption " Nuclear Plant Construction Program and Rates," of from the sale will be used together with other funds of the Company to " Management's Discussion and Analysis of Financial Condition and retire at maturity the Company's $50,000,000 principal amount of First Results of Operations." Mortgage 4%% Bonds, Series S, due March 1,1987 and $125,000,000 principal amount of 14%% Debentures, Series 6, due March 15,1987. (21) Quarterly FinancialInformation Electric Electric Average Number of Earnings Per Operating Operating Net Net Income on Common Shares Common Three Months Ended Revenues Income Income CommonStock Outstanding Share (thousands except per share data) March 31,1985 $1,203,829 $172,615 $196,229 $167,049 180,090 $0.93 June 30,1985 $1,110,654 $161,104 $189,718 $160,634 189,453 $0.85 September 30,1985 $1,490,872 $325,338 $366,316 $337,390 191,438 $1.76 December 31,1985 $1,158,796 $207,408 $203,473 $174,552 194,002 $0.90 l March 31,1986 $1,322,325 $218,443 $205,077 $175,630 195,973 $0.90 June 30,1986 $1,203,454 $235,408 $213,347 $183,944 197,886 $0.93 September 30,1986 $1,682,044 $429,753 $418,436 $389,337 199,793 $1.95 December 31,1986 $1.270,688 $199.354 $212,735 $184,030 202.059 $0.91 Report Of Independent Public Accountants To the Stockholders of Commonwealth Edison Company-We have examined the consolidated balance sheets and statements of requirement for the Company to show cause why the Certificate of Public consolidated capitalization of Commonwealth Edison Company (an C'nvenience and Necessity for Braidwood Unit 2 should not be Illinois corporation) and subsidiary companies as of December 31,1986, withdrawn or altered. The outcome of the ICC proceeding and the and 1985, and the related statements of consolidated income, retained ultimate recovery of the Unit 2 portion of the Company's estimated earnings, premium on common stock and other paid-in capital, and investment in the Braidwood station at completion of $5.05 billion are changes in financial position for each of the three years in the period uncertain at this time. ended December 31.1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included In our opinion, subject to the effect of such adjustments, if any, as might l such tests of the accounting records and such other auditing procedures as have been required to the 1986 financial statements had the outcome of we considered necessary in the circumstances. the matters referred to in the preceding paragraphs been known, the financial statements referred to above present fairly the financial position As discussed in Note 3, the financial statements for 1986 include electric of Commonwealth Edison Company and subsidiary companies as of operating revenues collected subject to refund pending appeal of an order December 31,1986, and 1985, and the results of their operations and the of the Circuit Court of Cook County, Illinois which reversed the October changes in their financial position for each of the three years in the period 1985 rate orders of the Illinois Commerce Commission (ICC) granting ended December 31,1986, in conformity with generally accepted rate increases to the Company. In addition, the 1986 financial statements accounting principles which, etcept for the change, with which we concur, include costs deferred under a rate phase-in plan for which the future in accounting for pension costs as discussed in Note 12, were applied on a recovery is subject to the outcome of the appeal. Although being contested consistent basis. by the Company, the outcome of this matter is uncertain at this time. s1 v#e P As discussed in Note 4, in July 1986, the Company received a final order from the ICC in the Braidwood construction hearings and a second. Chicago, Illinois related, order opening a further proceeding. The final order includes a February 6,1987

38 Daard cf Dirsators of*icars s i a James J. 0'Connor ohs > Thomas L Martin, Jr. (2)(4)(s) James J.0'Connor Robert J. Manning ~ Chairman and President of the Pmid nt, Illinois Institute of ' Chairman and President Vice President Company Technology Walhee B.Behnke,Jr. Donald A.Petkus Norris A. Aldeen cH4) Edward A. Mason OH4H6) Vice Chairman Vice Present Former Chairman and Present VW President, Research Byron Lee, Jr. Cordell Reed Amerock Corporation Amore Corporation Executive Vice Present Vice Present (CabinetIardware) Patrick G.Ryan OH4) 3 de L The.ias George P.Rifakes Jean Allard CH4) President a d Chief Executive . Executive Vice President Vice Pmident s Partner 09icer Raisend P. Bachert J. Patrick Sanders Sunnenschein Carlin Nath & Combined InternationalCorporat. ion Vice President and Comptroller Vice Present Rosenthal(Attorneys) (Insurance holding company) H.as tan M. Dellsy John J.Viera Wallace B. Behnke, Jr.0)c) A. Dean Swift cH4H5) yo President and Vice President Vice Chaiman of the Compa::y Presait Gen ralCounsel Ernest M.Roth Albert B. Dick III(4x5) Executive Service O.rps of Chicago Jan es 'V. Johnson Treasurer Former Chairman of the Board (Nonprofit corpom on of rttired Vic Pre ident Klaus H.Wisiol A.B. Dick Company (Copying. executives providircoluntary i.uplicating and printing equipment management consultrJ in to Thomas J.Ma'unan Secretary and supplies) nonprofit agencieg Vice President ' I?onald P.Jacobs OH4H5) Bide LThomas W De an, J. L Kellogg Graduate S& of Executive Vice Pmdent of the Managers / af Management, Northwestern Company Un versity Eugene P.Wilkinson CH4H6) - Robert Beckwith .hthr W.Kleinrath i George E. Johnson claH4) Fortur Present and Chief Nanager of Fuel Marg,tr of % tion Construction Chairman and Present Executive Officer Robert L Bolger James J. Maley - Johnson Products Company,Inc. Institute c,! Nuclear Power Assistant Vice Present Aristant Vice President (Personalcare producta and Opertims(Nonyritor anization John C.Bukouki Da id W.NoccLi d cametics) ded&altoqualityconstrxtion and Assistant Vice President Ma: vpof Custr.ner S< nice ,'iafety b the operation of nuclear Louis 0. DelGeorge Jama A.Sd.neider Harvey Kapnick t3H4) Chairman of the Board and P',wu p. ants) Assistant Vice President Oyating Manager Present

0) h=tia canmitue PaulJ Fen 9glio David A. Scholz Chicagi, Pacific Corporation y $ $" d" Manger s' Computer Services Assistant Vice Preside :t (Corsumer products) tu compo.tmo ccamiu,.

Den s P.k ile Walter J.Mewski Byron Lee, Jr. c). (56 %instmscommun. Assista

• %ident Manager of Quality Assurance Executive Vice Presxient of th, is) t'ai r os.rition comw",

and 4 er-Bennie B.Stephenson Company Nu w Manager of Nuclear Safety J.' ann y Gri Norman E.Wandke Anistant Vict 'res.. ot Assistant Vice Present a A Ge5e'ai'.winger- ?ossilSbt,ns i Charlest Harr.ach ~ Manage of Merketing I Olnsion Vice Presidents And Of fier Executives li. Edward Partels Donald A.Schindlbeck Southern (Joliet) Western (lembard) William J.Cormack s Kenneth L Graesser Chicago North Nuclear Stations William H. Downey Rock River (Rockfordi Nicholas J.Kalivianakis Lester J.Dugas Nuclear Statiors Chicago South Anthony E. Enrietto Richard E. VanDerway Northern (Northbrook) General Purchasing Agent (

OtherInformation Transfer Agents The First National Bank of Chicago

• Stock Transfer Division MailSuite 0122 Chicago, Illinois 60670-0122 Manufacturers Hanover Trust Company' Shareholder Senices P. O. Box 24935 Church Street Station ShareholderInquiries New York, New York 10249 Inquiries about shareholder accounts, dividend payments I

and the dividend reinvestment and stock purchase plan The First NationalBank of Boston should be directed to Shareholder Senices as follows: Shareholder Senices P. O. Box 644 s asuc use s 02 By Telephone: In the metropolitan Chicago 312 Area Code, call 294 3186 or use these toll-free numbem Dividend Reinvestment Plan Agent 4 The First NationalBank of Chicago In o er tates. .1-800 25 2 ShareholderInvestment Senice MailSuite 0128 By Mail: Chicago, Illinois 60670-0128 Commonwealth Edison 312-407-4660 Attn: Shartnolder Senices P. O. Box 767 Registrars Chicago, Illinois 60690-0767 ContinentalIllinois NationalBank and Trust Company of Chicago" Shareholder Senices Other Inquiries 30 North LaSalle Street Questions about stock transfers or dividend reinvestment Chicago, Illinois 60697 plan accounts should be directed to the Transfer Agents or the Dividend Reinvestment Plan Agent. The First National Bank of Chicago *" Stock Transfer Division MailSuite 0122 Annual Meeting The annual meeting of stockholders will be held Thursday, Chicago, Illinois 60670-0122 April 16,1987 at 1030 a.m. at the Chicago Hilton and Towers. Notice of the meeting and proxy materials will be Morgan Shareholder Senices Trust Company mailed to stockholders in March. 30 West Broadway New York, New York 10007 Form 10-K and Financial Review State Street Bank and Trust Company The 1986 Form 10 K Annual Report to the Securities and Corporate Trust Exchange Commission and the 1986 ten year Financial 225 Franklin Street Review mill be available in April. A copy of both may be Boston, Massachusetts 02110 obtained without charge from Klaus H. Wisiol, Secretary, a comna n=h only Commonwealth Edison, P. O. Box 767, Chicago, "*""d *"d P" "k 'alY Illinois 60690-0767.

l Commemusalth Edson /' Poet Omco Box 707 CIncess,Nueede M787 i 6 ) l 1 l l

'S common an em.on f. e)' One First National Plaza Chicago,12nois Address Reply to: Post Office Box 767 gN/ Chicago, Illinois 60690 - 0767 i February 23, 1987 Director - Division of Reactor Licensing Office of Nuclear Reactor Regulation U. S. Nuclear Regulatory Commission Washington, D. C. 20555 Gentlemen: Pursuant to the provisions of Section 50.71 of 10CFR, there is enclosed a copy of our 1986 Annual Report for each reactor, as follows: Dresden Station: 50-10 50-237 50-249 Quad-Cities Station 50-254 50-265 Zion Station 50-295 50-304 LaSalle County Station 50-373 50-374 Byron Station 50-454 50-455 Braidwood Station 50-456 50-457 Sincerely, ks AWP Klaus H. Wisiol L Secretary fffl _j}}