ML20137R078

Forwards Detailed Financial Data for Comed Nuclear Reactors

ML20137R078
Person / Time
Site:	Dresden, Byron, Braidwood, Quad Cities, Zion, LaSalle
Issue date:	04/09/1997
From:	Dietzel J AFFILIATION NOT ASSIGNED
To:	NRC (Affiliation Not Assigned)
References
NUDOCS 9704140030
Download: ML20137R078 (79)

Text

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l Unicom Corporation - ,

. One First National Plaza

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• PO. Box A 3005

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Chicago,1:linoes 60690-3005 - l

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.*M M c l] l April 9,1997 d

Director - Division of Reactor Licensing

Office of Nuclear Reactor Regulation ,

U.S. Nuclear Regulatory Comnussion Washington,DC 20555 j,

Dear Sir:

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As indicated in the cover letter dated February 21,1997 enclosing our l Summary Annual Reports, enclosed are thirteen copies (one for each 4 i

. nuclear reactor of Comed) of the Unicom Proxy Statement which provides  !

more detailed financial data and other traditional information. l.

Sincerely,  ;

M i John R. Dietzel Secretary's Office

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PROXY STATEMENT t o April 9,1997 This Proxy Statement is being sent ko you in connection with the solicitation by the Unicom Board of Directors cf proxies for use at Unicom's annual meeting of shareholders to be held on May 29, 1997.

You may revoke your proxy at any time before it is voted. You may revoke it by written notice to David A. Scholz, Secretary, Unicom Corporation,10 South

Dearborn Street,

Post Office Box A-3005, Chicago, IL 60690-3005, by signing and delivering a more recent proxy or by attending the meeting and voting in person; Attendance at the meeting will not automatically revoke your proxy. All shares represented by properly executed and unrevoked proxies received in the accompanying form in time for the annual meeting will be voted at the meeting or at any adjournment thereof. A ticket is not required for attendance at the annual meeting; however, confirmation of stock ownership will be made prior to admission to the meeting.

The cost of soliciting proxies will be borne by Unicom. In addition to solicitation by mail, officers and employees of Unicom may solicit proxies by telephone or in person. Unicom has arranged for

. Morrow & Co. Inc. to assist in the solicitation of proxies, at an estimated cost (excluding reimbursement of out of pocket costs) of $12,000.

Unicom's 1996 Summary Annual Report was mailed to each shareholder on or about February 19,1997. The audited financial statements of Unicom, along with certain other financial information, are included in Exhibit B to this Proxy Statement. This Proxy Statement and form of Proxy were first mailed to shareholders on or about April 9,1997 The Board of Directors recommends a vote FOR all Director nominees named in item A, FOR approval of the matters discussed in items B, C and D, and AGAINST the shareholder ,

proposal discussed in item E.

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, ITEM A: ELECTION OF DIRECTORS .: .

NOMINEES

Jean Allard, Edward A. Mason and Frank A. Olson, whose current terms as Directors expire at

the 1997 annual meeting of shareholders, are not standing for re-election. Both Ms. Allard and Mr.

Mason have reached the applicable mandatory retirement age, and Mr. Olson has chosen not to -

4 stand for re-election due to a substantialincrease in his other business obligations. Their contributions 1

were many and are gratefully appreciated.

1 Ten Directors are to be elected at the annual meeting to serve terms of one year and until their 1 respective successors hac 'en elected. The Board has decided that it is not necessary to fill the

, vacancies caused by the teurements of Ms. Allard, Mr. Mason and Mr. Olson at this time and, j i therefore, the number of Board members is being reduced to ten. The nominees for Director, all of  ;

j whom are now serving as Directors of Unicom and Commonwealth Edison Company (" Comed"), are j j listed below together with certain biographical information. Except as otherwise indicated, each i nominee for Director has been engaged in his or her present principal occupation for at least the past )

five years. Unicom was formed in 1994. j i

l l EDWARD A. BRENNAN, age 63. Director of Unicom and Comed since 1995. 1 3

Retired Chairman and CEO of Sears, Roebuck and Co. (retail merchandiser) for I l

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. more than five years prior to August 1995. Member of Audit Corporate

.] [f Governance and Compensation, and Nominating Committees. Other

. F fa directorships: The Allstate Corporation. AMR Corporation, Dean Foods Company, Dean Witter. Discover & Co., Minnesota Mining and Manufacturing Company and The SABRE Group Holdings, Inc.

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i JAMES W. COMPTON, age 59. Director of Unicom since 1994 and ComEu

! j since 1989. President and Chief Executive Officer of the Chicago Urban League i (a non-profit agency). Chairman of Finance Committee and member of

. y Corporate Governance and Compensation, Executive and Nominating

! Committees.

g BRUCE DeMARS, age 61. Director of Unicom and Comed since October 1996.

Retired. Admiral, United States Navy and Director, Naval Nuclear Propulsion

.. Program for more than five years prior to October 1996. Member of Corporate Governance and Compensation Committee. .

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' w SUE L. GIN, age 55. Director of Unicom since 1994 and Comed since 1993 E Founder, Owner, Chairman and Chief Executive Officer of Flying Food Fare, Inc.

j y; (in-flight catering company). Member of Corporate Governance and l

, Compensation, Executive and Finance Committees.

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Unkom Corporation One First National Plaza P.O Box A-3005 Chicago, Illinois 60690-3005 URECOED NOTICE OF ANNUAL MEETING OF SHAREHOLDERS To Be Held on Thursday, May 29,1997 at 10:30 A.M. (Local Time)

The annual meeting of shareholders of Unicom Corporation ("Unicom" or the " Company") will be held in the Wallingford Center of the Clock Tower Resort & Conference Center,7801 E. State Street, Rockford, Illinois. At the meeting, shareholders will be asked to consider and act upon the following matters, and to transact such other business as may properly be brought before the meeting:

Item A: The election of ten Directors.

Item B: The amendment and restatement of the Unicom Corporation Long-Term incentive Plan.

Item C: The material terms of performance-based incentives in Long-Term Performance Unit Awards under Unicom's Long-Term incentive Plan.

Item D: The appointment of Arthur Andersen LLP, independent public accountants, as Auditors for 1997.

Item E: A shareholder proposal to limit to an annual maximum of $250.000 the value of stock and/or cash paid to any one executive under the Long-Term Incentive Plan or as a bonus.

Shareholders of record on the books of Unicom at 4:00 P.M., Chicago time, on March 31,1997,

. will be entitled to vote at the meeting.

A PLEASE FILL IN, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY.

In the absence of specific direction, the shares represented by the proxies will be voted at the meeting and will be voted non-cumulatively FOR the election of the nominees named in this Proxy Statement as Directors, FOR ltems B, C and D, and AGAINST ltem E (the shareholder proposal).

DAVID A. ScHotz Secretary April 9,1997

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DIRECTIONS TO THE CLOCK TOWER RESORT & CONFERENCE CENTER ,

From Chicago Area: ,

I-90 (Kennedy Expressway-Northwest Tollway) West to Rockford, exit at Business Route U.S. 20.

Straight across Business Route U.S. 20 to Clock Tower Resort & Conference Center.

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.:: ,. DONALD P. JACOBS, age 69. Director of Unicom since 1994 and Comed since ,

1979. Dean of the J. L. Kellogg Graduate School of Management Northwestern l i . - J University. Member of Corporate Governance and Compensation, Finance and

- ,g'g Nominating Committees. Other directorships: The First National Bank of

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Chicago, Hartmarx Corp., Security Capital Industrial Trust, Unocal Corp. and

. Whitman Corp.

i EDGAR D. JANNOTTA, age 65. Dimetor of Unicom and Comed since 1994.

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Senior Director of William Blair & Company, L.L.C. (investment banking and 4 l

- brokerage company) since January 1996. For .more than five years prior thereto, Managing Partner of William Blair & Company and Senior Partner during 1995.

Chairman of Nominating Committee and member of Audit, Corporate Governance and Compensation, and Finance Committees. Other directorships:

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g AAR Corp., AON Corporation, Bandag, incorporated, Molex Incorporated, Oil-Dri Corporation of America and Safety-Kleen Corp.

7 ; , .; S " i GEORGE E. JOHNSON, age 69. Director of Unicom since 1994 and Comed t .

- since 1971. Founder and retired Chair; nan, Johnson Products Company, Inc.

(personal care products company). Chairman of Indecorp, Inc. for niore than five years prior to December 1995. Member of Audit, Corporate Govemance

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% and Compensation, and Executive Committees. Other directorship: Burrell Comrnunications Group.

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LEO F. MULLIN, age 54. Director of Unicom and Comed since 1995. Vice Chairman of Unicom and Comed since December 1995. President and Chief Operating Officer of First Chicago Corporation from November 1993 to July

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1995. Chairman, President and Chief Executive Officer of American National Bank and Trust Company of Chicago from April 1991 to November 1993. 1

Member of Exocutive Committee. Other directorships

Pittway Corporation and a inland Steel Industries, Inc.

fg JAMES J. O'CONNOR, age 60. Director of Unicom since 1994 and Comed

- since 1978. Chairman of Unicom and Comed. Chairman of Executive Committee. Other directorships: Corning incorporated, First Chicago NBD

, ,, Corporation. The First National Bank of Chicago, Thne Company and UAL

• .,- Corporation.

. h SAMUEL K. SKINNER, age 58. Director of Unicor ce 1994 and Comed since 1993. President of Unicom and Comed since Feta uary 1993. General Chairman l l >

of the Republican National Committee from August 1992 to January 1993. Chief t, of Staff to the President of the United States from December 1991 to August 1992. Member of Executive Committee. Other directorships: ANTEC Corporation. The Broken Hill Proprietary Company Limited, LTV Corporation and Union Pacific Resources Group Inc.

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, l ADDITIONAL INFORMATION OONCERNING BOARD OF DIRECTORS Compensation of Directors-Directors who are not employees of Unicom or any of its subsidiaries receive an annual fee of $30,000 payable in shares of Unicom Common Stock under the Unicom Colporation 1996 Directors' Fee Plan. Such Directors also receive a fee of $1,000 for each Board and Committee meeting they attend and an additional annual fee of $2,500 for each Committee of the Board that they chair, which meeting and chair fees may, at the election of the Director, be ,

paid in shares of Unicom Common Stock under the 1996 Directors' Fee Plan. In the event that Directors also serve as directors of Comed, or as chairs of corresponding committees of Comed, the aggregate fees paid to such Directors in respect of such service to Unicom and Comed do not ,

exceed the foregoing amounts. Directors who are full-time employees of Unicom or any of its subsidiaries receive no fees for service on the Board of Directors. Directors may defer the cash

, portion of their fees. Directors who have never been an officer or an employee of Unicom or any of its subsidiaries, and who have attained at least age 65 and completed the required period of Board service (3 to 5 years as applicable, including service as a director of Comed), are eligible for retirement benefits upon retirement. Such benefits are paid to the retired Director or a surviving spouse for a period equal to such Director's years of service (including service as a director of Comed) in an amount per year equal to the annual retainer for Board members as in effect at the time of payment. Effective January 1,1997, the Board of Directors terminated the further accrual of retirement benefits and offered each Director the option to irrevocably elect, in lieu of amounts otherwise payable, a lump sum amount payable upon retirement, either by delivery of shares of Unicom Common Stock or in cash. In lieu of further accrual of retirement benefits, non-employee Directors will receive a $6,200 increase in their annual fee, effec'ive June 1,1997 and payable in shares of Unicom Common Stock.

Audit Committee-The Audit Committee consists of five Directors who are not employees of Unicom or any of its subsidiaries. Members serve three-vear staggered terms. It is the responsibility of the Audit Committee to review, with Unicom's independent Auditors, Unicom's financial statements and the scope and results of such Auditors

• examinations, to monitor the internal accounting controls and practices of Unicom, to review the Summary Annual Report to shareholders and the financial statements set forth in Exhibit B, and to recommend the appointment, subject to shareholder approval, of independent Auditors. The Committee met three times during 1996. Members of the Committee are Jean Allard (Chair), Edward A. Brennan, Edgar D. Jannotta, George E. Johnson and Edward A. Mason.

Corporate Govemance and Compensation Committee-The Corporate Governance and l Compensation Committee consists of all Directors who are not and have never been employees of Unicom or any of its subsidiaries. Members serve one-year terms. The Committee reviews management and executive compensation programs and corporate governance matters and administers awards under Unicom's Deferred Compensation Unit Plan, Long-Term incentive Plan, 1 and 1996 Directors' Fee Plan. The Committee met five times during 1996. Members of the Committee 1 are Frank A. Olson (Chairman), Jean Allard, Edward A. Brennan, James W. Compton, Bruce DeMars. l Sue L. Gin, Donald P. Jacobs, Edgar D. Jannotta, George E. Johnson and Edward A. Mason.  ;

e i Executive Committee-The Executive Committee consists of six Directors. Members serve one-  !

year terms. The remaining Directors constitute alternates to serve temporarily, in rotation, in place of any member unable to serve. The Committee has and may exercise all the authority of the Board of Directors when the Board is not in session, subject to limitations set forth in the By-Laws. The Committee did not meet during 1996. Members of the Committee are James J. O'Connor (Chairman),

James W. Compton, Sue L. Gin, George E. Johnson, Leo F. Mullin and Samuel K. Skinner.

/~, hance Committee-The Finance Committee consists of five Directors. Members serve one-year terms. The Committee reviews the scope and results of Unicom's and its subsidiaries' financing program. The Committee met two times during 1996. Members of the Committee are James W.

Compton (Chairman), Jean Allard, Sue L. Gin, Donald P. Jacobs and Edgar D. Jannotta.

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Nominating' Committee-The Nominating Committee consists of five Directors who are not ,

employees of Unicom or its subsidiaries. Members serve one-year terms. The Committee' reviews the

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l qualifications of potential candidates and proposes norninees. for Director to the Board The .  !

Committee will consider nominees recommended by shareholders if such recommendations are submitted in writing, accompanied by a description of the proposed nominee's qualifications and other relevant biographical information and evidence of the consent of the proposed nominee. The j recommendations should be addressed to the Nominating Committee, in care of the Secretary of Unicom Nominations also may be presented by shareholders at the annual meeting of shareholders. l The Committee met one time during 1996. Members of the Committee are Edgar D. Jannotta (Chairman), Edward ~A. Brennan, James W. Compton, Donald P. Jacobs and Frank A. Olson. ,

1 Attendance at Meetings-During 1996, there were seven meetings of Unicom's Board of  :

Directors. The average attendance of all incumbent Directors, expiessed as a percent of the i

- aggregate total of Board and Board Committee meetings in 1996, was 95%. Each incumbent Director l attended at least 76% of the meetings of Unicom's Board and Board Committees of which the Director was a member, ,

During 1996, there were eight meetings of Comed's Board of Directors. The average attendance !

of all incumbent Directors, expressed as a percent of the aggregate total of Board and Board Committee meetings in 1996, was 95%. Each incumbent Director attended at least 79% of the meetings of Comed's Board and Board Committees of which the Director was a member.

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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT , ,

The fcilowing table lists the beneficial ownership, as of March 1,1997, of Unicom Common Stock held by persons known to Unicom to be the beneficial owner of more than five percent of such stock and held by each of the Directors,' each of the executive officers named in the Summary Compensation Table on page 13 and Unicom's Directors and executive officers as a group.

Amount of -

Beneficial Ownership Percent of Common of Name Stock Class ,

Barrow, Hanley, Mewhinney & Strauss, Inc. . . . 13.210,500(1) 6.11 %

Jean Allard. , . . .... .

1,963 Edward A. Brennan . . . . . . . . . . 1,781 James W. Compton . .. ., , . . 2,361 Bruce DeMars . . . . . . . . 242 Sue L Gin , , , . . . 5,167 Donald P. Jacobs ,,.. . , 3,522

• Edgar D. Jannotta . .. . ... . 2,003 George E. Johnson , , , , , 4,147 Edward A. Mason , , ,. 2,489 Leo F. Mullin , ,

20,091 James J. O'Connor . . . 32.653(2)(3)

Frank A. Olson . .. 2,003 Samuel K. Skinner . . 34,782 Thomas J. Maiman . . . 8,520(3)

Michael J. Wallace . .

9,518(3)(4)

Directors and executive officers as a group (35 persons) . 213,580r3)(5)

• Less than one percent (1) Barrow, Hanley, Mewhinney & Strauss, Inc. is an investment advisor located at One McKinney Plaza, 3232 McKinney Avenue-15th Floor, Dallas, Texas 75204-2429. According to their Schedule 13G dated February 13, 1997, they share voting power with respect to 9,981,400 shares, have sole voting power with respect to 3,229,100 shares and have sole dispositive power with respect to all shares.

(2) includes 1,670 shares owned by family me,bers.

(3) Does not include shares of Unicom Common Stock that would have been received by an officer under certain awards made pursuant to the Unicom C 'rporation Long-Term incentive Plan but

} for an election by such officer to defer receipt of such : hares. All such deferred shares were issued to a trust held by an institutional investor. The Trustee has sole voting rights with respect to such deferred shares. Dividends paid thereon are either reinvest 3d in Unicom Common Stock and held by such Trustee or are paid to the officer making the deferral. As of March 1,1997, the total number of shares deferred by officers was 124,916. Deferrals by Messrs. O'Connor, Maiman and Wallace totalled 41,340,0,683 and 9,927 shares, respectively. .

(4) Includes 100 shares jointly owned with a family member,189 shares owned by a family member and 200 shares held in a custodial account for a family member.

(5) includes 1,979 shares owned by spouses,200 shares held in a custodial account for a family member,1,399 shares jointly owned by spouse and in-law,1,859 shares owned by family members and 1,978 shares jointly owned with family members. Such persons also beneficially own 70 shares of Comed Preference Stock representing less than one percent of such class.

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4 a a SECTifh 16(a), BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Je'.: tion 16(a) of the Securities Exchange Act of 1934 requires Unicom's officers and directors and p';rsons who own more than ten percent of a registered class of Unicom equity securities

(" Reporting Person") to fde reports of ownership and changes in ownership with the Securities and Dchange Commission, Reporting Persons are required oy Securities and. Exchange Commission

, regulations to lumish Unicom with copies of all Section 16(a) reports they file.

Based solely on its review of the copies of such forms received by it and written representations from certain Reporting Persons, Unicom believes that during fiscal 1996, its Reporting Persons i complied with all filing requirements applicable to them. I ITEM B: AMENDMENT AND RESTATEMENT OF UNICOM CORPORATION LONG-TERM INCENTIVE PLAN The second item to be considered by shareholders at the annual meeting will be an amendment and restatement of the existing Unicom Corporation Long-Term incentive Plan. The incentive Plan was originally approved by Comed's shareholders in May 1993. It was re-approved by Comed in August _1994, as the then sole shareholder cf Unicom, in connection with its assumption by Unicom.

- As explained below, it is being amended, and submitted to both Unicom and Comed shareholders for their consideration and approval, so that future grants or awards under the incentive Plan can qualify as " performance-based compensation" under the Internal Revenue Code. Neither the number ,

of shares available for awards under the incentive Plan, nor the types of awards allowed under the )

Incentive Plan, is being changed, Subject to shareholder approval, the amendments to the incentive j Plan establish the following new limits on awards: first, the maximum aggregate number of shares of Common Stock available for stock option and stock appreciadon rights grants to any given individual in any five consecutive years would be limited to 500,000, and second, the maximum aggregate number of performance units that could be granted to any given individual in any given year would be limited to 50,000, The full text of the incentive Plan, which will beeme effective upon Unicom and Comed shareholder approval, is attached as Exhibit A to this Proxy Statement.

Purposes of incentive Plan and Amendments The purposes of the incentive Plan are (i) to align the interests of the Company's shareholders and recipients of awards by increasing the proprietary interest of such recipients in the CompanVs growth and success and (ii) to advance the interests of the Company by attracting and retaining wall-qualified persons by providing such persons with performance-related incentives. Awards under the original plan have been, and awards under the amended incentive Plan are expected to be, structured to achieve these purposes.

The incentive Plan provides for a variety of awards that can be flexibly administered in order to carry out its purposes. The Board believes this authority will continue to permit the Company to keep pace with changing developments in compensation programs and to make the Company competitive with other companies that offer creative incentives to attract and keep employees. The flexibility of the incentivo Plan will continue to allow the Company to respond to changing circumstances such as changes in tax laws, accounting rules, securities regulations and other rules regarding benefit plans.

The incentive Plan grants the administrators flexibility in creating the terms and restrictions deemed appropriate for particular awards as facts and circumstances warrant.

As noted earlier, the purpose of the amendments, and the reason for obtaining shareholder approval, is to assist awards under the incentive Plan in qualifying as perforrnance-based compensation under the Internal Revenue. Code. Section 162(m) of the Internal Revenue Code, which became effective after the adoption of the original plan in 1993, limits the deduction that may be claimed for compensation paid to the Chairman and Chief Executive Officer and the four other highest paid executive officers at the end of a given calendar year to $1,000,000 per person, subject to 7

l certain exceptions. The rule applies to all types d compensation, including amount's realized .upon the exercise of stock options and the receipt of cash and stock in payment of awards, unless the award and the plan under which they are made qualify as " performance-based" under the Internal Revenue Code and related regulations. The amendment and restatement of the original plan 'is intended to allow future option, stock appreciation rights and performance unit grants under the incentive Plan to be eligible for treatment as performance-based compensation under Section 162(m) ,

of the Code.

Principal Terms of incentive Plan ,

Employees of the Company and its subsidiary companies (in which the Company owns directly or indirectly a 51% or more voting equity interest) are eligible to be selected to participate in the incentive Plan. The selection of participants from eligible persons is within the sole discretion of the Corporate Governance and Compensation Committee of the Board of Directors. Approximately 16,800 persons are eligible to participate in the incentive Plan.

The incentive Plan authorizes the Corporate Governance and Compensation Committee to make or grant the following types of awards singly, in combination or in tandem:

Stock Options. Awards may consist of options to purchase shares of the Company's Common Stock, which may be " incentive stock options" or non-qualified stock options. Incentive 1 stock options must meet the requirements of Section 422 of the Internal Revenue Code and carry some potential tax advantager for the recipient. Non-qualified stock options are not subject to those requirements and do not carry such advantages. The Committee is empowered to determine the number of shares su@ct to each option, the manner and time of the option's exercise, and the exercise price per shcre of stock subject to the option. The exercise price of an incentive stock option may not be less than the fair market value of a share of Common Stock j on the date the option is granted. The Committee may establish any exercise price for non- i qualified stock options. The exercise price of an option may, at the discretion of the Committee, be paid by a participant in cash, shares of Common Stock owned by the participant, a combination thereof, or such other consideration as the Committee may deem appropriate.

Stock Appreciation Rights. A stock appreciation right ("SAR")is a right to receive a payment (either in cash, shares of Common Stock, or a combination thereof) equal to the appreciation in market value of a stated number of shares of Common Stock. The appreciation is measured by the difference between a reference price stated in the SAR and the market value of a share of Common Stock on the date of exercise of the SAR. A SAR may be granted in tandem with a stock option (" Tandem SARs") or independent of a stock option ("Non-tandem SARs"). A Tandem SAR may be granted either at the time of the grant of the related stock option or, in the case of a non-qualified stock option, at any time thereafter during the term of such option. Upon the exercise of a stock option as to some or aC of the shares covered by the award, the related Tandem SAR is canceled automatically to the extent that the number of shares subject to the Tandem SAR -

exceeds de numbu of remaining shares subject to the related stock option.

Stock A vards. Awards may also consist of grants of restncted or unrestricted shares of Common Stot k. Such awards will be subject to such terms, conditions, restrictions and/or limitations, if a, y, as the Committee deems appropriate, which may include restrictions on transferability and continued employment.

Performance Mares. Performance shares are either shares of Common Stock or units which are expressed in terms of Common Stock. Such awards are contingent +;non the attainment over a specified time periou (as determined by the Committee) of certain performance objectives. The performance objectivet to be achieved during a performance period and the measures of whether and to what de vee such objectives have been attained are also determined by the Committee.

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, Performance Units. Awarda may also be granted in the form of " performance units," which are units valued by reference to criteria chosen by the Committee other than Common Stock.

Performance units are similar to performance shares in that they are contingently awarded based on the attainment over a performance period of certain objectives. The length of the performance period, the performance objectives to be achieved and the measure of whether and to what degree such objectives have been achieved are determined by the Committee. Amounts earned under performance units may be paid in cash, shares of Common Stock or both.

Other Stock-Based Awards. The Committee is also authorized to grant to participants awards )

. of stock and other awards that are valued in whole or in part by reference to, or are otherwise i based on, Common Stock. i Awards may be paid in cash, shares of Common Stock, a combination of cash and shares c' l Common Stock, or any otha fu,m of property, as the Committee determines, if an award is granted in the form of a stock option, restricted or unrestricted stock award, performance shares, or in the form of any other stock-based award, the Committee may include as part of such award an entitlement to receive dividends or dividend equivalents. At the discretion of the Committee, the payment of performance shares or performance units may be deferred by a participant. As noted in tne first paragraph of this item, the amendments limit (i) the maximum aggregate number of shares of Common Stock available for stock option and stock appreciation rights grants to 500,000 for any given individua; in any five consecutive years and (ii) the maximum aggregate number of performance units that can be granted to 50,000 for any given individual in any given year.

Awards are evidenced by written agreements containing the terms, conditions, restrictions and/or limitations covering the grant of the award.

Available Shares; Outetanding Awards The incentive Plan originally made available an aggregate of 4,000,000 shares of Common Stock for the grant of awards. Since then, 659,284 shares have been issued in payment of awards under the incentive Plan. There remain 3,340,716 shares available for satisfying currently outstanding awards (including the stock options described in the next paragraph), and issuing future awards.

Shares covered by any stock option, stock appreciation right or other stock award that expires or terminates unexercised or is cancelled or forfeited become available again for awards under the incentive Plan As of March 1,1997, there were 1,190,000 shares covered by outstanding non-qualified stock options. Each stock option entitles the holder to purchase shares of the Company's Common Stock.

The options becomo exercisable in equal increments on the first three anniversaries of the grant date l (subject to acceleration in the event of a change in control of the Company), and expire entirely on I the tenth anniversary of the grant date to the extent not previously exercised. Options to purchase an aggregate of 1,201,500 shares at an exercise price of $25.50 per share were granted in July 1996 to employees, including options to purchase 65,000,50,000,50,000,22,500 and 15,000 shares granted to Messrs. O'Connor, Mullin, Skinner, Maiman and Wallace, respectively; and options to purchase 436,500 shares granted to all executive officers as a group. Options to purchase an aggregate of 4,000 shares at an exercise price of $25.50 per share were granted in December 1996 to two key

, non-executive employees. Non-employee Directors are not eligible to participate in the Incentive Plan.

As of March 1,1997, the market price of the Common Stock was $22.50 per share, which was below the exercise price of the outstanding options. j Benefits under the incentive Plan with respect to 1997 and future years are not determinable.

Incentive Plan Administration The incentive Plan is administered by the Corporate Govemance and Compensation Committee of the Board of Directors of the Company. No member of the Committee is eligible to participate in the incentive P!an. Among the powers granted to the Committee are the authority to interpret the 9

incentive Plan, establish rules and regulations for its operation, select employees of the' Company and its subsidiaries to receive awards, and determine the form, amount and other terms and conditions of awards. The Committee also has the power to modify or waive restrictions on awards, to amend awards and to grant extensions and accelerate awards.

Amendment and Termination -

The Board of Directors may amend the incentive Plan at any time but may not, without shareholder approval, adopt any amendment which would increase the number of shares of Common '

Stock available for award under the incentive Plan or which would cause the incentive Plan to lose its exemption under Securities and Ex, Sange Commission Regulation Section 240.16b-3.

The incentive Plan has no fixed termination date but may be terminated by the Board at any time.-

Termination of the incentive Plan will not affect the status of any awards outstanding at the date of termination.

Federal Tax Treatment Under current U.S. federal tax law, the following is a brief summary of the U.S. federal income tax consequences generally arising with respect to awards under the incentive Pian.

A participant who is granted an incentive stock option will not recognize any taxable income at the time of the grant of the option or at the time of its exercise. If the participant does not dispose of the shares acquired pursuant to an incentive stock option before the later of two years from the date of grant and one year from the date of exercise, any gain or loss realized on a subsequent disposition of the shares will be treated as a long-term capital gain or loss, and the Company will not be entitled to any deduction for federal income tax purposes.

A participant who is granted a non-qualified option will not recognize taxable income at the time of grant, but will recognize taxable income at the time of exercise equal to the difference between the exercise price of the shares and the market value of the shares on the date of exercise. The Company will be entitled to a tax deduction for the amount of income recognized by the participant.

A participant who is granted a SAR will not recognize any taxable income at the time of grant, but will recognize taxable income at the time of exercise equal to the difference between the reference price of the shares and the market price of the shares on the date of exercise, and the Company will be entitled to a tax deduction for the amount of income recognized by the participant.

A participant who has been granted either performance units or performance shares will not recognize taxable income at the time of the grant. A participant will recognize ordinary income at the time the award is paid equal to the amount of cash paid or the value of shares delivered, and the .

Company will be entitled to a tax deduction for the amount of income recognized by the participant.

A participant who has been granted an award of restricted shares of Common Stock will rot recognize taxable income at the time of the grant, and the Company will not be entitled to a tax deduction at the time of the grant, unless the participant makes an election to be taxed at the time of the award. When the restrictions lapse, the participant will recognize taxable income in an amount equal to the excess of the fair market value of the shares at such time over the amount, if any, paid for such shares. The Company will be entitled to a corresponding tax deduction.

A participant who has been granted an unrestncted stock award will recognize taxable income at the time of grant in an amount equal to the then fair market value of the Common Stock awarded The Company will receive a corresponding tax deduction.

10

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ITEM C: MATERIAL TsRMS OF PERFORMANCE-BASED -

INCENTIVES IN THE LONG-TERM PERFORMANCE UNIT AWARDS UNDER UNICOM'S LONG-TERM INCENTIVE PLAN The third item to be considered by shareholders at the annual meeting will be the approval of the material terms of certain performance unit awards to be made under the Unicom Corporation Long-Term incentive Plan. The Corporate Govemance and Compensation Committee has annually granted to certain mmagement-level employees a long-term performance unit award whose payment is based upon a cumulative total shareholder return performance comparison of Unicom Common Stock to the common stock of the other companies comprising the Dow Jones Utility Stock Index over a three-year period. Such employees include persons subject to the compensation deduction limitations of Section 162(m) of the internal Revenue Code. As noted previously, the deduction limitations do not apply to certain categories of performance-based compensation grants which meet the applicable statutory requirements. Such requirements include obtaining shareholder approval of the " material terms" of the grants. Those " material terms" are (i) the individuals eligible to receive compensation under the award, (ii) the business criteria on which the performance incentives under the award are based and (iii) the maximum amount of compensation to be paid or the formula by which the amount of individual awards will be determined under the award.

J

- Eligible Participants Recipients of the long-term performance unit awards would include the Company's Chief Executive Officer and its four most highly paid officers (other than the Chief Executive Officer).

Previous and currently outstanding long-term performance unit awards have included so-called

" group level" and " officer level" employees of Comed and Commonwealth Edison Company of Indiana, Inc., representing an aggregate of approximately 325 recipients. It is expected that future awards would cover the aforementioned recipients and, if the Corporate Governance and

- Compensation Committee so determines, other key employees of the Company and its subsidiaries.

Business Criteria and Formula for Awards Under each long-term performance unit award, a participant would be entitled to receive a payment based on the cumulative total shareholder return on the Company's Common Stock relative to the common stock of the other companies comprising the Dow Jones Utility Stock Index over a three-year performance period. Cumulative total shareholder return is calculated by dividing (1) the sum of the cumulative amount of dividends during the three-year period (assuming that those dividends are reinvested) plus the difference in the share price between the beginning and end of j the three-year period, by (2) the share price at the beginning of the three-year period. The Company's 4 performance relative to the other companies in the public utility index must equal or exceed the 25th percentile for any award to be earned by a participant, and must equal or exceed the 90th percentile to earn the maximum payout.

Payout amounts under the awards are determined based upon a participant's salary and the aforementioned relative performance. Specifically, a portion of base salary is divided by the closing price of Unicom Common Stock as reported in The Wall Street Joumalas New York Stock Exchange Composite Transactions on the last business day immediately preceding the commencement of the performance period to determine the number of performance units that the participant will initially receive. The total number of performance units which may be granted to such participant in any given year under the incentive Plan may not exceed 50,000. The initial number is then adjusted based upon i the performance of Unicom Common Stock relative to the other companies comprising the Dow Jones Utility Stock Index over a three-year performance period. At the minimum performance level (i.e., the 25th percentile), that initial number is multiplied by one-half; and at the maximum performance level (i.e., the 90th percentile), it is multiplied by two. The dollar value of the payout is then determined by multiplying the performance adjusted number of performance units by the average closing price of 11 1

Unicom Common Stock as reported in The Wall Street Joumal as New York Stock Exchange Composite Transactions during the calendar quarter ending on the last day of the performance period.

Payments made to the named executive officers under prior long-term performance unit awards are reflected in the "Payouts" column under the "Long-Term Compensation" heading in the Summary Compensation Table.

ITEM D: APPROVAL OF AUDITORS Subject to approval of the shareholders, the Board of Directors of Unicom has appointed Arthur Andersen LLP, independent public accountants, as Auditors to examine the annual and quarterly '

consolidated financial statoments of Unicom and its subsidiary companies for 1997. The shareholders will be asked at the annual meeting to approve such appointment. The fitrn of Arthur Andersen LLP has audited the accounts of Unicorn since its inception in 1994, and Comed since 1932. A  :

representative of Arthur Andersen LLP will be present at the meeting to make a statement if such representative so desires, and to respond to shareholders' questions.

ITEM E: SHAREHOLDER PROPOSAL The last item to be considered by shareholders at the annual meeting will be a shareholder proposal regarding incentive compensation. Mr. Dale L Harshman, who owns 500 shares of Unicom Common Stock, has notified the Company that he intends to submit the following proposal at the annual meeting:

"The shareholders request that the Long Term Incentive Plan and bonuses be modified so that under future executive compensation arrangements the value of stock and or cash paid under such plans shall not exceed Two Hundred Fifty Thousand Dollars ($250,000.00) per calendar (or fiscal) year to any one executive."  !

The proponent has submitted the following statement in support of the proposal:

i " Current executive compensation has grown at a rate greatly exceeding the growth rate of corporate profits, earnings per share, dividends, total returns to shareholders or inflation. Top executives are handsomely compensated with ample salaries, retirement plans, perks and other compensation. Payments of up to $250,000.00 should adequately motivate senior executives to perform the services expected of them. I recommand c vote for this plan."

The address of Mr. Harshman will be supplied orally or in writing promptly upon request directed to David A. Scholz, Secretary, Unicom Corporation,10 South

Dearborn Street,

Post Office Box A-3005, Chicago, IL 60690-3005, telephone (312) 394-2899.

[

Following is a statement of the Board of Directors in opposition to the proposal:

"The Board of Directors opposes arbitrarily limiting the amounts of long-term and other incentive compensation. In order to attract and retain highly skilled managers, the Board believes that the Company must offer compensation and benefits that are competitive with those offered by other companies. The Board further believes that the Company would encounter difficulty in competing for managerial talent if it were restricted in the amounts or types of compensation that it could offer to prospective management candidates.

"The Company's incentive compensation programs provide a mechanism for the Company to offer competitive compensation while linking pay to performance. A significant portion of each

. executive's compensation depends on corporate results and business unit performance. This lankage enables the Company to align the interests of executives with those of shareholders while providing sufficient incentives to draw top executive leadership for the Company. In addition, a large portion of the Company's incentive compensation is currently paid in the form of shares of Unicom Common Stock, further strengthening alignment of the interests of shareholders and executives. The imposition of an arbitrary limit on incentive compensauon would deprive the Company of the full benefit of this powerful compensation tool. Significantly, a limit on incentive 12 i

m .

p pay might result in increased base compensation, since the Company could not realistically hope j to compete for top managerial talent by offering less overall pay.-  ;

1 - .

"The Board 'does not believe it would be in the best interests of the Company or its shareholders to impose an arbitrary limit on incentive compensation payouts. By its very nature, - +

incentive compensation is intended to reward executives for achieving goals considered to be

' important to the Company. As the electric utility industry becomes more open to competition, it '

will be all the more important for the Company to retain maximum flexibility in its compensation programs so as to enable it to attract and retain skilled executives and to provide ;'centives for

- the achievement of corporate goals." j EXECUTIVE COMPENSATION i The following table sets forth certain information relating to the compensation during the past

three calendar years of those persons who were, at December 31,1996, the Chief Executive Officer and the other four most highly compensated executive officers of Unicom or Comed.

SUMMARY

COMPENSATION TABLE I Annual Compensation Long-Term Compensation j N Awards Payouts ,j Annual Securities All Other  !

4

=

Compon- Underlying LTIP Compen- i Salary Bonus sation Options /5ARs outs sation(1) {

Name and Principal Position Year S S S # Pay $ $ ,

2 i James J. O'Connor . 1996 844.926 528,079 0 65,000 324,956 101,174 ,

Chairman (Chief 1995 826,926 826,926' 0 - 452,296 98,102  ?

Executive Officer) 1994 773,536 485,106 0 - 0 93,120 i Unicom and Comed j 1

, Samuel K. Skinner 1996 589,000 368.125 0 50,000 232,994 102,048  !

President 1995 580,000 580,000 0 - 324,297 105,828

, Unicom and Comed 1994 543,748 602,338 0 - 0 87,969 Leo F. Mullin(2) 1996 580,000 362,500- 0 50,000 91,849 117,287 Vice Chairman 1995 35,508 275,000 0 - 15,156 1,953 Unicom and Comed )

Thomas J. Maiman 1996 336,785 105,639 0 22,500 90,981 24,506 Executive Vice President 1995 279,055 128,445 0 - 126,633 20,265 Comed 1994 267,516 155,862 0 -

0 19,609 Michael J. Wallace 1996 308,440 94,104 0 15,000 87,847 16,488 Senior Vice President 1995 277,440 93,021 0 -- 122,271 13,469 t Comed 1994 269,689 123,803 0 -

0 12,919 (1) Amounts.shown include matching contributions made by Comed pursuant to the Comed 4

Employee Savings and investment Plan ("ESIP"), matching contributions made by Comed pursuant to the Comed Excess Benefit Savings Plan and premiums and administrative service foes paid by Comed on behalf of the named individuals under various group life insurance plans.

For the year 1996, contributions made to the ESIP amounted to $6,648, $3,781, $6.993, $6.308 and $5,497 on behalf of Messrs. O'Connor, Skinner, Mullin, Maiman and Wallace, respectively.

. Contributions made to the Comed Excess Benefit Savings Plan during 1996 totaled $23,802, L $20,796, $18,288, $7,127 and $6,900 on behalf of Messrs. O'Connor, Skinner, Mullin, Maiman and Wallace, respectively. Premiums and administrative service fees paid during 1996 for Split 13

i

^

. i Dollar Life, Accidental Death and Travel Accident insurance policies for Messrs. O'Corgnor,  !

Skinner, Mullin, Maiman and Wallace, respectively, are as follows: $70,323, $365 and $36;  !

$77,191, $255 and $25; $91,727, $254 and $25; $10,894, $161 and $16; and $3,944, $134 and  ;

$13. Comed is entitled to recover the premiums and administrative service fees from any  ;

amounts paid by the insurer on such Split Dollar Life policies ~and has retained a collateral interest in each policy to the extent of the premiums and administrative service fees paid with .

respect to such policy.  !

(2) Mr. Mullin became an executive officer of Unicom and Comed in December 1995.

. i OPTION /SAR GRANTS IN LAST FISCAL YEAR Individual Grants Number of '

. Securities  % of Total Underlying Optione/SARs Exercise Grant Date  :

Options /SARs Granted to or Base Present  !

Granted Employees in Price Expiration Value Name #(1) Fiscal Year $/ Share Date $(2)

James J. O'Connor (CEO) . . . . 65,000 5.39 25.50 7/17/06 243,100 Samuel K. Skinner . . .... . 50,000 4.15 25.50 7/17/06 187,000 i Leo F. Mullin . ,, . . . ... 50,000 4.15 25.50 7/17/06 187,000 Thomas J. Maiman . . . . . 22,500 1.87 25.50 7/17/06 84,150 Michael J. Wallace . . . . . ,. 15,000 1.24 25.50 7/17/06 56,100 (1) Each option becomes exercisable in equal annust increments on the first, second and third anniversaries of the July 1996 grant date, subject to acceleration in the event that a change in control of the Company occurs. The options do not include any stock appreciation rights.

(2) The " grant date present value" is based upon the Black-Scholes option-pricing model. The actual value, if any, an executive may realize upon exercise of the option will depend on the excess of the stock price over the exercise price on the date the option is exercised. Consequently, there .

is no assurance the value realized by an executive will be at or near the value estimated by the l Black-Scholes model The principal assumptions incorporated into the valuation model by the ,

Company are as follows: (i) expected time to exercise of seven years, (ii) dividend yield rate of ,

6.3%, (iii) risk-free interest rate of 6.64% and (iv) expected volatility of 20.98%

i LONG TERM INCENTIVE PLANS-AWARDS IN LAST FISCAL YEAR Performance Estimsted Future Payouts Under Non Stock Price-Based Plans o a es, Period ntil Units or Maturction Threshold Target Maximum Name Other Rights (1) or Payout Number Number Number .

(Number of Performance Units)

James J. O'Connor (CEO) . 16.589.87 3 years (2) 8,294.94 16,589.87 33,179.74 Samuel K. Skinner . 9,275.58 3 years (2) 4,637.79 9,275.58 18,551.16 Leo F. Mullin 9,275.58 3 years (2) 4,637.79 9,275.58 18,551.16 Thomas J. Maiman . . .

5,502.45 3 years (2) 2,751.23 5,502.45 11,004.90 Michael J Wallace 4.089.55 3 years (2) 2,044.78 4,089.55 8,179.10 (1) Long-term performance unit awards were initiated during 1994 to executive and group level employees under the Unicom Corporation Long-Term incentive Plan. Under the awards described in the table, the number of units initially awarded to a participant is determined by ,

dividing a portion of base salary (ir:cluding income from current compensation units under 14

Unicom's 'and Comed's Deferred Compensation Unit Plans) (such portion being 50% for Mr. ,

O'Connor, 40% each for Messrs. Skinner, Mullin and Maiman and 35% for Mr. Wallace) by

$27.125. Payouts are based on the cumulative total shareholder return on Unicom Common Stock (assuming reinvestment of dividends) relative to that of the other companies comprising the Dow Jones Utility Stock Index over a three-year performance period ending December 31, I 1999 The dollar value of a payout is determined by multiplying the number of units applicable to i the level of performance achieved by the average closing price of Unicom Common Stock as reported in The WallStreet Joumalas New York Stock Exchange Composite Transactions during l the calendar quarter ending on December 31,1999. Payments are to be made half in cash and half in the form of unrestricted shares of Unicom Common Stock. E1fective with awards payable in 1996, a participant may elect to defer receipt of up to 100% of the total award (net of applicable taxes) under the Unicom Corporation Stock Bonus Deferral Plan and receive, after such deferral, the deferred amount in the form of unrestricted shares of Unicom Common Stock. l Notwithstanding the foregoing, no payouts are earned or made if the relative cumulative total {

shareholder return on Unicom Common Stock is lower than the 25th percentile; and the highest level of payout is reached when such relative return equals or exceeds the 90th percentile. l (2) Three-year period ending December 31,1999. (

SERVICE ANNUITY SYSTEM PLAN The following table sets forth the annual retirement benefits payable under Comed's Service Annuity System Plan (including payments under a supplemental mar.agement retirement plan) to employees who retire at age 65 at stated levels of compensation and years of service at retirement 1 (in 1997).

PENSION PLAN TABLE l Highest 4*

• Annual Normal Retirement Benefits After Specified Years of Service

• g,[',h 40 Earnings 15 20 25 30 35

$ 100,000. $ 35,369 $ 45,905 $ 55,800 $ 65,217 $ 74,275 $ 83,066 200,000. 70,738 91,810 111,601 130,433 148,550 166,131 300,000. . 106,107 137,715 167,401 195,650 222,825 249,197 400,000. , 141,475 183,620 223,201 260,866 297,100 332,263 500,000. 176,844 229,526 279,002 326,083 371,374 415,328 600,000. 212,213 275,431 334,802 391,300 445,649 498,394 581,460 700,000. 247,582 321,336 390,603 456,516 519,924 800,000, 282,951 367,241 446,403 521,733 594,199 664,526 000,000. 318.320 413,146 502,203 586,949 668,474 747,591 1,000,000. 353,689 459,051 558,004 652,166 742,749 830,657 1,100,000, , 389,058 504,956 613,804 717,382 817,024 913,723 1,200,000. 424,426 550,861 669,604 782,599 891,299 996,788 1,300,000. 459,795 596,767 725,405 847,816 965,573 1,079,854 1,400,000. 495,164 642,672 781,205 913,032 1,039,848 1,162,920 1,500,000. 530,533 688,577 837,005 978,249 1,114,123 1,245,985 1,600,000, 565,902 734,482 892,806 1,043,465 1,188,398 1,329,051 1,700,000. 601,271 780,387 948,606 1,108,682 1,262,673 1 412,117 1,800.000. 636,640 826,292 1,004,406 1,173.899 1,336,948 1,495,183 1,900,000. 672,009 872,197 1,060,207 1,239,115 1,411,223 1,578,248 2,000,000. 707,377 918,102 1,116,007 1,304,332 1,485,498 1,661,314

• An emplovaa may elect a marital annuity for a surviving spouse which would reduce the employee's norrnal retirement benefits. The amo;nts shown reflect certain assumptions as to total camings, but do not reflect any reduction for Social Security benefits.

15

f

)

i Sen/ ice Annuity System Plan-Comed maintains a non-contributory Service Annuity System Plan for all regular employees of Comed. The Plan provides benefits upon retirement at age 65 which are based upon years of credited service and percentages of the employee's highest consecutive four- '

year average annual base pay, which includes basic compensation and certain incentive pay. An '

employee with at least 10 years of service may retire prior to attaining age 65 (but not prior to age

50) and will receive reduced benefits if retirement is prior to age 60. A non-executive employee may I work beyond age 65 with additional benefits accruing for eamings and service after age 65.

j Contributions to the Plan by Comed are based upon actuarial determinations that take into account the amount deductible for income tax purposes and the minimum contribution required under the i Employee Retirement income Security Act of 1974, as amended. Compensation-used in the computation of annual reti,ement benefits under the Plan is substantially equivalent to the amounts shown in the " Salary" and " Bonus" columns under the " Annual Compensation" heading of the )

Summary Compensation Table. The compensation used in the computation of annual retirement benefits under the Plan is limited by the Internal Revenue Code as of January 1,1997 to $160,000 (which number is subject to adjustment for increases in the cost of living) for any one employee. Any reduction in the annual retirement benefits payable to management employees under the Plan as a result of any limitations imposed by the Internal Revenue Code is restored under a supplemental management retirement plan maintained by Comed. Thus, annual retirement benefits, as set forth in the Pension Plan Table above, are based on the amounts shown in the " Salary" and " Bonus" columns i

under the " Annual Compensation" heading of the Summary Compensation Table, without limitation as a result of the application of the provisions of the Internal Revenue Code. Credited years of service '

under the Plan for the persons named in the Summary Compensation Table are as follows: James J.

O'Connor,33 years; Leo F. Mullin,1 year; Samuel K. Skinner,4 years: Thomas J. Maiman,31 years; and Michael J. Wallace, 22 years.

EMPLOYMENT AGREEMENTS Comed has an a0reement with Samuel K. Skinner providing for an initial 1993 base salary of

$490,000 per annum, an unfunded supplemental retirement benefit and credit for ten years of service j

for purposes of determining eligibility for certain post-retirement health care benefits. The supplemental retirement benefit does not vest until the completion of five years of employment, unless Comed terminates Mr. Skinner's employment for reasons other than fraud or willful misconduct; however, payment of a surviving spouse benefit will be made if Mr. Skinner dies within such five i years. The formula underlying the supplemental retirement benefit provides a benefit, together with any benefits payable under the Service Annuity System Plan and a social security supplement, equal ,

to one-third of Mr. Skinner's highest annual eamings during the preceding five years, after five years of service, and increasing ratably annually to one-half of such annual earnings after ten years. The agreement also provides for a severance payment equal to two years of base salary, payable over '

three years, and a three-year continuation of health and life insurance benefits in the event that Mr.

Skinner's employment is terminated by Comed for reasons other than death, fraud or willful '

misconduct. The severance payment is subject to reduction to the extent that Mr. Skinner receives  ;

compensation from another full-time employer during the payment period. t Comed entered into an employment agreement with Leo F. Mullin, pursuant to which he became Vice-Chairman of Unicom and Comed on December 1,1995. The agreement provides that Comed will pay Mr. Mullin an initial base salary of $577,000 per annum. In addition, Mr. Mullin received a bonus upon commencement of his duties of $275,000. The agreement provides that he will receive  ;

bonuses on the same basis as any annual bonus paid to Unicom's and Comed's Chairman or President, or both, as determined by the Board of Directors. For calendar year 1996, Mr. Mullin was guaranteed a bonus of at least 50% of his base salary. He was also awarded performance units  !

making him eligible for payments under the Unicom Core: ration Long-Term Incentive Plan. Mr. I Mullin's agreement also provides for an unfunded supplemental retirement benefit pursuant to which he will receive the annual retirement benefit that would have been payable under the Service Annuity 16 l

l.  !

l

- .. ~. -. . ---- -. - --

r t

Systenk Plan if'he were to retire at age 60 with 20 years of service plus one additional year for each year of actual employment. No such benefit is payable until Mr. Mullin has completed five years of i service, unless Comed terminates his employment for reasons other than death, fraud or willful misconduct or Mr. Mullin terminates his employment as a result of certain adverse actions taken by Comed; however, payment of a surviving spouse benefit will be made if Mr. Mullin dies within such five-year period. The agreement further provides for a severance payment equal to two years of his then-current base salary and most recent annual bonus, payable over three years, and a three-year continuation of health and life insurance benefits in the event that his employment is terminated by Comed for reasons other than death, fraud or willful misconduct or in the event that he terminatee hk employment because Comed has reduced or failed to pay his salary or takes certain other actions. The severance payment is subject to reduction in the event that Mr. Mullin J accepts other full-time employment during the payment period.

CORPORATE GOVERNANCE AND COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

! The Corporate Governance and Compensation Committee of the Board of Directors of Unicom Corporation ("Unicom") and Commonwealth Edison Company (" Comed") have furnished the '

following report on executive compensation:

Introduction. It is the policy of the Committee to compensate executive officers based on their  !

responsibilities, their achievement of annual goals and the Company's annual and long-term performance. The Committee believes that mmpensation paid should be appropriate in relation to the financial performance of the Company and should be sufficient to enable the Company to attract and retain individuals possessing the talents required for the Company's long-term successful performance. The Committee also believes that the incentive compensation performance goals for executive management should be based on factors over which management has significant control and which are important to the Company's long-term success.

In 1996, the major components of executive officer compensation were base salary, consisting of cash salary and current compensation unit income, and incentive compensation related to awards under the Unicom Corporation Long-Term incentive Plan (the " Incentive Plan").

Base Salary. The process of determining the officers' base salary begins with a review of the salary levels for various comparable executive positions at twenty-three of the largest companies in the electric utility industry as published in the 1995 Edison Electric Institute Executive Compensation Survey. The Committee also considers the median levels of base salary for various comparable positions among companies in the utility industry and in industry generally. This information is used as a reference point due to the similarity of the basic duties and responsibilities between such positions and positions within the Company. Judgment is then applied to recognize differences in the organization structure and responsibilities of executive officers of the Company, in the size and complexity of the Company's operations, and in the regulatory environment and competitive ,

challenges faceo by the Company. After considering these various factors, the Committee approved, in December 1995, base salary ranges for 1996 which were generally about 3% above 1995 levels.

The base salary of each officer is ect within the applicable range based on a largely subjective assessment of the particular responsibilities and performance of such officer following, in the case of officers other than the Chairman, discussions with the Chairman regarding his recommendations. The length of service and level of experience of each officer in his or her area of responsibility are also considered. For 1996, the Committee approved increases in cash salary for the executive officers averaging 3.2% of base salary. Percentage increases for individual executive officers varied and were structured, in part, to recognize changes in industry levels and to reflect the performance and contributions of the individual officers.

In 1996, most executive officers held current compensation units. Each such unit entitles the holder to receive current income equal to the dividends paid on one share of Unicom common stock.

17

During 1996, the Committee awarded compensation units to three recently hired executive officers in an effort to provide a salary enhancement for these individuals in relation to competitive positions .

elsewhere;  !

With respect to compensation comparisons with'other companies, it should be noted that i J because of the differences, discussed above, between the Company and others in the group of ,

twenty-three large utilities that participated in the 1995 Edison Electric Institute Executive l Compensation Survey, that group is not used in the performance comparisons shown on page 20.-

The Dow Jones Utility Stock Index, a well-known and widely-followed utility index comprising a

~

broader array of utility companies (including Unicom and nine of the other large utilities in the Edison Electric Institute Survey), is used for those comparisons. A comparison to the companies composing this Index is also used for measuring performance for purposes of one of the incentive compensation awards discussed below .

Incentive Compensation Awards. The other component of executive compensation is incentive compensation earne'd under awards made by the Committee under the incentive Plan. Such awards included an annual incentive award, a longer-term award covering a three-year performance period and stock options. 1 Annual incentive awards were established to encourage the achievement of certain corporate

]

and business unit goals during 1996. Award payouts were also contingent on maintaining quarterly j cash dividends of at least 40 per share, limiting operation and maintenance expenses and capital l

{ expenditures to specified levels, and achieving a minimum level of earnings per share. The potential payouts were tied to base salary and varied depending on management level and level of goal j achievement. The varying payouts were established based on subjective judgment with respect to the

appropriate level of incentive and award, considering degree of difficulty of the goals and degree of responsibility of the different levels of managernent for achievement of the goals.

With respect to management employees other than Messrs. O'Connor, Mullin and Skinner, corporate goals were established for the annual incentive award with respect to Unicom's earnings 4 per share and the amount by which Comed's operation and maintenance expenses were below j budget. For purpe of measuring achievement of such goals, the Committee provided for the 2

exclusion of certain hms on grounds that it would not be appropriate to allow the effects of such

items to affect the measure of performance. As a result of these adjustments, the eamings per share

! goals ranged froryg2M to achieve the minimum award level, to $3.39, to achieve the maximum

, award leve!. and the operation and maintenance expense goals ranged from $1,998 million to $1,912 million, respectively. As so adjusted for purposes of the award, eamings per share were $3.33 and operation and rnaintenance expenses were $2,019 million.

With respect to Messrs. O'Connor, Mullin and Skinner, the annual incentive award was based 4

ontirely upon the achievement of earnings per share goals for Unicom. The earnings per share goals were set at $3.24, to achieve the minimum award level, and $3.39, to achieve the maximum award level, and eamings were adjusted in the same manner as described in the preceding paragraph. The level of Unicom earnings as determined under this award was $3.33 per share.

Longer-term incentive awards were initiated in 1994 to encourage an interest in longer term performance by keying incentive payouts to the total return performance of Unicom common stock in 2

relation to that of the other companies constituting the Dow Jones Utility Stock Index over three-year performance periods. Payments on such awards, as a percentage of base salary, increase with the executive's management level. For the three-year performance period that ended with 1996 Unicom stock performance was slightly above the 43rd percentile among the stocks constituting the Dow Jones Utility Stock index. Resulting payments are included in the "Payouts" column under the "Long-Term Compensation" heading in the Summary Compensation Table.

18

d l

1 1

j

. Stock option awards were initiated in 1996 to reward and motivate the Company's management to increase long-term shareholder value. The options grant.the holders the opportunity to purchase shares of the Company's Common Stock at an exercise price equal to the market value on the date of grant, and become exercisable in equal increments over. a three-year period (subject to acceleration in the event of a change in control of the Company). The options have a maximum term of ten years. Committee decisions with respect to the size of option grants were based on an evaluation of competitive compensation data drawn from eleven other utilities and ten non-utility companies similar to the Company as well as the option recipient's base salary, management level and performance. Option grants are made generally to key employees who are expected to contribute materially to the Company's success.

Compensation of the Chief Executive Officer. The Committee's assessment of the Chairman and Chief Executive Officer's personal performance at the outset of 1996, based upon a non-quantifiable )

evaluation of his leadership, achievements and contributions to the Company during 1995, was very favorable. Under Mr. O'Connor's leadership, the Company's financial performance in 1995 improved significantly over 1994 as evidenced by an increase in eamings per share to $2.98 in 1995 from $1.66 ,

in 1994. Notwithstanding this assessment, and based on an assessment of competitive pay and in )

view of the Committee's focus on incentive compensation, Mr. O'Connor's cash salary for 1996 l remained unchanged from its level in 1995. The Chairman's total base salary in 1996 was $844,926 l

($700,000 cash salary plus $144,926 in current compensation unit income). The Committee's objective in structuring the Chairman's incentive compensation was to encourage both short-term and longer-term actions to benefit earnings per share and the cumulative return on Unicom's common stock. The elements of these awards are described above.

The Chairman's total compensation (cash salary, compensation unit income, and incentive compensation) was $1,697,961 for 1996. The Committee believes, based on available information, that both the absolute and relative levels of compensation for 1996 were fully appropriate considering the size and complexity of the Company's operations (the Company is one of the largest in the comparison group of twenty-three electric utility companies), and also considering the Committee's very favorable assessment of the Chairman's performance in providing leadership to the Company, which achieved improved financial performance in 1996. Earnings per share rose to $3.09 in 1996 from $2.98 in 1995, and the improved performance resulted in an increase of $335 million in shareholders' equity.

Internal Revenue Code Section 162(m) Considerations. Sec ;on 162(m) of the Internal Revenue Code provides that executive compensation in excess of $1 million will not be deductible for purposes of corporate income taxes unless it is performance-based compensation and is paid pursuant to a plan meeting certain requirements of the Code. As noted in previous reports, the Committee intends to continue reliance on performance-based compensation programs. Such programs will be designed to fulfill, in the best possible manner, future corporate business objectives.

To the extent consistent with this goal, the Committee currently anticipates that such programs will also be designed to satisfy the requirements of Section 162(m) with respect to the deductibility of compensation paid. The Committee believes that executive compensation actually paid in respect of 1996 was deductible.

Corporate Governance and Compensation Committee Jean Allard Donald P. Jacobs Edward A. Brennan Edgar D. Jannotta James W. Compton George E. Johnson Bruce DeMars Edward A. Mason Sue L. Gin Frank A. Olson 19 1

., . ~ . _ ., _ __

SHAREHOLDER RETURN PERFORMANCE ,

Set forth below is a line graph comparing the quarterly percentage change in the cumulative total shareholder return on Unicom Common Stock ("UCM") against the cumulative total return of the S&P 500 Composite Stock Index and the Dow Jones Utility Stock index for the five-year period ending December 31,1996.

CUMULATIVE PERFORMANCE SINCE JANUARY 1,1992 ASSUMING REINVESTMENT OF DIVIDENDS -

(JANUARY 1,1992 = $100)

TOTAL RETURN 220 200 -

3, , 3,3 i .

DJ 128 180 - "c" ' "

, sie ao3 DJ 140 160 -

,,,1,,

S&e 118 "

140 -

s.e los oJ u4 oc" " -

W 104 UCM 81 4

120 {ljj g

100*L + i

/

60 -

40 l 1992 1993 1994 1995 1996 i l

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-o- UCM COMMON STK* l DJ UTIL : S&P 500 COMPOSITE '

J Performance shown for Unicom Common Stock on and after September 1,1994 and for Comed common stock prior to that date.

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. VOTING

Shareholders of record on the books of Unicom at 4:00 P.M., Chicago time, on March 31,1997, will be entitled to vote at the annual meeting. Unicom had outstanding on March 31, 1997, ,

216,201,387 shares of Common Stock. Each share entitles the holder to one vote on each matter i

), submitted to a vote at the meeting, except that in the election of Directors each shareholder has the right to vote the number of shares owned by such shareholder for as many persons as there are ,

Directors to be elected, or to cumulate such votes and give one candidate as many votes as shall l equal the number of Directors to be elected multiplied by the number of such shares or to distribute l such cumulative votes in any proportion among any number of candidates. The holders of a majority j of the outstanding shares entitled to vote on a particular matter and represented in person or by proxy ]

will constitute a quorum for the consideration of such matter at the meeting.

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The shares represented by the proxy of each shareholder include shares owned by such shareholder and shares credited to such shareholder's account under the Dividend Reinvestment and i Stock Purchase Plan and the Employee Stock Purchase Plan. l The shares represented by properly executed and unrevoked proxies received in the accompanying form in time for the meeting will be voted at the meeting and will be voted as directed

in the proxies. With respect to the election of Directors, a shareholder may mark the accompanying form of proxy to (i) vote for the election of all ten nominees named in this Proxy Statement as ,

! Directors, (ii) withhold authority to vote for all such Director nominees or (iii) vote for the election of all

" such Director nominees other than any nominee or nominees with respect to whom the shareholder  !

. withholds authority to vote. Assuming that a quorum is present at the meeting, the ten persons receiving the greatest number of votes shall be elected as Directors. The proxy holders will cumulate i votes for shares represented by proxies only if a shareholder gives them specific written instructions l i to do so.

With respect to item B (the amendment and restatement of the Unicom Corporation Long-Term y incentive Plan), item C (the material terms of long-term performance unit awards), item D (the

! appointment of Auditors) and item E (the shareholder proposal), a shareholder may mark the

] accompanying form of proxy to (i) vote for the matter, (ii) vote against the matter or (iii) abstain from f voting on the matter. Assuming that a quorum is present at the meeting, the affirmative vote of a  !

majority of the shares of Common Stock represented at the meeting and entitled to vote on the matter L is required for approval of these items. Proxies marked to abstain from voting with respect to any of {

} these matters will have the legal effect of voting against such matter. Proxies submitted by brokers for shares beneficially owned by other persons may indicate that all or a portion of the shares j l represented by such proxies are not being voted with respect to approval of these items. This is

because the rules of the New York Stock Exchange may not permit a broker to vote Common Stock )

held in street name with respect to these matters in the absence of instructions from the beneficial l 4

' owner of the Common Stock. The shares represented by broker proxies which are not voted with i i respect to such items will not be counted in determining whether a quorum is present for the l l

consideration of these matters and will not be considered represented at the meeting and entitled to .

l j vote on them.

The shares represented by properly executed and unrevoked proxies received in the accompanying form in time for the meeting will be voted as directed in the proxies. In the absence of specific direction, the shares represented by the proxies will be voted at the meeting and will 3

be voted non-cumulatively FOR the election of the nominees named in this Proxy Statement as l Directors, FOR approval of the matters discussed in items B, C and D, and AGAINST ltem E (the shareholder proposal). In the event any nominee for Director shall be unable to serve, which is not now contemplated, the proxies may or may not be voted for a substitute nominee.

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SHAREHOLDER PROPOSALS FOR 1998 ANNUAL MEETING ,

1 Any shareholder proposal intended to be presented at the 1998 annual meeting of Unicom's i shareholders must be received at the principal executive offices of Unicom by December 10,1997, in order to be considered for inclusion in Unicom's proxy materials relating to that meeting. Any such proposal should be directed to the Secretary of Unicom located on the 37th Floor, First National Bank j Building,10 South

Dearborn Street,

Chicago, Illinois. If mailed, it should be sent to Secretary, Unicom j

, Corporation,10 South

Dearborn Street,

Post Office Box A-3005, Chicago, Illinois 60690-3005.  !

OTHER MATTERS As of the date of this Proxy Statement, management knows of no matters to be brought before the annual meeting other than the matters referred to in this Proxy Statement. If, however, further business is presented, the proxy holders will act in accordance with their best judgment.

By order of the Board of Directors. I DAVID A. SCHOLZ

< Secretary April 9,1997

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A copy of Unicom's Annual Report on Form 10-K to the Securities and Exchange Commission may be obtained without charge by writing to David A. Scholz, Secretary, Unicom Corporation, 10 South

Dearborn Street,

Post Office Box A-3005, Chicago, Illinois 60690-3005.

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EXHIBIT A UNICOM CORPORATION AMENDED AND RESTATED LONG-TERM INCENTIVE PLAN ARTICLE 1: Purpose The purposes of the Long-Term incentive Plan (the " Plan") of Unicom Corporation (the

" Company") and its subsidiaries 'are (i) to align the interests of the Company's stockholders and recipients of awards under the Plan by increasing the proprietary interest of such recipients in the l Company's growth and success and (ii) to advance the interests of the Company by attracting and i retaining well-qualified persons by providing such persons with performance-related incentives.- l ARTICLE II: Definitions For purposes of the Plan, the following terms shall have the following meanings:

" Award" shall mean any form of stock option, stock appreciation right, stock award,  ;

performance shares, performance units or other stock-based award granted under this Plan. j

" Board"shall mean the Board of Directors of the Company.

" Code" shall rnean the internal Revenue Code of 1986, as amended, or any successor

- legislation.

" Committee" shall mean the Corporate Governance and Compensation Committee or such other committee of the Board us may be appointed from time to time by the Board consisting of two or more Directors, all of whom must quahfy as disinterested persons within the meaning of Securities and Exchange Commission Regulation 240.16b-3 or any successor regulation.

" Common Stock"shall mean the Common Stock, without par value, of the Company.

"Participanf'shall mean an employee to whom an Award has been made pursuant to this Plan.

" Subsidiary" shall mean any corporation of which the Company owns directly or indirectly 51% or more of the outstanding shares of stock entitled to vote for the election of directors and any partnership, joint venture or other enterprise with respect to which the Company owns a 51%

or more interest and has the power to direct or cause the direction of the management and policies.

ARTICLE lil: Eligibility Participants in the Plan shall consist of such employees of the Company and its Subsidiaries as the Committee in its sole discretion may select from time to time. The Committee's selection of a person to participate in the Plan in any year shell not require the Committee to select such person to participate in the Plan in any other year. No employee shall have the right to be selected to participate in the Plan.

ARTICLE IV: Shares Available 4.1 Shares. Subject to adjustment as provided in Section 4.2 of the Plan, an aggregate of 4,000,000 shares of Common Stock shall be available for Awards under the Plan, reduced by the sum ]

of the aggregato number of shares of Common Stock then subject to (i) outstanding stock options 1

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and outstanding stock appreciation rights that are not related to a stock option, (ii).outst riding Awards which may be exercised or selected solely in shares of Common Stock and (iii) outstanding Awards which may be exercised or cettled either in shares of Common Stock or cash. To the extent (i) that an outstanding stock option expires or terminates unexercised or is cancelled or forfeited (other than in connection with the exercise of a related stock appreciation right) or (ii) that an outstanding stock appreciation right that is not related to a stock option or other outstanding Award, either of wh/ch may be exercised or settled (A) solely in shares of Common Stock or (B) in shares of Common Stock or cash, expires or terminates unexercised or is cancelled or forfeited, then the shares of Common Stock subject to such expired, unexercised, cancelled or forfeited portion of such Award shall again be available for Awards under the Plan. In the event that all or a portion of a stock appreciation right is exercised, the number of shares of Common Stock subject to such right (or portion thereof) shall again be available for issuance under the Plan, except to the extent that shares of Common Stock were issued (or would have been issued but were withheld to satisfy tax withholaing obligations) upon exercise of the right. Stock appreciation rights and other Awards which may be exercised or settled only in cash shall not affect the number of shares of Common Stock available for Awards under the Plan.

Shares of Common Stock to be delivered under the Plan shall be made available from authorized and unissued shares of Common Stock, or authorized and issued shares of Common Stock reacquired and held as treasury shares or otherwise, or a combination thereof.

4.2 Adjustment Provisions. In the event of any stock split, stock dividend, recapitalization, reorganization, merger, consolidation, combination, exchange of shares, liquidation, spin-off or other similar change in capitahzation, or any distribution to holders of Common Stock other than a cash dividend, the number and class of shares available under the Plan, the number and class of shares subject to each outstanding option and the purchase price per share, the terms of each outstanding stock appreciation right, and the number and class of shares subject to each other outstanding Award shall be appropriately adjusted by the Committee, such adjustments to be made in the case of outstanding stock options and stock appreciation rights without a change in the aggregate purchase price or reference price.

ARTICLE V: Administration i 5.1 Administration and Interpretation. The Plan shall be administered and interpreted by the Committee. The Committee shall have the authority to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan and perform all acts, including the delegation of its administrative responsibilities, as it shall, from time to time, deem advisable; to construe and interpret the terms and provisions of the Plan and any Award issued under the Plan (and any notices or agreements relating thereto); and to otherwise supervise the administration of the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or -

in any notice of an Award or any agreement relating thereto in the manner and to the extent it shall deem necessary to carry the Plan into effect. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Committee (or any of its members) arising out of or in connection with the Plan shall be within its absolute discretion and shall be final, binding and ,

conclusive on the Company and all employees and Participants and their respective beneficiaries, l heirs, executors, administrators, successors and assigns.  !

Neither the Committee nor any member thereof shall be liable for any act, omission, interpretation, construction or determination made in connection with the Plan in good faith, and the members of the Committee shall be entitlea to indemnification and reimbursement by the Company in respect of any claim, loss, damage or expense (including attorney's fees) arising therefrom to the full extent permitted by law and under any directors' and officers' liability insurance that may be in A-2 l

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effect from time to tirne. In addition, no member of the Board and no employee of the Company shall j be liable for any act or failure to act hereunder, by any other member or employee or by any agent to 1 I

whom duties in connection with the administration of this Plan have been delegated or, except in circumstances involving a member's or employee's bad faith, gross negligence or fraud, for any act or failure to act by the member or employee.

A majority of the Comrrnitee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, or acts approved in writing by a majority of the Committee without a meeting, shall be the acts of the Committee.

5.2 Awards. The Committee shall have full authority to grant, pursuant to the terms of the Plan, to employees: (i) stock options, (ii) stock appreciation rights, (iii) stock awards, (iv) performance i I

shares, (v) performance units, and (vi) other stock-based awards. In particular, and without limitation, the Committee shall have the authority; (a) to select the employees to whom Awards may from time to time be granted hereunder; (b) to determine the types of Awards, and combinations thereof, to be granted hereunder to employees and whether such Awards are to operate on a tandem basis and/or in conjunction with or apart from other awards made by the Company outside of this Plan; l (c) to determine the number of shares of Common Stock or monetary units to be covered by each Award granted hereunder; (d) to determine the terms and conditions, not inconsistent with the terms of this Plan, of any Award granted hereunde (including, but not limited to, any restriction or limitation on exercise or transfer, any vesting snedule or acceleration "ereof, or any forfeiture provisions or waiver l thereof, regarding any Award and the shares of Common Stock relating thereto, based on such  !

factors as the Committee shall determine, in its sole discretion); i l

(e) to determine whether Common Stock and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or at the election of the Participant; and (f) to modify or waive any restrictions or limitations contained in, and grant extensions to or accelerate the vesting c.f any outstanding Awards as long as such modifications, waivers, l extensions or accelerat:ons are consistent with the terms of this Plan; but no such changes shall impair the rights of any Paiticipant without his or her consent.

An Award under the Plan shall be made in such manner and evidenced by such means as the Committee shall determine, which may include, but shall not be limited to, written agreements between the Company and the employee to whom the Award is granted.

ARTICLE VI: Stock Options 6.1 Grants. Stock options may be granted alone or in addition to other Awards granted under this Plan. Each stock option granted under this Plan shall be of one of two types: (i) an " incentive stock option" within the meaning of Section 422 of the Code (or any successor provision) or (ii) a non-qualified stock option. The Committee shall have the authority to grant to any employee one or more incentive stock options, non-quahfied stock options, or both types of stock options (in each case with or without stock appreciation rights). No incentive stock optivns may be awarded after the tenth anniversary of the date this Plan is adopted by the Board.

6.2 Terms of Options. Stock options granted under this Plan shall be subject to the following terms and conditions and shall be in such form and contain such additional terms and conditions, not inconsistent with the terms of this Plan, as the Committee shall deem desirable:

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(a) Exercise Price. The exercise price per share of Common Stock purchasable under a stock option shall be determined by the Committee at the time of grant but no incentive stock option shall have an exercise price less than 100% of the fair market value of the Common Stock at the option grant date.

(b) Option Term. The term of each stock option shall be fixed by the Committee, but no incentive stock option shall be exercisable more than ten years after the date the option is ,

granted.

(c) Exercisabihty. Stock options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Committee. -

(d) Method of Exercise. An option may be exercised (i) by givhg written notice to the Company specifying the number of whole shares of Commor. Stock to ee purchased with the purchase price therefor to be payable in full either (A) in cash, (B) in previously owned whole shares of Common Stock (for which the holder of the option has good title frce and clear of all liens and encumbrances) with their fair market value determined as of the dato d exercise. (C) by authorizing the Company to retain whole shares of Common Stock which would otherwise be issuable upon exercise of the option with their fair market value determined as of the date of exercise, (D) in cash by a broker-dealer acceptable to the Company to whorn the optionee has submitted an irrevocable notice of exercise, or (E) a combination of (A), (B) and (C), in each case to the extent determined by the Committee at the time of grant of the option,(ii) if applicable, by

= surrendering to the Company any stock appreciation rights or other Awards which are cancelled by reason of the exercise of the option and (iii) by executing such documents as the Company may reasonably request. No shares of Common Stock shall be issued until the full purchase price has been paid.

(e) Termination of Employment by Death, Disability or Retirement. If a Participant's employment by the Company or a Subsidiary terminates by reason of the Participant's death, disability (as determined by the Committee) or retirement (as determined by the Committee), any outstanding stock option then held by such Participant shall remain exercisable, but only to the extent such option was exercisable on the date of such Participant's terminatbn of employment, until the expiration of the term of such option. If on the date of such termination of employment, any such stock option shall not be fully exercisable, the Committee shall have the discretion to cause such stock option to continue to become exercisable on the date or dates specified therein as if such termination of employment had not occurred. The Committee may exercise the discretion granted to it by the preceding sentence at the time a stock option is granted or at any time thereafter while such stock option remains outstanding.

(f) Other Termination of Employment. Uniess otherwise determined by the Committee at or after grant, if a Participant's employment by the Company or a Subsidiary terminates for any reason other than the Participant's death, disability or retirement, the stock option shall terminate at such time as provided in the Award.

(g) Buyout and Settlement Provisions. The Committee may at any time offer to buy out an option previously granted, based on such terms and conditions as the Committee shall establish and communicate to the Participant at the time that such offer is made.

(h) Maximum Share Grant. The maximum number of shares that may be granted to a Participant in any particular five-year period shall not exceed 500,000.

ARTICLE Vil: Stock Appreciation Rights The Committee may grant stock appociation rights to employees either alone or in addition to stock options granted under Article VI. A stock appreciation right shall entitle the holder thereof to receive upon exercise shares of Common Stock, cash or a combination thereof with an aggregate value equal to the excess of the fair market value of one chare of Common Stock over the reference A-4

r price of such stock appreciation right multiplied by the number of shares of Common Stock subject to such stock appreciation right or portion thereof which is exercised. Any stock appreciation right related to a non qualified stock opuori may be granted at the same time such option is granted or at any time thereafter before exercise or expiration of such option. Any stock appreciation right related to an incentive stock option shall be granted at the same time such option is granted. In the case of j any stock appreciation right related to any option, the stock appreciation right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related ,

option, except that a stock appreciation right grant 6d with respect to less than the full number of l shares covered by a related option shall not be reduced until the exercise or termination of the related i option exceeds the number of shares not covered by the stock appreciation right at the time of grant.

Any option related to any stock appreciation right shall no longer be exercisable to the extent the related stock appreciation right has been exercised. The Committee may impose such conditions or ,

restrictions on the exercise of any stock appreciation right as it shall deem appropriate. The maximum number of shares that may be subject to stock appreciation rights granted to a Participant in any particular five-year period shall not exceed 500,000.

l ARTICLE Vill: Stock Awards j l

Restricted or unrestricted shares of Common Stock may be granted either alone or in addition to I c: hor Awards granted under this Plan. The Committee may grant Awards of Common Stock subject to the attainment of specified performance goals, continued employment and such other limitations i or restrictions as the Committee may determine. {

ARTICLE IX: Performance Shares Performance shares may be awarded either alone or in addition to other Awards granted under this Plan and shall consist of the right to receive Common Stock or cash of an equivalent value at the end of a specified performance period. The Committee shall determine the employees to whom and j the time or times at which performance shares shall be awarded, the number of performance shares to be awarded to any person, the duration of the period during which, and the conditions under which, a Participant's rights to performance shares will be vested and the receipt of the shares will be deferred.

The Committee may condition the grant of performance shares upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine.

- ARTICLE X: Performance Units I

Performance units may be awarded either alone or in addition to other Awards granted under this Plan and shall consist of the right to receive a fixed dollar amount, payable in cash or Common Stock or a combination of both. The Committee shall determine the employees to whom and the time or times at which performance units shall be awarded, the number of performance units to be awarded to any person, the duration of the period during which, and the conditions under which, a Participant's right to performance units will be vested and the ability of Participants to defer the receipt of payment of such performance units. The maximum number of performancc units that may be granted to a Participant in any one-year period shall not exceed 50,000.

The Committee may condition the vesting of performance units upon the attainment of specified performance goals or such other factors or criteria as the Committee shall determine.

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ARTICLE XI: Other Stock-Based Awards , .

Otner awards of Common Stock and cash awards that are valued in whole or in part by reference to, or are payable in or otherwise based on, Common Stock ("other stock-based awards") including, without limitation, Awards valued by reference to performance concepts, may be granted either alone or in addition to or in tandem with stock options, stock apprec:ation rights, stock awards, performance

• shares or performance units.

Subject to the provisions of this Plan, the Committee shall have authority to determine the persons to whom and the, time or times at which such Awards shall be made, the number of shares of '

Common Stock to be awarded pursuant to such Awards, and all other conditions of such Awards.

ARTICLE Xil: Termination or Amendment Notwithstanding any other provision of this Plan, the Board may at any time, and from time to time, amend, in whole or in part, any or all of the provisions of this Plan, or suspend or terminate it entirely; provided, however, that, unless otherwise required by law, the rights of a Participant with respect to any Awards granted prior to such amendment, suspension or termination, may not be impaired without the consent of such Participant; and, provided further, no amendment may be made which would cause this Plan to lose its exemption under Securities and Exchange Commission Regulation 240.16b-3 or which would increase the number of shares of Common Stock available for Awards under Section 4.1 of the Plan without shareholder approval.

ARTICLE Xill: General Provisions 13.1 Unfunded Status of Plan. This Plan is intended to be unfunded. With respe-t to any payments as to which a Participant has a fixed and vested interest but which are not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.

13.2 No Right to Employment. Neither this Plan nor the grant of any Award hereunder shall give any Participant or other employee any right with respect to continuance of employment by the Company or any Subsidiary, nor shall they be a limitation in any way on the right of the Company or any Subsidiary by which an employee is employed to terminate his or her employment at any time.

13.3 Other Plans. In no event shall the value of, or income arising from, any Awards under this Plan be treated as compensation for purposes of any pension, profit sharing, life insurance, disability or any other retirement or welfare benefit plan now maintained or hereafter adopted by the Company or any Subsidiary, unless such plan specifically provides to the contrary. .

13.4 Withholding of Taxes. The Company shall have the right to require, prior to the issuance or delivery of any shares of Common Stock hereunder, payment by the Participant of any federal, state, local or other taxes which may be required to be withheld or paid in connection with an Award herounder. An Award agreement may provide that (i) the number of shares of Common Stock issuable with respect to such Award shall be reduced by the amount necessary to satisfy any such obligation or (ii) the Participant may satisfy any such obligation by any of the following means: (A) a cash payment to the Company, (B) delivery to the Company of previously owned whole shares of Common Stock (for which the Participant has good title, free and clear of allliens and encumbrances) having a fair market value determined as of the date the obligation to withhold or pay taxes first arises in connection with an Award (the " Tax Date"), (C) authorizing the Company to withhold from the shares of Common Stock otherwise issuable to the Participant pursuant to an Award, a number of A-6

whole shares of Common Stock having a fair market value determined as of the Tax Date or (D) any combination of the foregoing methods; provided, however, that in the case of a Participant who is subject to Section 16 of the Securities Exchange Act of 1934, as amended, the Company may require that the method of satisfying such an obligation shall be in compliance with Section 16 and the rules and regulations thereunder. An Award agreement may not provide for shares of Common Stock to be delivered or withheld having a fair market value in excess of the amount determined by applying the Participant's maximum marginal tax rate. Any fraction of a share of Common Stock which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shal' be paid in cash by the Participant. The Company may requ"e that any or a!I obligations to satisfy or pay taxes with respect to any Award shall be satisfied or paid by the Participant prior to satisfaction of such Award by the Company.

13.5 No Assignment of Bene /its. No Award or other benefit payable under this Plan shall, except as otherwis a specifically provided by this Plan or by law, be transferable in any manner other than by will or the laws of descent and distribution, and any attempt to transfer any such benefit shall be void.

All stock optioris, stock appreciation rights and performance shares may be exercised or settled during the Participant's lifetime, only by the Participant or his or her guardian, conservator or other legal representative. Awards or other benefits payable under this Plan shall not in any manner be subject to the debts, contracts, liabilities, engagements or torts of any person who shall be entitled to such benefit, nor shall it be subject to attachment or legal process for or against such person.

13.6 Goveming Law. This Plan and actions taken in connection herewith shall be governed and construed in accordance with the laws of the State of Illinois (without regard to applicable Illinois principles of conflict of laws).

13.7 Construction. Wherever any words are used in this Plan in the masculine gender, they shall be construed as though they were also used in the feminine gender in all cases where they would so apply, and wherever any words are used herein in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply.

ARTICLE XIV: Effective Date This Plan, formerly the Commonwealth Edison Company 1993 Long-Term Incentive Plan, which was assumed, adopted and amended by the Board on August 30,1994 and approved by the shareholder of the Company on August 30,1994, is effective September 1,1994.

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EXHIBIT B 4

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$ UNICOM CORPORATION AND SUBSIDIARY COMPANIES 1 CONSOLIDATED FINANCIAL STATEMENTS j AS OF DECEMBER 31,1996 AND 1995 i

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Unicom Corporation and Subsidiary Companies Certain portions of this document contain forward looking statements with respect to the consequences of future events, including estimates of costs associated with certain actions and outcomes. Unforeseen events or conditions may require changes in the. factors affecting such .

estimates and the projected results thereof. Consequently, actual results could differ materially from the estimates presented. See the last paragraph under the subheading " Liquidity and Capital Resources-Construction Program in " Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information regarding certain caveats affecting forward looking statements. Forward looking information is contained in various sections of this report, including, without limitation, (i) Note 1 of Notes to Financial Statements in the third and fifth paragraphs under the subheading " Depreciation and Decommissioning Costs" and " Management's Discussion and Analysis of Financial Condition and Resu!ts of Operations" in the last paragraph under the subheading " Regulation-Nuclear Matters," with respect to the estimated costs of decommissioning nuclear generating stations, (ii) " Management's Discussion and Analysis of Financial Condition and Results of Operations" under the subheading " Liquidity and Capital Resources-Construction Program," regarding Comed's construction program budget, (iii) the fourth paragraph under the subheading "Results of Operations-Operation and Maintenance Expenses" under " Management's Discussion and Analysis of Financial Condition and Results of Operations" and (iv) the last paragraph in Note 21 of Notes to Financial Statements, regarding cleanup costs associated with MGP and other remediation sites.

INDEX Page Definitions . . . . . . . .. B-2 Summary of Selected Consolidated Financial Data . B-3 Price Range and Cash Dividends Paid Per Share of Common Stock .. B-3 1996 Consolidated Revenues and Sales . . .. . B-3 Management's Discussion and Analysis of Financial Condition and Results of Operations. B-4 Report of Independent Public Accountants. . . . .. . B-17 Consolidated Financial Statements-Statements of Consolidated Income for the years 1996,1995 and 1994 B-18 Consolidated Balance Sheets-December 31,1996 and 1995 B-19 Statements of Consolidated Capitalization-December 31,1996 and 1995. B-21 Statements of Consolidated Retained Earnings for the years 1996,1995 and 1994 B-22 Statements of Consolidated Cash Flows for the years 1996,1995 and 1994. . B-23 Notes to Financial Statements . . . B-24 Subsequent Events . . . .. . ... B-46 Reference is made to " Subsequent Events" for certain recent information that should be read and considered in connection with the other information contained in this Exhibit B.

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- . . - , . - . ~ . = - - - . - . - . . , . . - . . . . . - . - - . . - .-. .. . .

l DEFINITIONS The following terms are used in this document with the following meanings:

Term 04eening

.AFUDC Allowance for funds used during construction AMT Alternative minimum tax APB Accounting Principles Board . .

CERCLA Comprehensive Environmental Response, Compensation and Liability.

l i Act of 1980, as amended .

,, CFC .

Chlorofluorocarbon _

. Clean Air Amendments Clean Air Act Amendments of 1990 l ComFd Commonwealth Edison Company _ .

Cotter Cotter Corporation, which is a wholly-owned subsidiary of Comed. .

DOE U.S. Department of Energy ESPP- Employee stock purchase plan  !

. Financial Accounting Standards Board -  !

FASB FERC Federal Energy Regulatory Commission ,

j FERC Order FERC Open Access Order issued in April 1996.

Fuel Matters Settlement A settlement effected in November 1993 relating to various ICC fuel reconciliation proceedings involving Comed.  ;

' ICC lilinois Commerce Commission 3 indiana Company Commonwealth Edison Company of Indiana, Inc., which is a wholly--

owned subsidiary of Comed. j i ISO ' Independent System Operator MGP Manufactured gas plant

! NEIL Nuclear Electric Insurance Limited NML Nuclear Mutual Limited i i

NRC Nuclear Regulatory Commission l

. Rate Matters Settlement A settlement effected in November 1993 relating to various rate proceedings involving Comed..  !

Rate Order ICC rate order issued in January 1995, as subsequently modified  ;

Remand Order ICC rate ordr,r issued in January 1993, as subsequently modified  ;

SEC - Securities ar,d Exchange Commission SFAS Statement cf Financial Accounting Standards  ;

]

Trust Comed Fir ancing 1, which is a wholly-owned subsidiary trust of Comed.  ?

i Unicom Unicom Corporation j

Unicom Enterprises Unicom interprises Inc., which is a wholly-owned subsidiary of Unicom.  ;

i Unicom Thermal Unicom thermal Technologies Inc., which is a wholly-owned subsidiary  ;

of Unicom Enterprises.

' . Comed's nuclear generating units known as Byron Unit 2 and Braidwood Units l Units 1 and 2

)'

U.S. EPA U.S. Environmental Protection Agency i

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UNICOM CORPORATION AND SUBSIDIARY COMPANIES l Summary of Selected Consolidated Financial Data 1996 1995 1994 1993 1992 (Millions of Dollars Except Per Share Data)

Operating revenues ,, , $ 6,937 $ 6,910 $ 6.278 5 5.260 $ 6,026 Net income $ 666 $ 640(1) $ 355 $ 46(2) $ 443 -

Earnings per cornmon share . . $ 3 09 $ 2.98(1) $ 1.66 $ 0.22(2) $ 2.08 Cash dividends declared per commor', share , $ 1,60 $ 1.60 $ 1.60 $ 1 60 $ 2.30 >

Total assets (at end of year) . , , $23,388 $23.250 $23,121 $24 383 $20,993 ,  !

Long-term obligations at end of year excluding current portion:

Long-term debt, preference stock and preferred securities subject to mandatory redemption requirements. $ 6,487 - $ 7,011 $ 7,746 $ 7,861 $ 7,913 Accrued spent nuclear fuel disposal fee and related interest . , ,, S 657 $ 624 5 590 $ 567 5 549

. Capital lease obligatons . . ~$ 477 $ 376 $ 433 $ 323 $ 347 Other long-term obligations . , S 1,989 $ 1,826 $ 1,754 $ 1,718 $ 666

- (1) includes an extraordinary loss related to the early redemption of long-term debt of $20 million or $0.09 per common share.

(2) includes the cumulative effect of change in accounting for income taxes of $10 million or $0.05 per common share, i

l Price Range

• and Cash Dividends Paid Per Share of Common Stock 1996 (by quarters) 1995 (by quarters)

Fourth Third Second First Fourth Third Second First Pnce range:

High . 28W 28 % 29 35 % 33 % 30k 27% 26 %

Low. 24 % 22% 26 27 30 % 26 % 23 % '23%

Cash dividends paid . 40 40c 40c 40e 40g 40c 40c 40e

' As reported as NYSE Composite Transactions.

Unicom's common stock is traded on the New York, Chicago and Pacific stock exchanges, with the ticker symbol UCM. -r At December 31,1996, there werre approximately 161,000 holders of record of Unicom's common stock.

1996 Consolidated Revenues and Sales Operating increase / Kilowatthour increase /

Flevenues (Decrease) Sales (Decrease) increase (Thousands) Over 1995 (Millions) Over 1995 Customers Over 1995 Residential . $2,541,873 (3 0)% 22.310 (4.3)% 3.102.101 0.7% (

Small commercial and industrial 2.113,71f 1.9 % 25.131 (0.7)% 289,803 0.3%

Large commercial and industrial . 1,445,70J 1.4 % 23.896 05% 1,550 0.7%

Public authorities . 503.004 3.3 % 7,336 25% 12,142 0.9%

Electric railroads . 29.651 10 3 % 424 8.7 % 2 -

Ultimate consumers . $6,633,952 -

79.097 (1.1)% 3,405.598 0.7%

Sales for resale . 235,041 12,178 44 Other revenues . 68,031 - -

Total , $6.927.024 0.4 % 91,275 '/1.1)% 3.405.642 0.7%

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF l FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in the Electric Utility industry Unicom and its predominant business, electric energy generation, transmission and distribution,-

are in a period of fundamental change in the manner in which customers obtain, and energy suppliers provide, energy services. These changes are attributable to changes in technology, the relaxation of regub ' ,y barriers to utilities' respective service territories as well as to efforts to change the manner in 1 j

which electric utilities are regulated. Federal law and regulations have been amended to provide for

, open transmission system access, and various states are considering, or have adopted, new regulatory structures to allow access by some or all customers to energy suppliers in addition to the local utility.

Comed and other energy suppliers, energy customers and other interested parties have been active participants in the discussions related to the economic and technical issues associated with reform. As a result of these efforts, legislation was introduced in Illinois during January 1997 which is intended to provide both electric service providers and their customers with an orderly transition to a less regulated market for electric service. Under the legislative proposal, utilities would be granted a period in which to offer direct access experiments that would allow them and customers to gain experience with the effects of such access, with a ;equirement to pmvide such access starting in f i

2000. Such a requirement would be phased-in to customers over several years, starting with larger load customers. The legislation would provide utilities with an opportunity to recover costs, which l might not otherwise be recoverable, in charges for electric service in a less regulated market through, l 1

among other things, cost savings and a transition charge for customers who use attemate suppliers of electric power and energy. The legislation would provide for a leveling of certain regulatory oversight and tax provisions among electric service providers in Illinois and would also allow certain restructurings of utility operations in order to facilitate their response to a competitive environment.  ;

The legislation would also provide for annual base rate decreases of 1.5 percent, starting in 2000 and continuing through 2004. Comed supports the proposed legislation and believes there is support ,

among a number of constituencies for its provisions. Other legislative proposals have also been l '

introduced for consideration, which contain different provisions with respect to timing and cost tecovery. The Governor of Illinois has formed a three-person advisory comrriittee to advise with  ;

respect to electric utility deregulation issues. No assurance can be given as to when any such legislation may be adopted or in what form it may be adopted.

In respcqse to changes in the industry, Comed has implemented certain customer initiatives designed to improve and strengthen customer relationships and is undertaking an evaluation of its .

operations and assets, particularly generating assets, with a view toward positioning itself for market and industry changes. As discussed below, Comed's actions to date have included a five-year base rate cap, efforts to control expenditure growth through personnel reductions, operational efficiencies and sales of generating plants. Although Comed's operating results and financial condition have historically been affected by various rate proceedings, Comed expects that these industry changes, and Comed's activities anticipating or responding to them, will directly impact its operating results j and financial condition over the next several years.

Electric Utility industry. The electric utility industry has historically consisted of vertically integrated companies which combine generation, transmission and distribution assets; serving customers within relatively defined service territories; and operating under extensive regulation with respect to rates, operatior4s and other matters. Utilities operated under a regulatory compact with the state, with a statutory obligation to serve all of the electricity needs within their service territory in a nondiscriminatory manner. Historically investment and operating decisions have been made based upon the utilities' respective assessment of those current and projected needs of its customers. In i

view of this obligation, regulation has focused on investment and operating costs, and rates have been based on a recovery o'some or all of such prudently incurred costs plus a retum on invested l capital. Such rate regulation, and the abil.ty of utilities to recover investment and other costs through ,

i rates, has provided the basis for recording certain costs as regulatory assets. These assets represent B-4 I

- - -- - -- -- .- . - = - - - - --

t costs which are allocated over future periods reflecting related regulatory treatment..rather than expensed in the current period.

As noted previously, the United States electric utility industry is in a process of fundamental [

a change as state legislators and regulators re-examine their approach to regulation and its objectives and consider a transition to > ompetitive or market-based system of pricing for electric energy.

Although the process and approach have varied from state to state in terms of the elements and timing of implementation, it is evident that the question is no longer if, but rather how and when there l will be a more competitive electricity market. The Federal Energy Policy Act of 1992, among other t things, empowered FERC to introduce a greater level of competition into the wholesale marketplace ,

for efectric energy, in April 1996, the FERC Order was issued requiring utilities to file open access tariffs with regard to their transmission systems. These tariffs set fo1h the terms, including prices, ,

under which other parties and the utility's wholesale marketing function may use the utility's transmission system. Comed has filed an open access tariff with the FERC. The FERC Order requires the separation of the transmission operations and wholesale marketing functions so as to ensure that I unaffiliated third parties have access to the same information as to system availability and other requirements. The FERC Order further requires utilities to operate an electronic bulletin board to make transmission price and access data available to all potential users. A key feature of the FERC Order

is that it contemplates full recovery of a utility's costs " stranded" by competition. These costs are  ;

" stranded" or "strandable" to the extent market-based rates would be insufficient to allow for their full recovery. To recover stranded costs, the utility must show that it had a reasonable expectation that it would continue to serve the customer in question under its regulatory compact.  ;

An important element of reform proposals under consideration is the ability of other suppliers to provide energy in competition with a utility within its service territory. This element generally has included consideration of some future form of " retail wheeling," whereby a utility's transmission and distribution system is made available to other energy suppliers for delivery of their services to retail ,

customers, in addition, some governmental entities, such as cities, may elect to "municipalize" a  !

utility's distribution facilities through condemnation proceedings. Such municipalities would then be able to purchase electric power on a wholesale basis and resell it to customers over the newly acquired facilities. The FERC Order provides for the recovery of a utility's investment stranded by municipalization. While municipalization is possible under the present regulatory system, Comed is not required to grant attemative electric suppliers access to its distnbution system through any tyoe of "retai! wheeling."

Presumably, under such a modified regulatory structure, customers will base energy purchase decisions on a combination of factors, including price, reliability and service. In addition to the ,

potential effects on revenues and marketing and sales efforts, such changes can raise the question 6s to whether an affected utility's rates are based on cost-based regulation, allowing recovery of '

incurred costs, or are based on something else, i.e., the marketplace. Under generally accepted l accounting principles, the latter determination would require the write off of regulatory assets and liabikties and would require an examination as to the recoverability in revenues of other incurred r costs, with any portion determined to be unrecoverable being sutv to write off. Various approaches j have been proposed to deal with such strandable costs, from full .acovery, as provided in the FERC l Order, to no recovery, as proposed by at least some of the participants in virtually all legislative debates on regulatory reform proposals. For additional information, see " Regulatory Assets and 7 Liabikties"in Note 1 of Notes to Financial Statements.  ;

Retail wheeling and municipalization are significant issues for electric utility companies, including Comed, because of their potential to strand a utility's costs. Without the development of a more fully competitive marketplace, it is not possible to develop an estimate of strandable costs with any degree j of accuracy. Any calculation of potentially strandable costs requires that a set of anumptions be made, including the timing of open access (customer choice), the extent of open access allowed, 3 potential market prices over time, sales and load growth forecasts, operating performance over time, l allowed rates over time, cost structure over time, mitigation opportunities and strandable cost j

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recoveries. Th'o calculation of strandable c.osts is extremely sensitive to the ac.sumptions made, and the resulting estimates are potentially misleading if removed from the context in which they were ,

calculated. At this point in time, Comed does not subscribe to a certain set of assumptions or a particular estimate. The proposed legislation described above, which Comed supports; would provide utilities the opportunity to recover their stranded costs, if any. However, Comed believes the amount of its strandable costs could be material without allowance for recovery of costs and i

investments it incurred under its regulatory compact, including its duty to serve. Most reform proposals anticipating increased competition include some form of stranded cost recovery. Comed is taking steps, such as cost-control measures, improving generating station reliability and additional depreciation, to minimize its potential stranded investment. See Note 2 of Notes to Financial ,

Statements for additional information.

Comed. Comed is responding, and is undertaking a significant planning effort with respect to further responses, to the developments within the utility industry. During the past several years, such efforts have focused on cost reductions, including personnel reductions, efficiencies in purchasing and inventory management, and an incentive compensation system keyed to cost reduction and control. Notwithstanding these efforts, Comed's costs remain high in comparison to its neighboring utilities.

Comed is examining its assets, particularly generating assets, with a view toward rationalizing their investment and operating costs against their ability to contribute to the revenues of Comed under various market scenarios. Such an assessment involves the consideration of numerous factors, including revenue contribution, operating costs, impacts on Comed's service obligations, purchase I commitments and remaining assets, and the impact of various options. Such options include continued operation, indefinite suspension from operation, sale to a third party and retirement. If Comed retired a generating plant, particularly a nuclear plant, without regulatory or legislative provision for continued recovery of its investment, such retiremant could have a material impact on Comed's and Unicom's financial position and results of operations. ,

I On April 17,1996, Comed announced that it had finalized agreements to sell two of its coal-fired generating stations, representing approximately 1,600 megawatts of generating capacity Under the agreements, State Line and Kincaid stations would be sold for a total of $250 million, which approximates the book value of the stations. The net proceeds, after income tax effects, would be ,

approximately $200 million, which would be used to retire or redeem existing debt. Under the terms of the sales, Comed would enter into exclusive 15-year purchased power agreements for the output of the plants. The agreements are subject to regulatory approval, and proceedings have been initiated to obtain those approvals. Numerous parties have intervened in the proceedings, including various govemmental and consumer groups and Comed's principal union. The union has also filed a lawsuit in state court alleging that the labor provisions of the Kincaid agreement are violative of state

law and seeking to erijoin the ICC proceedings. Comed had previously filed an action in federal court seeking confirmation that the state law is preempted by federal labor law, and Comed believes that the union's allegations are without merit. These actions have now been consolidated and are pending in federal court. The State Line and Kincaid agreements give the purchasers the .right to terminate the agreements if a closing has not occurred prior to December 31,1996 for State Line and June 30, 1997 for Kincaid. Such closing has not occurred as of January 31,1997.

With respect to its transmission assets, Comed is participating with approximately 20 other electric utility companies in an effort to form an ISO for the midwest United States. Under the structure currently contemplated, the ISO would set standard transmission rates and facilitate compliance with the FERC Order. In addition, while individual utility companies would continue to own their transmission lines, the ISO would oversee regional planning to avoid transmission constraints.

t Creation of the ISO will be subject to further negotiations among the parties as well as federal and state regulatory approval.

Comed is also taking actions to strengthen its relationship with its customers. On December 11,  ;

i 1995, Comed instituted a five-year base rate cap for all of its customers. The base rate cap does not

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r affect Comed's fuel cost or nuclear decommissioning cost recovery provisions. See Note 2 of N,otes . i Tto Financial Statements for additional information about Comed's base rate cap and other initiatives intended to give customers more choice and control over the services they seek and the price Lthey pay.  ;

Liquidity and Capital Resources UTILITY OPERATIONS

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Construction Program. Comed and the Indiana' Company have. a construction program .for jhe' 3 l year 1997l which consists principally of improvements to their existing nuclear and other electric-production, transmission and distribution facilities. It does not include funds to add new generating

. capacity to Comed's system. The program, as currently approved by Comed, calls for electric plant and equipment expenditures of approximately $982 million (excluding nuclear fuel expenditures of .i '

approximately $322 million). It is estimated that such construction expenditures, with cost escalation computed at 3.5% annually, will be as follows: i 1997 (Millions .h' of Collars)

Producton ...,,.... , . .. . . '$420 I

. Transmission and Distribut:on. , , , . 421.

General .. . . , , ., , .. . 141 i Total . . . , , , .$982 j l

Such construction program includes the replacement of the steam generators at Comed's i Braidwood Unit 1 and Byron Unit 1 nuclear generating units expected to be placed in service prior to ,

year-end: 1998. The estimated replacement cost is approximately $4G0 million, including l approximately $80 million for the cost.of removal of the existing steam generators. Approximately ,

$130 million of this estimated cost is included in the construction expenditures shown above.  !

Approximately $140 million has been incurred through December 31,1996. In addition, Comed has i continued to monitor the degradation of the. steam generators at its Zion nuclear generating station.

• Recent studies indicate that the degrac'ation is continuing and that replacement may be required sooner than 2005. No amount has been included in Comed's construction budget for replacement of ,

these steam generators, since Comed has not decided whether or when to effect a replacement.

Based upon its experience with the replacement activities at Braidwood and Byron, and depending  ;

on the timing of any replacement at Zion, Comed believes such cost could be approximately $435 l million if a decision to reolace is made.

Comed's forecasts of peak load indicate a need for additional resources to meet demand, either through generating capacity, through equivalent purchased power or through the development of ..

additional demand-side management resources, in 1998 and each year thereafter. However, it [

believes that adequate resources, including cost-effective demand-side management resources, non-  !

utility generation resources and other utility power purchases, could be obtained in sufficiem '

i quantities to meet such forecasted needs. If Comed instead were to build additional capacity to meet its needs, it would need to make additional capital expenditures during 1997. ,

Purchase commitments for Comed and the Indiana Company, principally related to construction  ;

and nuclear fuel, approximated $1,018 million at December 31,1996. In addition, Comed's estimated t commitments for the purchase of coal are indicated in the following table.

Contract Period Commitment (1) h Black Butte Coal Co, . .. , , . . , , 1997 2000 $807 i Decker Coal Co . . . 1997-2014 $582 i Big Horn Coal Co. . . 1998 $ 22 l

(1) In mdlions of dollars, excluding transportation costs. No estimat.s of fLture cost escalation has been made.  !

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1 For, additional information conceming these coal contracts and Comed's fuel supply, see "Results of I Operations" below and Notes 1 and 21 of Notes to Financial Statements.

The foregoing paragraphs in this " Construction Program" section include forward-looking statements with respect to the future levels of capital expenditures which are necessarily based upon assumptions regarding estimated costs and availability of materials and services as well as

- contingencies. Unforeseen events or conditions may require changes in the scope of work with consequent changes in the timing and level of the projected expenditures. In addition, changes in laws and regulations, or their interpretation and enforcement, can affect the scope of certain projects,

- the manner in which they are undertaken and the costs associated therewith. While Comed gives consideration to such factors in developing its budgets, such consideration cannot predict the course of future events or anticipate the interaction of multiple factors beyond management's control upon project timing and cost. Consequently, actual results could differ materially from those described.

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Capital Resources. Comed forecasts that intemal sources will provide more than three-fourths of the funds required for Comed's construction prograrn and other capital requiroments, including nuclear fuel expenditures, contributions to nuclear decommissioning funds, sinkiri, - Jnd obligations ed refinancing of scheduled debt maturities. See Notes 7 and 9 of Notes to Finano,al Statements for the summaries of the annual sinking fund requirements and scheduled maturities for Comed preference stock and long-term debt, respectively. The forecast assumes the rate levels reflected in the Rate Order remain in effect. See " Regulation," subcaption " Rate Matters" below for additional information.

The type and amount of extemal financing will depend on financial market conditions and the needs and capital structure of Comed at the time of such financing. A portion of Comed's financing is expected to be provided through the continued sale and leaseback of nuclear fuel through Comed s existing nuclear fuel lease facility. See Note 18 of Notes to Financial Statements for more information conceming Comed's nuclear fuel lease facility. Comed has approximately $906 million of unused bank lines of credit at December 31,1996 which may be borrowed at various interest rates and which may be secured or unsecured. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread which is dependant upon the credit ratings of Comed's outstanding first mortgage bonds or on a prime interest rate. Collateral, it required for the borrowings, would consist of first mortgage bonds issued under and in accordance with the provisions of Comed's mortgage. See Note 10 of Notes to Financial Statements for information concerning lines of credit. See the Statements of Consolidated Cash Flows for the construction expendstures and cash flow from operating activities for the years 1996,1995 and 1994.

During 1996, Comed sold and leased back approximately $317 million of nuclear fuel through its existing nuclear fuel lease facility. In addition, Comed issued $199 million of pollution control obligations, the proceeds of which were used to redeem an equivalent amount of other pollution control obligations. In January 1997 Comed issued $150 million principal amount of 7.375% Notes due January 15,2004, $150 million principal amount of 7.625% Notes due January 15,2007 and $150 million principal amount of Company-obligated preferred securities of subsidiary trust, the proceeds of which will be used to discharge current maturities of long-term debt and to redeem on March 11, 1997 $200 million principal amount of First Mortgage 9W% Bonds, Series 57, due May 1,2016. See the Statements of Consolidated Cash Flows and Note 4 of Notes to Financial Statements for information regarding common stock activity.

1 As of January 31,1997, Comed has an effective " shelf" registration statement with the SEC for the future sale of up to an additional $505 million of debt securities and cumulative preference stock for general corporate purposes of Comed, including the discharge or refund of other outstanding securities.

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Comed's securities and other securities guaranteed by Comed are currently rated by three principal securities rating agencies as follows:

Standard Duff &

Moody's & Poor's Phelps First mortgage and secured pollution control bonds , Baa2 BBB BBB Publicly-held debentures and unsecured poHution control obhgations . Baa3 BBB- BBB-Convertible preferred stock . baa3 BBB- BBB-Preference stock baa3 BBB- BBB-Comed obhgated mandatority redeemable preferred securities of the Trust. . ,

baa3 BBB- BBB- ~

Commercial paper . P-2 A-2 D-2 In January 1997, Moody's changed the rating outlook on Comed's securities from " stable" to

" negative" and Duff & Phelps added Comed's securities to " Rating Watch-Down." As of January 1997. Standard & Poor's rating outlook . Comed remained " stable."

Capita / Structure. Comed's ratio of long-term debt to total capitalization has decreased to 46.1%

at December 31,1996 from 49.3% at December 31,1995. This decrease is retaied primarily to the retirement of long-term debt, the increase in current maturities of long-terrr' debt reclassified to current liabilities and the increase in retained eamings.

uNREGutATED OPERATIONS Unicom Enterprises is engaged, through its subsidiaries, in energy service activities which are not subject to utility regulation by state or federal agencies. Its principal subsidiary, Unicom Thermal, currently provides district cooling services to office and other buildings in the city of Chicago under a non-exclusive use agreement. District cooling involves, in essence, the production of chilled water at a central location (s) and its circulation to customers' buildings through a closed circuit of supply and return piping. Such water is circulated through customers' premises primarily for air conditioning. This process is used in lieu of self-generated cooling. As a result of the Clean Air Amendments, the manufacture of CFCs has been curtailed, commencing in January 1996, thereby creating an excellent marketing opportunity for non-CFC based systems, such as Unicom Thermal's district cooling.

Unicom Thermal is involved in or considering district cooling projects in other cities, including a project in Boston with Boston Edison Technologies Group, Inc., a project in Windsor, Ontario, Canada with Ontario Hydro and a project in Houston, Texas with Houston Light and Power Energy Services Company.

Construction Program. Unicom has approved capital expenditures for 1997 of approximately $56 million for Unicom Thermal, primarily representing the construction costs of its district cooling facilities in Chicago and its share of construction costs in Boston and Windsor. Unicom Thermal's first two district cooling facilities in Chicago began serving customers in May 1995 and July 1996, respectively. Its third district cooling facility in Chicago is scheduled to be completed in 1997. As of '

December 31, 1996, Unicom Thermal's purchase commitments, principally related to construction, were approximately $42 million.

Capital Resources. Unicom expects to obtain funds to invest in its unregulated subsidiaries principally from dividends received on its Comed common stock and from bank borrowings. The availability of Comed's dividends to Unicom is dependent on Comed's financial performance and cash position. Other forms of financing by Comed to Unicom or the unregulated subsidiaries of Unicom, such as loans or additional equity investments, none of which is expected, would be subject to prior approval by the ICC.

Unicom Enterprises has a $200 million credit facility which will expire in 1999, of which $105 million was unused as of December 31,1996cThe credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including Unicom Thermal, and for B-9

a general corpbrate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom's and Unicom Enterprises' operations. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime interest rate or a floating rate bank index plus a spread which varies with the credit rating of Comed's outstanding first mortgage bonds, See Note 10 of Notes to Financial Statements for additional information regarding certain covenants _with respect to Unicom's and Unicom Enterprises' operations.

Regulation i Comed and the Indiana Company are subject to state and federal regulation in the conduct of 'l' their respective businesses, including the operations of Cotter, Such regulation includes rates, securities issuance, nuclear operations, environmental and other matters. Particularly in the cases of  :

nuclear operations and environmental matters, such regulation can and does affect operational and capital expenditures.

Rate Matters. On January 9,1995, the ICC issued its Rate Order in the proceedings relating to Comed's February 1994 rate increase request. The Rate Order provided, among other things, for (i) 1 at. increase in Comed's total revenues of approximately $301.8 million (excluding add-on revenue taxes) or 5.2%, on an annual basis, including a $303.2 million increase in base rates, (ii) the collection of municipal franchise costs on an individual municipality basis through a rider, and (iii) the use of a rider, with annual review proceedings, to pass on to ratepayers increases or decreases in estimated costs associated with the decommissioning of Comed's nuclear generating units. See " Depreciation and Decommissioning" in Note 1 of Notes to Financial Statements for additional information related to the level of decommissioning cost collections. The ICC also determined that the Units were 100%

"used and useful" and that the previously determined reasonable costs of such Units, as depreciated, should be included in full in Comed's rate base. The rates provided in the Rate Order became effective on January 14, 1995; however, they are being collected subject to refund as a result of subsequent judicial action. As of December 31,1996, electric operating revenues of approximately

$651 million (excluding revenue taxes) are subject to refund. Intervenors and Comed have filed appeals of the Rate Order with the lilinois Appellate Court, and oral argument was heard on January 28,1997. See Note 2 of Notes to Financial Staternents for additional information.

Nuclear Matters. Nuclear operations have been, and remain, an important focus of Comed-given the impact of such operations on overall operating and maintenance expenditures and the abihty of nuclear power plants to produce electric energy at a relatively low marginal cost. Comed operates a large number of nuclear plants, ranging from the older Zion, Dresden and Quad Cities stations to the more recently completed LaSalle, Byron and Braidwood stations, and is intent upon safe, reliable and efficient operation. These plants were constructed over a period of time in which technology, construction procedures and regulatory initiatives and oversight have evolved, with the result that older plants generally require greater attention and resources to meet regulatory

. requirements and expectations as well as to maintain operational reliability.

On January 29,1997, the NRC determined that Comed's Dresden nuclear generating station should remain on the NRC's list of plants to be monitored closely, where it has been since being placed on that list in 1992. The NRC also determined that Comed's LaSalle and Zion nuclear generating stations should be added to that list. Although in each case the NRC recognized that Comed had undertaken significant management changes and had accomplished a number of performance improvements, it expressed concern with specific issues at each station and expressed a general concern with the sustainability of improvements as the basis for its determination. The determination does not prevent Comed from operating the generating units; however, it does mean thht fM NRC will devote additional resources to monitoring Comed's operating performance and that Comed will need to work to demonstrate to the NRC the sustainability of improvements which it believes it has undertaken and is continuing to implement.

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The NRC also took the unusual additional step of requiring Comed to submit inforrhation to allow the NRC to determine what actions, if any, should be taken to assure that Comed can safely operate

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its six nuclear generating stations while sustaining performance impro ament at each site. The request also requires Comed to submit information regarding the criteria that it has established, or plans to establish, to measure performance and to explain Comed's proposed actions if the criteria are not met. The request states the NRC staff's concems with the " cyclical safety performance of '

Comed nuclear stations," noting the presence on the list of plants to be monitored closely of Dresden, LaSalle and Zion stations at various times during the past ten years. It also noted concerns regarding

" Corned's ability to establish lasting and effective programs that result in sustained. performance improvement." The request- does acknowledge the management and organizational changes implemented by Comed, including the " additional focus placed on management and leadership, accountability, the problem identification and corrective action processes, material condition improvement, work control, and radiation protection." It also acknowledges improvements seen at Dresden and Quad Cities stations; but indicated at the same time performance declines were observed at both LaSalle and Zion stations. The operational problems identified by the NRC are consistent with weaknesses identified in recent station self-assessments initiated by Comed, and management has undertaken to develop and implement programs designed to address these issues.

Consequently, Comed's management believes that it can provide sufficient information to the NRC demonstrating Comed's ability to operate its nuclear generating stations while sustaining performance improvements.

Comed has devoted, and intends to continue to devote. significant resources to the management and operations of its nuclear generating stations. Over the past several years, it has increased and reinforced station management with managers drawn from other utilities having experience with similar operational and performance issues. It has also sought to identify, anticipate and address operating and performance issues in a safe, cost-effective manner while seeking to improve the availability ard capaciy factors of its nuclear generating units. Such activities have included improvements in operating and personnel procedures and repair and replacement of equipment and can result in longer unit outages, in this regard, Comed's management decided to continue the present unit outages at its LaSalle station until the identified performance issues have been appropriately addressed. Comed presently expects such outages to extend into the summer of 1997.

Generating station availability and performance during a year may be issues in fuel reconciliation proceedings in assessing the prudence of fuel and power purchases during such year. Final ICC orders have been issued 'in fuel reconciliation proceedings for years prior to 1994. In 1996, an intervenor filed testimony in the fuel reconciliation proceeding for 1994 seeking a . refund of approximately $90 million relating to nuclear station performance.

Comed estimates that it will expend approximately $15.5 billion, excluding any contingency allowance, for decommissioning costs primarily during the period from 2007 through 2032. Such costs, which are estimated to aggregate $3.9 billion in current-year (1997) dollars, are expected to be funded by external decommissioning trusts which Comed established in compliance with Illinois -

law and into whici Comed has been making annual contributions. Future decommissioning cost estimates may be sanificantly affected by the adoption of or changes to NRC regulations as well as changes in the asNmptions used in making such estimates, including changes in technology, available altematives for the disposal of nuclear waste, and inflation. See Note 1 of Notes to Financial Statements under " Depreciation and Decommissioning" for additional information regarding decommissioning costs.

Environmental Matters. Comed is involved in administrative and legal proceedings concerning air quality, water quality and other matters. The outcome of these proceedings may require increases in future construction expenditures and operating expenses and changes in operating procedures. See Note 21 of Notes to Financial Statements for additional information regarding certain ef'ects of CIRCLA on Comed.

B-11

Results of Operations Unicom's earnings per common share were $3.09 in 1996, $2.98 in 1995 and $1.66 in 1994.

Substantially all of the results of operations for Unicom are the results of operations for Comed. The results of Unicom's unregulated subsidiaries are not material to the results of Unicom and subsidiary companies as a whole. As such, the following section discusses the results of operations for Comed alone.

Net /ncome. The 1996 results reflect, among other factors, a 1% decrease in overall operation and maintenance expenses as compared to 1995 and the positive effects of an income tax refund related to prior years (net income effect of $26 million or $0.12 per common share) and a reduction in real estate taxes (net income effect of $28 million or $0.13 per common share). Approximately half of the reduction in real estate taxes is related to the year 1995. The real estate tax reduction results primarily from ongoing challenges by Comed of the methodology used by local taxing authorities to assess the value of Comed's nuclear generating stations. The 1996 results also reflect a 9% reduction in the total of interest expense on debt and dividend requirements on preferred and preference stocks compared to 1995, largely due to the early retirement of debt at the end of 1995. In September 1996, the ICC approved Comed's request to increase depreciation charges on its nuclear generating

]

units by $30 million for the year 1996, reducing net income by $20 million or $0.09 per common share. l The 1995 results reflect higher revenues, primarily as a result of higher kilowatthour sales, and the higher rate levels, which became effective in January 1995 under the Rate Order. The higher kilowatthour sales reflect the unusually hot summer weather in 1995. The 1995 results were also affected by higher operation and maintenance expenses, which reflect an after-tax charge of $59 l million or $0.27 per common share for a voluntary employee separation offer to certain Comed employees. Comed also recorded an after-tax charge of $20 million or $0.09 per common share related to the early redemption of $645 million of long-term debt. I i

The 1994 results reflect higher revenues as a result of the favorable comparison to 1993 in which I the effects of the Rate Matters Settlement and the Fuel Matters Settlement were recorded. The 1994 results also reflect Comed's increased kilowatthour sales to ultimate consumers as the result of an improving economy and warmer weather. The effects of these items were partially offset by higher operation and maintenance expenses, which include an after-tax charge of $20 million or $0.09 per common share for additional pension costs related to an early retirement offer made to certain employees during 1994. Comed also recorded a reduction in the carrying value of its investments in uranium-related properties in 1994, which reduced net income by $34 million or $0.16 per common share.

Operating Revenues. Comed's electric operating revenues reflect revenues from sales to ultimate consumers (including residential, commercial and industrial customers within its service territory),

revenues from sales for resale (i.e., sales to wholesale customers, principally other electric utilities),

and revenues from collections under its fuel adjustment clause (which is intended to recover Comed's fuel cost for generating electric energy and the energy portion of purchased power cost in relation to the amount included in Comed's base rates). Operating revenues are affected by kilowatthour sales, rates and fuel adjustment clause recoveries. Kilowatthour sales, in tum, are affected by weather, the level of economic activity within Comed's service area, and off-system or wholesale sales to other utilities. Off system sales opportunities are affected by a number of factors, including nuclear generating availability and performance.

During 1996, electric operating revenues increased $25 million principany reflecting increased sales for resale and increased energy cost recoveries under Comed's fuel adjustment clause, although kilowatthour sales to ultimate consumers were down 1.1% from the prior year due to the cooler summer weather compared to the exceptionally hot summer in 1995. Operating revenues B-12

increased $632 million in 1995, as compared to 1994, primarily due to an increase.of 4.6% in kilowatthour sales to ultimate consumers attributable to the hot summer weather as well as a rate increase that became effective in January 1995. Operating revenues increased $1,017 million in 1994, as compared to 1993, principally reflecting the favorable comparkon to the prior year in which the refunds associated with the Rate Matters Settlement and the Fuel Matters Settlement were deducted from revenues, but also reflecting a 2.8% increase in kilowatthour sales to ultimate consumers as a result of warmer summer weather, colder winter weather and improved economic activity within Comed's service territory. The 1994 revenues were also affected by a decline in the amount of energy costs recovered under the fuel adjustment clause. Kilowatthour sales including sales for resale decreased 0.1% in 1996, increased 7.3% in 1995 and decreased 3.0% in 1994.

Fuel Costs. Changes in fuel expense for 1996,1995 and 1994 primarily resulted from changes in the average cost of fuel consumed, changes in the mix of fuel sources of electric energy generated and changes in net generation of electric energy. Fuel mix is determined primarily by system load, the costs of fuel consumed and the availabikty of nuclear generating units. The cost of fuel consumed, net generation of electric energy and fuel sources of kilowatthour generation were as follows:

1996 1995 1994 Cost of fuel consurned (por milhon Btu)

Nuclear . $0.53 $0 52 $0 53 Coal . s2.41 $2.43 $2.31  !

Oil . $3 41 $3 06 $2.89 Natural gas . $2.75 $185 $2.27 Avorage all fuels , $1.17 $1.o5 $1.08 >

Not generahon of electnc energy (rnilhons of kilowatthours) . 93,048 96.608 90.243 Fuel sources of kilowatthour generakon:

Nuclear . 67% 73 % 71 %

Coal. 30 24 25 1

Oil . 1 -

Natural gas . 2 3 3 100 % 100 % 100 %

The uecrease in nuclear generation as a percentage of total generation for 1996 compared to the prior years is primarily due to scneduled and non-scheduled outages at certain of Comed's nuclear generating stations.

Under the Energy Policy Act of 1992, investor-owned electric utilities that have purchased enrichment services from the DOE are being assessed amounts to fund a portion of the cost for the decontamination and decommissioning of uranium enrichment facilities owned and previously operated by the DOE. Comed's portion of such assessments is estimated to be approximately $15 million per year (to be adjusted annually for inflation) to 2007. The Act provides that such assessments are to be treated as a cost of fuel. See Note 1 of Notes to Financial Statements under

" Deferred Unrecovered Energy Costs" for information related to the accounting for such costs. .

Fuel Supply. Compared to other utilities, Comed has relatively low average fuel costs as a result of its reliance predominantly on lower cost nuclear generation. Comed's coal costs, however, are high j compared to those of other utilities. Comed's western coal contracts and its rail contracts for delivery of the western coal provide for the purchase of certain coal at prices substantially above currently prevailing market prices, and Comed has significant purchase commitments under its contracts. In addition, as of December 31,1996, Comed had unrecovered fuel costs in the form of coal reserves of approximately $364 million. In prior years, Comed's commitments for the purchase of coal i exceeded its requirements. Rather than take all the coal it was required to take, Comed agreed to I purchase the coal in place in the form of coal reserves. For additional information concerning Comed's coal purchase commitments, fuel reconciliation proceedirve and coal reserves, see

" Liquidity and Capital Resources" above and Notes 1 and 21 of Notes L Financial Statements. I B-13 i l

4 Purchased Power. Amounts of purchased power are primarily affected by system load, the availability of Comed and the Indiana Company's generating units and the availability and cost of power from other utilities.

The number and average cost of kilowatthours purchased were as follows:

1996 1995 1994 Kilowatthours (millions) 6.129 2.475 2,071 Cost per kilowatthour . 2.37g 2.60c 2.86c Deferred Under or Overrecovered Energy Costs-Net. Operating expenses for the years 1996, 1995 and 1994 include the net change in under or overrecovered allowable energy costs under Comed's fuel adjustment clause. See " Fuel Costs" and " Fuel Supply" above and Note 1 of Notes to Financial Statements under "Deferreo '.irecovered Energy Costs."

Operation and Maintenance Expenses. Operation and maintenance expenses include the expenses associated with operating and maintaining Comed's generation, transmission and distribution assets as well as administrative overhead and support. Given the variety of expense categories covered, there are a number of factors which affect the level of such expenses within any given year. Two major components of such expenses, however, are the costs associated with operating and maintaining Comed's fossil and nuclear generating facilities. Generating station expenses are affected by the cost of materials, regulatory requirements and expectations, the age of facilities as well as cost control efforts.

During the three years presented in the financial statements, the aggregate level of operation and maintenance expenses decreased 1% in 1996 and increased 4% during 1995 and 2% during 1994.

All three years include increases in the level of generating station expenses, as discussed below. The year to year variations reflect, in substantial part, the impact in 1995 of an early separation program offered to Comed's employees, which resulted in a $97 million charge related to the offered incentives. Additional factors in each year also affected the level of operation and maintenance expenses.

Operation and maintenance expenses associated with generating stations have increased during the three year period as a result of activities associated with the repair, replacement and improvement of generating facility equipment. During 1996,1995 and 1994, operation and maintenance expenses associated with fossil generating stations increased $4 million, $3 million and $4 million, respectively.

In the same years, operation and maintenance expenses associated with nuclear generating stations increased $88 million, $32 million and $9 million, respectively. During 1994, the increasas were attributable to scheduled maintenance and unplanned equipment repairs. In 1995, Comed increased the number and scope of maintenance activities associated with generating stations. Such efforts are the result of station performance evaluations performed to identify the sources and causes of unplanned equipment repairs. The goal of such efforts is to design and implement cost effective repairs and improvements to improve station availability. The efforts begun in 1995 continued into 1996 and are expected to continue through 1998.

The increase in operation and maintenance expenses associated with nuclear generating l stations has been driven by Comed's objective to improve stahon availability as well as to meet  !

regulatory requirements and expectations. Comed is actively embarked upon a program to improve l the quality of nuclear operations, including safety and efficiency, which is also expected to achieve a I longer term goal of improvod availability and to be positioned to take advantage of opportunities in i the wholesale market for revenue generation. During the three years presented in the financial statements, Comed has increased and reinforced station management with managers drawn from j other utilities having experience with similar operating issues. It has also sought to identify, anticipate B-14

and address nuclear station operation and performance issues in a safe, cost-effective manne'r while seeking to improve the availability and capacity factors of its nuclear generating units. Such activities have included improvements in operating and personnel procedures and repair and replacement of equipment, and can result in longer unit outages. Such activities have involved increased maintenance and repair expenses in recent years. Comed expects 1997 overall operation and maintenance expenses to increase by approximately $150 million over 1996 expenses. Approximately

$100 million of this increase is related to nuclear operations and is intended to address previously identified operational issues (including issues identified by the NRC in connection with its determination regarding the plants to be monitored closely) and to achieve a longer term benefit of improved capacity factors. Comed expects this increased level of expenses to continue through -

}

1998.

Operation and maintenance expenses associated with transmission and distribution facilities increased $11 million in 1996 and decreased $3 million and $18 million in 1995 and 199J, respectively. The 1996 increase reflects higher maintenance expenses. The decreases in 1995 anc 1994 reflect cost control efforts. Costs of customer-related activities, including customer assistance, energy sales services and uncollectible accounts, increased $17 million and $10 million in 1996 and 1995, respectively. )

Operation and maintenance expenses also include compensation and benefits expenses. During the period from 1995 to 1996, Comed undertook to reduce the size of its workforce by offering L

incentives for employees to leave voluntarily. Such incentives included both current payments and earlier eligibility for post-retirement health care benefits, and resulted in 1995 provisions of $72 million 1 for the payments and $25 million for the benefits incentives and 1996 provisions of $8 million for payments and $4 rnillion for benefits incentives Comed also offered an early retirement program during 1994, which increased pension expense by approximately $34 million in that year. During 1995 and 1996, charges related to post-retirement health care benefits (after excluding the effects of the l separation program) decreased $40 million and $12 million, respectively, primarily as a result of a plan amendment effected in mid-1995 which required retired employee contributions to the plan for the first time. Favorable experience also allowed the use of lower health care cost trend rates, producing a lower charge for 1995 and 1996. During 1996, Comed also recorded a reduction of $12 million in the provision for pension costs in 1996 as compared to 1995. Finally, operation and maintenance expenses reflect $38 million, $65 million and $50 million for employee incentive compensation plan costs in 1996,1995 and 1994, respectively. The payments, which were made partly in cash and partly in shares of Unicom common stock, were made under Unicom's Long-Term incentive Plan as the result of the achievement during the indicated years of specified financial performance, cost containment and operating performance goals. Operation and maintenance expenses in 1996,1995 and 1994 include approximately $19 million, $16 million and $20 million, respectively, for wage increases The effects of inflation have also increased operation and maintenance expenses during the years and are also reflected in the increases and decreases discussed herein.

• Operation and maintenance expenses associated with certain administrative and general costs decrrased $11 million in 1995 and increased $12 million in 1994. The decrease in 1995 was due to a varie y of reasons including a decrease in expenses related to insurance, injuries and damages and the provision for vacation pay liability. The increase in 1994 is primarily due to increased provisions for injuries and damages and obsolete materials Depreciation. Depreciation expense increased in 1996,1995 and 1994 as a result of additions to plant in service and an increase in the nuclear depreciation rate for 1996. In September 1996, the ICC approved Comed's additional depreciation initiative for 1996, which increased depreciation expense by $30 million in 1996. Comed also continues to consider the possibility of additional B-15

. 'a

depreciation options. See " Depreciation and Decommissioning" in Note 1 of Notes to Financial Statements and Note 2 of Notes to Financial Statements for additional information.

I laterest on Debt. Changes in interest on long-term debt and notes payable for the years 1996, 1995 and 1994 were due to changes in average interest rates and in the amounts of long-term debt and notes payable outstanding. Changes in interest on Comed's long-term debt also reflected new isaes of debt, the retirement and early redemption of debt, and the retirement and redemption of issue:, #ch were refinanced at generally lower rates of interest. The average amounts of Comed's long-term debt and notes paysble outstanding and average interest rates thereon were as follows:

1996 1995 1994 Long-term debt outstanding Average amount (mdhons) . $6.644 $7,528 $7,934 Average interest rate . 7 67% 7.78 % 7 83%

Notes payable outstanding-Average amount (mdhons) 4 , $ 230 $ 51 5 9 Average interest rate . 5.79 % 6.40% 6.48%

Decommissioning. The staff of the SEC has questioned certain of the current accounting practices of the electric utility industry, including Comed, regarding the recogdtion, measurement and classification of decommissioning costs for nuclear generating stations in financial statements of electric utilities. In response to these questions, the FASB is reviewing the accounting for nuclear decommissioning costs and issued an exposure draft in February 1996 requesting written comment.

If currer,i electric utility industry accounting practices for such decommissioning costs are changed, annual provisions for decommissioning could increase and the estimated cost for decommissioning i could be recorded as a liability rather than as accumulated depreciation. Unicom does not believe that such changes, if required, would have an adverse effect on the results of operations due to Comed's ability to recover decommissioning costs through rates.

Investments in Uranium-Related Properties. In 1994, Comed recorded a reduction in the carrying value of its investments in uranium-related properties after completing a review of various alternatives and reassessing the long-term recoverability of those investments. The effects of the reduction reduced 1994 not income by $34 million or $0.16 per common share.

Other Items. The amounts of AFUDC reflect changes in the average levels of investment subject to AFUDC and changes in the average annual capitalization rates as discussed in Note 1 of Notes to Financial Statements. AFUDC does not contribute to the current cash flow of Unicom or Comed.

Comed's ratios of earnin0s to fixed charges for the years 1996,1995 and 1994 were 2.90,2.79 and 1.99, respectively. Comed's ratios of earnings to fixed charges and preferred and preference stock dividend requirements for the ynars 1996,1995 and 1994 were 2.48, 2.39 and 1.73, respectively.

Business corporations, in general, have been adversely affected by inflation because amounts retained after the payment of all costs have been inadequate to replace, at increased costs, the productive assets consumed. Electric utilities in particular have been especially affected as a resu!t j of their capital intensive nature and regulation which limits capital recovery and prescribes installation l or modification of facilities to comply with increasingly stringent safety and environmental 4 requirements. Because the regulatory process limits the amount of depreciation expense included in I Comed's revenue allowance to the original cost of utility plant investment, the resulting cash flows are inadequate to provide for replacement of that investment in future years or preserve the purchasing power of common equity capital previously invested.

B-16

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~ '

- REPORT'OF INDEPENDENT PUBLIC ACCOUNTANTS ,

+

4 i

To the Shareholders of Unicom Corporation:

We have audited the accompanying . consolidated balance ' sheets and statements of .

s

. consolidated capitalization of Unicom Corporation (an Illinois corporation) and subsidiary companies as of December 31,1996 and 1995, and the related statements of consolidated income,' retained.

earnings and cash flows for each of the three years in the period ended December 31,1996. These . l financial statements are the responsibility of the Company's management. Our responsibility is to 3 fj express an opinion on these financial statements based on our audits.

t We conducted our audits in accordance with generally accepted auditing ~ standards. Those -

standards require that we plan and perform the audit to obtain reasonable assurance about whether -

the financial statements are free of material misstatement. An audit includes examining, on a test .  ;

basis, evidence supporting the amounts and disclosures in the financial statements. An audit'also j includes assessing the accounting principles used and significant estimates made by management,' 7 as well as evaluating the overall financial statement presentation. We believe that our audits provide j a reasonable basis for our opinion. j in our opinion, the financial statements referred to above present fairly, in all material respects, .i the financial position of Unicom Corporation and subsidiary companies as of December 31,1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ,

ended December 31,1996, in conformity with generally accepted accounting principles.

l 4

ARTHUR ANDERsEN LLP l Chicago, Illinois January 31,1997 i

l

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i I

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t B-17 ,

(: .

b

• a tJNICOM CORPORATION AND SUBSIDIARY COMPANIES -

STATEMENTS OF CONSOLIDATED INCOME I

The following Statements of Consolidated Income for the years 1996,1995 and 1994 reflect the results of past operations and are not intended as any representation as to results of operations for any future period.

Future operations will necessarily be affected by various and diverse factors and developments, including changes in electric rates, population, business activity, competition, taxes, environmental control, energy use.

fuel supply, cost of labor, fuel, purchased power and other matters, the nature and effect of which cannot now bo determined.

1996 1995 1994 I

(Thousands Except Per Share Data)

OPERATING REVENUES , $6,937,024 $6,910,045 $6,277,521 OPERATING EXPENSES ANo TAXES:

Fuel . . . .. . .

$1,157,855 $1,087,109 $1,051,793 Purchased power .. . . ,

145,299 64,378 59,123 Operation and maintenance . . 2,161,847 2,175,651 2,094,655 Dmreciation .. . . 953,701 898,034 887,466 i Recovery of regulatory assets . .

15,272 15.272 15,453 ,

Taxes (except income) . . . 783,575 833,297 787,796 Income taxes . , ,. .. .

489,545 526,518 326,744 Investment tax credits deferred-net. . . (33,378) (28.710) (28,757)  !

$5,673.716 $5,571,549 $5,194,273 OPERATING INCOME ,

$1,263,308 $1,338.496 $1,083,248  :

OTHER INCOME AND (DEcuCTloNS):

Interest on long-term debt . , , , . . $ (515,370) $ (587,583) $ (621,225)

Interest on notes payable .. . , (13,308) (3,280) (557)

Allowance for funds used during construction-Borrowed funds . 19,426 11.137 18,912 Equity funds . . 20,776 13,129 22,628 Income taxes applicable to nonoperating activities . 7,812 5,085 27,074 Interest and other costs for 1993 Settlements . -

(61) (21,464)

Provision for dividends-Preferred and preference stocks of Comed . (64,424) (69,961) (64,927)

Comed-obligated mandatorily redeemable preferred securities of subsidiary trust . (16,960) (4,428) -

Miscellaneous-net . . . . (35,160) (43,001) (88,755)

$ (597,208) $ (678.963) $ (728.314) ,

Net income Before Extraordinary item . . $ 666,100 $ 659,533 $ 354,934 Extraordinary Loss Related to Early 9edemption of Long-Term Debt,  ;

Less Applicable income Taxes . -

(20.022) -

i

, Net income . . . . $ 666,100 $ 639,511 $ 354,934 Average Number of Common Shares Outstanding . . 215,500 214,692 214,031 i Earnings Per Common Share Before Extraordinary item . $ 3.09 $ 3.07 $ 1.66  :

Extraordinary Loss Related to Early Redemption of Long-Term Debt, j Less Applicable income Taxes . , ,.

(0.09) -

Earnings Per Common Share . .

g 3.09 $ 2.98 $ 1.66 Cash Dividends Declared Per Common Share. . b 1.60 $ 1.60 $ 1.60 The accompanying Notes to Financial Statements are an integral part of the above statements.

B-18

(

UNICOM CORPORATION AND SUBSIDIARY COMPANIES' -

CONSOLIDATED BALANCE SHEETS December 31 ASSETS 199s toes (Thousands of Dollars) .

UTiLrrY PLANT Plant and equipment, at original cost (includes construction work

$27,900,632 $27,052,778 . ;

in progress of $1,034 million and $1,105 million, respectively)

Less-Accumulated provision for depreciation ,. . .

11,473,991 10,565,093

$16,420,641 $16.487,685

• Nuclear fuel, at amortized cost . . . . . .. . .

805,623 734,667 ,

$17,226,264 $17,222,352 ,

i INVESTMENTS AND OTHER PROPERTY:

Nuclear decommissioning funds . ... .. ... .. .. $ 1,456,360. $ 1,237,527 Subsidiary companies . . . . . . 113,888 113,657 Other, at cost . .. . .. . .. . . 146,302 99,149

$ 1,716,550 $ 1.450.333 CURRENT ASSETS:

Cash . . .... ... . . . .... $ 8,727 $ 3,575 Temporary cash investments . . .. . . .. 51,821 47,801 Special deposits . .. . . . . ., 1,610 3,546 Receivables-Customers . .. .. . . . ... 568,155 579,848 Taxes . . .. .. . . , , .

- 32,988-Other .. . . .

109,835 83,795 l Provisions for uncollectible accounts ,. . .. (12.893) (11,828)

Coal and fuel oil, at average cost . ,

140,362 129,176 Materials and supplies, at average cost . .

324,485 333,539 Deferred unrecovered energy costs . . . 104.651 46,028 Deferred income taxes related to current assets and liabilities . 120,185 107,991 Prepayments and other . .. 35,872 45.178

$ 1,452,810 $ 1,451.637 DEFERRED CHARGES ANo OThER NONCURRENT Assets:

Regulatory assets . . .. . . $ 2,434,807 $ 2,467,386 Unrecovered energy costs . 444,009 588,152 Other . . . . . . 113,530 70,308

$ 2.992.346 $ 3,125.846

$23.387,970 $23.250,168 l l

The accompanying Notes to Financial Statoments are an integral part of the above statements.

B-19

j

, 4 i UNICOM CORPORATION AND SUBSIDIARY. COMPANIES .

CONSOLIDATED BALANCE SHEETS t

December 31 CAPITALIZATION AND LIABILITIES ,

teos 199c (Thousands of Dollars)

CAPITAUZATION (see accompanying statements): _ t Common stock equity . . .. .... .. . .. .. . ,, ... .$ 6,104,380 $ 5.769.637 ,

P.eferred and preference stocks of Comed- '

Without mandatory redemption requirements . , . . 507,342. 508,034 Subject to mandatory redemption requirements . . . . . . . . . 217,901 261,475 ]

I Comed-obligated mandatorily redeemable preferred securities of subddiary trust * ...... .. . . .. . . . . . . . . 200,000 200,000 Long-term debt . . . . . . .. . . . ... .. .. . . . .. 6.069.534 6,549,335

.$13.099,157 $13.288.481 CURRENT LIABluTIEs:

Notes payable- .

Commercial paper . . . .. . .. .. . . ... $ 121,000 $ 261,000 Bank loans .. ... ... . . .. . . . 7,750 7,150 Current portion of long-term debt, redeemable preference stock and capitalized lease obligations of subsidiary companies .. 745,665 434,563 Accounts payable ,, . . .. . .. 469,815 609,224  ;

Accrued interest ... . .. ... . . . . 168,750 171,523 Accrued taxes . . . , .. 171,104 215,388 Dividends payable . . ,, . . . . . . 101,850 102,497 Customer depos;ts. . . . . . . .. 51,585 44,520 i Other . .. . . . ... ... 98,567 93,841

$ 1,936.086 $ 1.939.706 I DEFERRED CREDITS AND OTHER NONCuRRENT LIABILITIES: j' Deferred income taxes . . . . . . $ 4,574,342 $ 4,507,349 Accumulated deferred investment tax credits 655.662 689,041 Accrued spent nuclear fuel disposal fee and related interest 657,449 624,191 Obligations under capital leases of subsidiary companies . 476,668 375.524 Regulatory liabilities . . . 668,301 601,002 Other. . .. .. . 1,320,305 1.224,874

$ 8.352,727 $ 8.021,981 COMM11MENTs AND CONTINGENT LIABILITIES (Note 21)

. $23,387,970 $23,250,168

• As described in Note 8 of Notes to Financial Statements, the sole asset of Comed Financing !, a subsidiary trust of Comed, is $206.2 million principal amount of Comed's 8.48% suboroinated deferrable interest notes due September 30,2035.

The accompanying Notes to Financial Statements are an integral part of the above statements.

B-20

~

UNICOM CORPORATION AND SUBSIDIARY COMPANIES-STATEMENTS OF CONSOLIDATED CAPITALIZATION December 31 1996 1995 (Thousands of Dollars)

COMMON STOCK EOunY:

Common stock, without par value-Outstanding-215,954,625 shares and 215,255,998 shares, respectively (excludes $4 million as of December 31,1996 held by trustee for Unicom Stock Bonus Deferral Plan) . . .

$ 4,929,909 $ 4,916,438 Preference stock expense of Comed . .. .. . . .. ... (3.526) (3,694)

Retained earnings . .. . ...... . ... 1,177,997 856,893

$ 6,104,380 $ 5,769,637 PREFERRED AND PREFERENCE STOCKS OF COMEo-WITHOur MANDATORY REDEMPTION REOulREMENTs:

Preference stock, cumulative, without par value-Outstanding-13,499,549 shares, ,..... . ... $ 504,957 $ 504,957

$1.425 convertible preferred stock, cumulative, without par value-Outstanding-75,003 shares and 96,753 shares, respectively . ......... .... . . .. . . . . 2,385 3,077 Prior preferred stock, cumulative, $100 par value per share-No shares outstanding . . ., ,

$ 507,342 $ 508,034 SUBJECT TO MANDATORY REDEMPTION REOulREMENTS:

Preference stock, cumulative, without par value-Outstanding-2,496,775 shares and 2,934,990 shares, respectively . . .. .. . .. $ 248,589 $ 292,163 Current redemption requirements for preference stock in-cluded in current liabilities . . . . (30,688) (30,688)

$ 217,901 $ 261,475

, COMEo-OBLIGATEo MANDATORILY REDEEMA8LE PREFERRED SECURITIES OF SueSIDIARY TRusn Outstanding-8,000,000. . $ 200,000 $ 200,000 LONo-TERM DEBT:

First mortgage bonds:

Maturing 1996 through 2001-5%% to 9%% $ 1,120,000 $ 1,270,000 Maturing 2002 through 2011-4.20% to 8%%. . 1,640,400 1,465,400 Maturing 2012 through 2021-5.85% to 974%. . 1,391,000 1,391,000 Maturing 2022 through 2023-7%% to 8%% 1,160,000 1,160,000 ,

$ 5,311,400 $ 5.286,400

• Sinking fund debentures. due 1999 through 2011--2%% to 7%% . . . ... .. . . .. . . .. . ... .

105,164 110,505 Pollution control obligations, due 2004 through 2014-4.10% to 6%%. ,,.... .. . , , .

142,200 317,200 -

Other long-term debt . . ...... ..... .. . ... . 1,100,833 1,126,318 Current maturities of long-term debt included in current liabilities (540,505) (235,992)

Unamortized net debt discount and premium (49,558) (55,096)

$ 6,069,534 $ 6,549,335

$13,099,157 $ 13,288,481 The accompanying Notes to Financial Statements are an integral part of the above statements.

B-21

4 UNICOM CORPORATION AND SUBSIDIARY COMPANIES STATEMENTS OF CONSOLIDATED RETAINED EARNINGS 1996 1995 1994 (Thousands of Dollars)

BALANCE AT BEGINNING OF YEAR . $ 856,893 $ 560,971 $549,152 Aco-Net incomo . . , , . . . . . . . 666,100 639.511 354,934

$1,522.993 $1,200,482 $904,086 DEDUCT-Cash dividends declars on common stock. , , , $ 344,892 $ 343,619 $342,561 Other capital stock transactions-net . 104 (30) 554

$ 344,996 $ 343,589 $343,115 BAUsNCE AT END OF YEAR . $1,177,997 $ 856,893 $560,971 l

The accompanying Notes to Financial Statements are an integral part of the above statements.

B-22

UNICOM CORPORATION' AND SUBSIDIARY COMPANIES

• STATEMENTS OF CONSOLIDATED CASH FLOWS 1996 1993 1994 (Thousands of Dollars) i Casa FEow FsoM OPERAnNo Activmts: ,

Net income . . ,

S 666,100 $ 639.511 $ 354,934 j Adjustments to reconcile net income to net cash provided by operating ]

activities: ,

990,779 929,365 ' '

Depreciation anci emortization . , , 949.413 Deferted income taxes and investment tax credits-net . 129,770 156,817 126,281 Ext <,,dinary loss related to early redemption of long-term debt - 33,158 .

Equity component of allowance for funds used during construction . (20.776) (13,129) (22,628)

' Provisions for revenue refunds and related interest . - - 37,548 Revenue refunds and related interest - 15,135 (1,221,650)

Recovery of regulatory assets , ,

15,272 15.272 15.453 Provisions /(payments) foi liability for early retirement and separatinn costs-not . . . . , (29,888) 60,713 33,580 Net effect on cat. flows of changes in:

Receivables . . , 69.706 (178,665) 114.215 Coal and fuel oil . (11,186) (20.304) 2.880  :

Materials and supphes . . , 9.053 51.073 18.102 Accounts payable excluding nuclear fuellease porvpal payments  !

and early retirement and separation costs-net 106,435 460.705 116.688 Accrued interest and taxes . , (47,057) (2.684) 70.408 Other changes in certain current assets and liabikties . 13,850 26.637 (55.843)

Other -net . 67,796 138,781 134.188

$ 1,959.854 $ 2.332,433 $ 653,521 I

CASH FEOw Fnou INVESTING Activities:

Construction expenditures $ (982.274) $ (927,327) $ (739,679)

Nuclear fuel expenditures . ,

(281,833) (289.118) (257,264)

Equity component of allowance for funds used dunng construction. 20,776 13.129 22.628 Contributions to nuclear decommissioning funds . (119,281) (132.653) (132.550)

Othor investments and special deposits . (1.052) (1.601) 622.264

$(1,363,664) $(1,337.570) $ (484.601)

CASH Flow f00M FINANCING AcTivmEs:

Issuance of secunties-Long-term debt . $ 251,902 $ 62,000 $ 546,289 Preferred securities of subsidiary trust - 200,000 -

Capital stock , 17,754 25.507 86,972 Retirement and redemption of secunties-Long-term debt . (433.084) (1,137,272) (703.930)

Capital stock . (44,513) (17.935) (23.643)

Deposits and secunties held for retirement and redemption of secunties -

106 3,191 Premium paid on early redemption of long-term debt -

(25.823) (4.564)

Cash dividends paid on common stock . (344,553) (343.375) (342.322)

Proceeds from sale / leaseback of nuclear fuel 316,617 193.215 306,649 Nuclear fuellease principal payments . (211,741) (237,645) (209,689) ,

increase (Decrease)in short term borrowings . (139,400) 261.000 1.200 l

$ (587.018) $(1,020,422) $ (339,847)

INCnEASE (DECREASF ) IN CASH ANo IEMPo8iAHY CASH INVESTMENTS . $ 9,172 $ (25.559) $ (170.927)

CASH ANo IEMPOnAfW CASH lNVESTMENTS AT OL-olNNINo or YEAR 51.376 76.935 247.862 CASH AND If MPoHArW CASH INVE STME NTS AT END OF YEAR . $ 60.548 $ 51,376 $ 76.935 The accompanyir,g Notes to Financial Statements are an integral part of the above statements.

B-23 1

l

. . t

. , UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Corporate Structuro and Basis of Presentation. Unicom was incorporated in January 1994 and ,

became the parent holding company of Comed and Unicom Enterprises in a corporate restructuring that became effective on September 1,1994. Comed, an electric utility, is the principal subsidiary of ',

Unicom. Unicom Enterprises is an unregulated subsidiary of Unicom and is engaged, through subsidiaries, in energy service activities. Unicom also has one other subsidiary that was formed to engage in unregulated activities.

4 The consolidated financial statements include the accounts of Unicom. Comed, the Indiana Company, Comed Financing I and Unicom's unregulated subsidiaries. All significant intercompany a transactions have been eliminated. Comed's investments in other subsidiary companies, which are not material in relation to Comed's financial position or results of operations, are accounted for in accordance with the equity method of accounting.

Use of Estimates. The preparation of financial statements in conformity with generally acceptod accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and habilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Regulation. Comed is subject to regulation as to accounting and ratemaking policies and l' practices by the ICC and FERC. Comed's accounting policies and the accompanying consolidated financial statements conform to generally accepted accounting principles applicable to rate-regulated enterprises and reflect the effects of the ratemaking process in accordance with SFAS No. 71, i Accounting for the Effects of Certain Types of Regulation. Such effects concern mainly the time at which rious items enter into the determination of net income in order to follow the principle of matching ;osts and revenues.

e I

B-24

UNICOM CORPORATION AND SUBSIDIARY COMPANIES ~,

NOTES TO FINANCIAL STATEMENTS-Continued Regulatory Assets and Liabilities. Regulatory assets are incurred costs which have been deferred and are amortized for ratemaking and accounting ptzposus. Regulatory liabilities represent amounts to be settled with customers through future rates. Regulatory assets and liabilities reflected on the .

Consolidated Balance Sheets at December 31,1996 and 1995 were as follows:

December 31 toes toes .

Regulatory assets-Deferred income taxes (1). , $1.649,037 $1,689,832 Deferred carrying charges (2) . 396,879 409,923 Nuclear decomrnissioning costs-Dresden Unit 1 (3) . , 174,621 138,058 Unamortized loss on reacquired debt (4) . . 148,380 160,440 Other . . 65.890 69,133 >

$2,434,807 $2.467,386 Regulatory liabilities:

Deferred income taxes (1). $ 668,301 $ 601.002 .

.= j (1) Recorded in compliance with sFAS No.109 1 (2) Recorded as authorized in the Romand Order The amortization period is over the remaining lives of the Units.

(3) Amortized over the remaining life of Dresden station. see " Depreciation and Decommissioning" below for additional -

I information.

(4) Amortized over the remaining lives of the long-term debt issued to finance the reacquisition. see " Loss on Reacquired  !

Debt" below for additional information. i l

See " Deferred Unrecovered Energy Costs" below regarding the fuel adjustment clause, the DOE assessment and coal reserves.

If a portion of Comed's operations was no longer subject to the provisions of SFAS No. 71 as a result of a change in regulation or the effects of competition, Comed would be required to write off the related regulatory assets and liabilities. In addition, Comed would be required to determine any impairment to other assets and purchase contracts and write down such assets or contracts to their fair value.

SFAS No.121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets  ;

to Be Disposed Of, which was adopted on January 1,1996, established accounting standards for the  !

impairment of long-lived assets. The SFAS also requires that regulatory assets which are no longer j probable of recovery through future revenue be charged to earnings. SFAS No.121 did not have an i i

impact on Comed's financial position or results of operations upon adoption.

De/ erred Unrecovered Energy Costs. The fuel adjustment clause adopted by the ICC provides for the recovery of changes in fossil and nuclear fuel costs and the energy portion of purchased power costs as compared to the fuel and purchased energy costs included in Comed's base rates.

As authorized by the ICC, Comed has recorded under or overrecoveries of allowable fuel and energy costs which, under the clause, are recoverable or refundable in subsequent months. Deferred ~

unrecovered energy costs also include amounts to be recovered through the fuel adjustment clause for assessments by the DOE to fund a portion of the cost for the decontamination and decommissioning of uranium enrichment facilities owned and previously operated by the DOE. As of December 31,1996 and 1995, an asset related to the assessments of t.pproximately $168 million and

$179 million, respcctively, was recorded, of which the current portion of approximately $16 million and

$15 million, respectively, was included in current assets on the Consolidated Balance Sheets. As of December 31,1996 and 1995, a corresponding liability of approximately $157 million and $167 million, respectively, was recorded, of wbch approximately $16 million and $15 million, respectively, was recorded in other current liabilities, B-25

1 4

UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS-Continuad At December 31,1996 and 1995, Comed had unrecovered fuel costs in the form of coal reserves of approximately $364 million and $448 million, respectively, in prior years, Comed's commitments

, for the purchase of coal exceeded its requirements. Rather than take all the coal it was required to take, Comed agreed to purchase the coal in place in the form of coal reserves. Comed has been allowed to recover from its customers the costs of the coal reserves through its fuel adjustment clause as coal is used for the generation of electricity; however, Comed is not eaming a retum on the expenditures for coal reserves. Such fuel costs expected to be recovered within one year amounting to approximately $73 million and $24 million at December 31,1996 and 1995, respectively, have been included on the Consolidated Balanca Sheets in current assets as deferred unrecovered energy costs. Comed expects to fully recover the costs of the coal reserves by the year 2000. See Note 21 for additional information concerning Comed's coal commitments.

Customer Receivables and Revenues. Comed is engaged principally in the production, .

I purchase, transmission, distribution and sale of electricity to a diverse base of residential, commercial, industrial and wholesale customers. Comed's electric service territory has an area of approximately 11,300 square miles and an estimated population of approximately eight million as of ,

December 31,1996 and 1995. It includes the city of Chicago, an area of about 225 square miles with )

an estimated population of approximately three million from which Comed derived approximately one-third of its ultimate consumer revenues in 1996. Comed had approximately 3.4 million electric customers at December 31,1996. )

Depreciation and Decommissioning. Comed % depreciation is provided on the straight-line basis by amortizing the cost of depreciable plant and equipment over estimated composite service lives.

Non-nuclear plant and equipment is depreciated at annual rates developed for each class of plant based on their composite service lives. Provisions for depreciation were at average annual rates of 3.25%,3.14% and 3.13% of average depreciable utility plant and equipment for the years 1996,1995 and 1994, retpectively. The annual rate for nuclear plant and equipment is 3.09% for 1996, which includes increased depreciation charges on Comed's nuclear generating units, approved by the ICC in September 1996, and excludes separately collected decommissioning costs, and 2.88% for 1995 and 1994, which excludes separately collected decommissioning costs. See Note 2 for additional information concerning the ICC's approval of Comed's request to increase depreciation charges on j nuclear generating units in 1996. l Nuclear plant decommissioning costs are accrued over the expected service lives of the related j nuclear generating units. The accrual is based on an annual levelized cost of the unrecovered portion of estimated decommissioning costs which are escalated for expected inflation to the expected time of decommissioning and are net of expected eamings on the trust funds. See " Decommissioning" )

, under " Management's Discussion and Analysis of Financial Condition and Results of Operations," I subcaption "Results of Operations," for a discussion of questions raised by the staff of the SEC and a FASb review regarding the electric utility industry method of accounting for decommissioning costs. )

. Dismantling is expected to occur relatively soon after the end of the useful life of each related generating station. The accrual for decommissioning is based on the prompt removal method authorized by NRC guidelines. Comed's twelve operating units have estimated remaining service lives ranging from 9 to 31 years. Comed's first nuclear unit, Dresden Unit 1, is retired and is expected to be dismantled upon the retirement of the last unit at that station, which is consistent with the regulatory treatment for the related decommissioning costs.

Based on Comed's most recent study, decommissioning costs, includins the cost of decontamination and dismantling, are estimated to aggregate $3.9 billion in current-year (1997) dollars excluding a contingency allowance. Comed estimates that it will expend approximately $15.5 B-26

UNICOM CORPORATION AND SUBSIDIARY COMPANIES ,

NOTES TO FINANCIAL STATEMENTS-Continued billion, excluding any contingency allowance, for decommissioning costs primarily during the period from 2007 through 2032. Such costs are expected to be funded by the external decommissioning trusts which Comed estabhshed in compliance with Illinois law and into which Comed has been -

making annual contributions. Future decommissioning cost estimates may be significantly affected by the adoption of or changes to NRC regulations as well as changes in the assumptions used in making such estimates, including changes in technology, available attematives for the disposal of nuclear waste, and inflation.

Pursuant to the Rate Order, beginning in 1995, Comed collects decommissioning costs from its ratepayers under a rider which allows annual adjustments to decommissioning cost collections outside the context of a traditional rate proceeding. The current estimated decommissioning costs allowed under the rider exclude a contingency allowance. Contingency allowances used in decommissioning cost estimates provide for currently unspecifiable costs that are likely to occur after decommissioning begins and generally range from 20% to 25% of the currently specifiable costs.

Under its most recent annual rider, filed with the ICC on February 28,1996, Comed has decreased lts estimated annual decommissioning cost accrual from $113.5 million to $108.8 million, primarily reflecting stronger than expected after-tax returns on the external trust funds in 1995. The ICC issued an order approving the rider filing on April 24,1996.

As a result of the ICC approval of the rider filing, beginning April 30,1996, the effective date of the order, Comed began accruing and collecting $108.8 million annually for decommissioning costs.

The assumptions used to calculate the $108.8 milkon decommissioning cost accrual include: the decommissioning cost estimate of $3.9 billion in current-year (1997) dollars, after-tax earnings on the tax-qualified and nontax-qualified decommissioning funds of 7.30% and 6.26%, respectively, as well as an escalation rate for future decommissioning costs of 5.5%. The annual accrual of $108.8 million provided over the lives of the nuclear plants, coupled with the expected fund eamings and amounts previously recovered in mtes, is expected to aggregate approximately $15.5 billion. The annual accrual and collection amounts will be reviewed again during the first quarter of 1997.

For the twelve operating nuclear units, decommissioning costs are recorded as portions of depreciation expense and accumulated provision for depreciation on the Statements of Consolidated income and the Consolidated Balance Sheets, respectively. As of December 31, 1996, the total decommissioning costs included in the accumulated provision for depreciation were $1,522 million.

For Comed's retired nuclear unit, Dresden Unit 1, the total estimated liability at December 31,1996 in current-year (1997) dollars of $276 million was recorded on the Consolidated Balance Sheets as a noncurrent liability and the unrecovered portion of the liability of approximately $175 million was recorded as a regulatory asset.

Under lilinois law, decommissioning cost collections are required to be deposited into extemal trusts; and, consequently, such collections do not add to the cash flows available for general -

corporate purposes. The ICC has approved Comed's funding plan which provides for annual contributions of current accruals and ratable contributions of past accruals over the remaining service lives of the nuclear plants. At December 31, 1996, the past accruals that are required to be

• contributed to the extemal trusts aggregate $169 million. The fair value of funds accumulated in the extemal trusts at December 31, 1996 was approximately $1,456 million which includes pre-tax unrealized appreciation of $230 million. The eamings on the extemal trusts accumulate in the fund balance and in the accumulated provision for depreciation.

Amortization of Nuclear Fuel. The cost of nuclear fuel is amortized to fuel expense based on the quantity of heat produced using the unit of production method. As authorized by the ICC, provision, for spent nuclear fuel disposal costs have been recorded at a level required to recovei the fee payable on current nuclear-generated and sold electricity and the current interest accrual on the one-B-27

UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL. STATEMENTS-Continued time fee payable to the DOE for nuclear generation prior to April 7,1983. The one-time fee and interest thereon have been recovered and the current fee and current interest on the one-time fee are

.. currently being recovered through the fuel adjustment clause. See Note 11 for further information concerning the disposal of spent nuclear fuel, the one-time fee and the interest accrual on the one-time fee. Nuclear fuel expenses, including leased fuel costs and provisions for spent nuclear fuel 1- disposal costs, for the years 1996,1995 and 1994 were $354 million, $391 million and $358 million, respectively.-

Income Taxes. Deferred income taxes are provided for income and expense items recognized for financial accounting purposes in periods that differ from those for income tax purposes. Income taxes deferred in prior years are charged or credited to income as the book / tax timing differences reverse. Prior years' deferred investment tax credits are amortized through credits to income generally over the lives of the related property. Income tax credits resulting from interest charges applicable to nonoperating activities, principally construction, are classified as other income.

AFUDC. In accordance with the uniform systems of accounts prescribed by regulatory authorities Comed capitalizes AFUDC, compounded semiannually, which represents the estimated ,

cost of funds used to finance its construction program. The equity component of AFUDC is recorded 1 on an after-tax basis and the borrowed funds component of AFUDC is recorded on a pre-tax basis. l I

The average annual capitalization rates for the years 1996,1995 and 1994 were 9.02%,9.52% and 9.85%, respectively. AFUDC does not contribute to the current cash flow of Unicom or Comed.

Interest. Total interest costs incurred on debt, leases and other obligations for the years 1996, 1995 and 1994 were $626 million, $696 million and $730 million, respectively. j Debt Discount, Premium and Expense. Discount, premium and expense on long-term debt of Comed are being amortized over the lives of the respective issues.

Loss on Reacquired Debt. Consistent with regulatory treatment, the not loss from Comed's reacquisition in connection with refinancing of first mortgage bonds, sinking fund debentures and pollution control obligations prior to their scheduled maturity dates is deferred and amort: zed over the lives of the long-term debt issued to finance the reacquisition.

Stock Option Awards / Employee Stock Purchase Plan. Unicom has elected to adopt SFAS No.

123. " Accounting for Stock-Based Compensation", for disclosure purposes only. Unicom accounts for its stock option awards and its employee stock purchase plan under APB Opinion No. 25,

" Accounting for Stock issued to Employees". See Note 5 for additional information.

Reclassifications. Certain prior year amounts have been reclassified to conform with current

, period presentation. These reclassifications had no effect on net income.

Statements of Consolidated Cash Flows. For purposes of the Statements of Consolidated Cash Flows, temporary cash investments, generally investments maturing within three months at the time of purchase, are considered to be cash equivalents. Supplemental cash flow information for the years 1996,1995 and 1994 was as follows:

1996 1995 1994 (Thousands of Dollars)

SurettMI NT AL CASH Ftow imosuAtlON' Cash paid dunng the year for:

' Interest (net of amount capitabted) . $538.351 $604.932 $645.658 income taxes (net of refunds) . $234.743 $367,708 $ (4.923)

$l#Pt!Mt NT AL SCHEDUtf Or NON CASH lNVESTING AND FINANCINo AcTivmts:

Capital lease obhgations incurred by subsidiary companies . $320.975 $198.577 $309,716 B-28

~

UNICOM CORPORATION AND SUBSIDIARY COMPANIES ,

NOTES TO FINANCIAL STATEMENTS-Continued (2) Rate Matters On January 9,1995, the ICC issued its Rate Order in the proceedings relating to Comed's '

February 1994 rate increase request. The Rate Order provided, among other things, for (i) an increase in Comed s total revenues of approximately $301.8 million (excluding add-on revenue taxes) or 5.2%, on an annual basis, including a $303.2 million increase in base rates, (ii) the collection of '

rnunicipal franchise costs on an individual municipality basis through a rider, and (iii) the use of a rider, with annual review proceedings, to pass on to ratepayers increases or decreases in estimated costs associated with the decommissioning of Comed's nuclear generating units. See Note 1 under

" Depreciation and Decommissioning" for additional information related to the level of decommissioning cost collections. The ICC also determined that the Units were 100% "used and useful" and that the previously determined reasonable costs of such Units, as depreciated, should be included in full in Comed's rate base. The rates provided in the Rate Order became effective on January 14, 1995; however, they are being collected subject to refund as a result of subsequent judicial action. As of December 31,1996, electric operating revenues of approximately $651 million (excluding revenue taxes) are subject to refund. Intervenors and Comed have filed appeals of the Rate Order with the Illinois Appellate Court, and oral argument was heard on January 28,1997.

On December 11,1995, Comed announced a series of customer initiatives as part of its larger ongoing effort to address the need to give all customer classes the opportunity to benefit from increased competition in the electric utility business, while retaining the benefits (such as reliability) of current regulation and ensuring utilities' cost recovery for commitments made under the obligation to serve customers. The initiatives include a five-year cap on base electric rates at current levels and various customer service and incentive pricing programs designed to allow customers more choice and control over the services they seek and the prices they pay. These initiatives are in addition to previously implemented special discount contract rate programs for new or existing industrial customers. Comed anticipates the initiatives will be fully implemented in 1997 and will reduce its revenues by approximately $40 million annually (including the effects of previously implemented initiatives and before income tax effects) primarily through changes in energy utilization. Additionally in September 1996, the ICC approved Comed's additional depreciation initiative for 1996. Comed's costs increased by $30 million in 1996 (before income tax effects), through the increase in depreciation charges on its nuclear generating units. Comed also continues to consider the possibility of additional depreciation options.

Under Comed's initiatives, the five-year base rate cap at current levels became effective in December 1995 and will extend until January 1,2001. The rate cap does not affect Comed's fuel cost or nuclear decommissioning cost recovery provisions. Comed's fuel cost variances will continue to be collected through its fuel adjustment clause, and such collections will continue to be subject to ,

annual reconciliation proceedings before the ICC. Likewise, nuclear decommissioning costs will continue to be collected as described in Note 1 under " Depreciation and Decommissioning."

See " Changes in the Electric UtMy industry" under " Management's Discussion and Analysis of Financial Condition and Results of Operations" for information regarding the legislative proposal supported by Comed.

(3) Authorized Shares and Voting Rights of Capital Stock At December 31,1996, Unicom's authorized shares consisted of 400,000,000 shares of common stock. The authorized shares of Comed preferred and preference stocks at December 31,1996 were:

preference stock-22,806,775 shares; $1.425 convertible preferred stock-75,003 shares; and prior B-29

UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS-Continued preferred stock-850,000 shares. The preference and prior preferred stocks are issuable in series and may be issued with or without mandatory redemption requirements. Holders of outstanding

• Unicom shares are entitled to one vote for each share held on each matter submitted to a vote of such snareholders; and holders of outstanding Comed shares are entitled to one vote for each share held on each matter submitted to a vote of such shareholders. All such shares have the right to f cumulate votes in elections for the directors of the corporation which issued the shares.

(4) Common Stock l At December 31, 1996, shares of Unicom common stock were reserved for the following purposes: l Long Term incentive Plan . . , 3,5/4.fX)9 Employeo Stock Purchase Plan . ... 703.570 Employee Savings and Investment Plan . . . . . . . . . , , 274.203 .

Exchange for Comed common stock not held by Unicom . 110,323 l 1996 Directors' Fee Plan 194.888 4.827.593 1

Common stock increased during the years 1996,1995 and 1994 as follows: l 1996 1995 1994 I Shares of Common Stock issued l Long-Term Incentive Plan . . . 132,579 481,751 -

l Employee Stock Purchase Plcn .... , 196.513 217.080 305.205

, Employee Savings and Investment Plan . . . ... 339,100 217,100 85.400 Con /ersion of $1425 convertible preferred stock. - - 185,041 Conversion of warrants . .. .... .....

13.274 Eirchange for Comed common stock not held by Unicom . 25.323 - -

199(I Directors' Foe Plan . 5.112 - -

698.627 915.931 588,920 j (Thousands of Dollars)

Amount of Common Stock issued Total issued ...... .... ... .. .. .. . $17,733 $C5,412 $14,782 l Held by trustee for Unicom Stock Bonus Deferral Plan . (4,300) - -

Other . 38 95 (386)

$13.471 $25.507 $14.3%

At December 31,1996 and 1995,78,045 and 82,742 Comed common stock purchase warrants, respectively, were outstanding. The warrants entitle the holders to convert such warrants into common stock of Comed at a conversion rate of one share of common stock for three warrants.

(5) Stock Option Awards / Employee Stock Purchase Plan Unicom has a nonqualified stock option awards program under its Long-Term Incentive Plan and an ESPP. The stock option awards program was adopted by Unicom in July 1996 to reward valued employees responsible for, or contributing to, the management, growth and profitability of Unicom and its subsidiaries. As of December 31, 1996, 1,205,500 options have been granted primarily to employees of Comed and its subsidiaries. Of this amount,15,500 options have been canceled and 1,100,000 are outstanding. The weighted average exercise price for the outstanding stock options is

$25.50. The stock options granted in 1996 will expire ten years from their grant date. One-third of the shares subject to the options vest on each of the next three anniversaries of the option grant date. In addition, the stock options will become fully vested immediately if the holder dies, retires, is

. terminated other than for cause or qualifies for long-term disability, and will also vest in full upon a B-30

T.

f '

l UNICOM CORPORATION'AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS-Continued 31, 1996, 2,000 of the granted stock options are change in control of Unicom. As of December exercisable and none of the stock options have been exercised. i The estimated f air market value for each of the stock options grantedl in 1996 was $3.7 value of each stock option granted was estin,ated as of the da'e of grant using the Black-Sc option-pricing model. Assumptions used to determine th of 6.64% and (iv) expected life of 7 years.

The ESPP allows employees to purchase Unicorn common stock at a 10% discount fro value. The stock is purchased in six month intervals. April and October of each year. S of the employees of Unicom, Comed and certain subsidiaries are eligible to participat Unicom issued 196,512, 217,080 and 150,495 shares of common stock in 1996,1995 a respectively, respectively. Comed issued under the ESPP at an average annual purchase pric under the ESPP.

Unicom has adopted the disclosure-only provisions of SFAS No.123, " Accounting f Based Compensation" For financial reporting purposes, Unicom has adopted APB No. 25,

" Accounting for Stock issued to Employees", and thus no compensation cost has be for the stock option awards program or ESPP. If Unicom SFAS No.123 using the fair value based method of accounting, the resulting effect on n and eamings per share would have been de minimis.

(6) Comed Preferred and Preference Stocks Without Mandatory Redemption Requ No shares of Comed preferred or preference stocks without mandatory redemption requ 1994,3,000,000 shares of Comed preference were issued or redeemed during 1996 or 1995. During stock without mandatory redemption requirements were issued and no shares of Comed preference stocks without mandatory redemption requ summarized as follows: Involuntary Redemption Liquidation shares Aggregate Price (1)

Stated Value Price (1)

Series Outstanding (Thousands ,

of Dollars) $25 00

$100 239 $ 25 25

$190 4 249 549 $25 00 51.5G0 $ 26 04

$2 00 2.000.000 $ 27.11 $25 00 2.000.000 52.440

$196 $101.00 $9912 750.000 74.340

$7 24 $10100 $98.90 750.000 74.175

$8 40 $10016 $98 09 750,000 73.566

$8 38 $ 25 00 $25 00 3 000.000 72.637

$2 425 13.499.549 $504 957 (1) Per share plus accrued and unpaid dedends. if any The outstanding shares of Comed's $1.425 convertible preferred stock are convertible at th option of the holders thereof, at any time, into common stock of Comed at the l rat l

B-31

I I

l ruNICOM CORPORATION AND SUBSIDIARY. COMPANIES NOTES TO FINANCIAL STATEMENTS-Continued 1 1

common stock for each share of convertible preferred stock, subject to future adjustment. The convertible preferred stock may be redeemed by Comed at $42 per share, plus accrued and unpaid dividends, if any. The involuntary liquidation price of the $1.425 convertible preferred stock is $31.80 per share, plus accrued and unpaid dividends, if any.

(7) Comed Preference Stock Subject to Mandatory Redemptiort Requirements During 1996,1995 and 1994, no shares of Comed preference stock subject to mandatory redemption requirements wera issued. The series of Comed preference stock subject to mandatory redemption requirements outstanding at December 31,1996 are summarized as follows:

Shares Aggregate Series Outstanding Stated Value Optional Redemption Price (1) i (Thousands j of Dollars)

$8 20 214.275 $ 21.428 $103 through October 31,1997, and $101 thereafter

$8 40 Series B 330 000 32.778 $101

$8 85 262.500 26.250 $103 through July 31.1998, and $101 thereafter l

$9 25 600,000 60.000 $103 through July 31,1999, and $101 thereafter

$9 00 330.000 38,659 Non-callable 50Br5 700.000 69.474 Non-calbbie 2.490,775 $248.589 (1) Per chare plus accrued and unpaid dividonds, if any.

The annual sinking fund requirements and sinking fund and involuntary 1:quidation prices per share of the outstanding series of Comed preference stock subject to mandatory redemption j

requirements are summarized as follows

- Sinking Annual Sinking Fund Fund involuntary Series Requirement Price (1) Liquidation Price (1)

$8 20 35.715 shares $100 $100.00  !

$8 40 Senes B 30,000 shares (2) $100 $ 99 326

$8 85 37.500 shares $100 $100 00  ;

, $9 25 75.000 shares $100 $100 00 '-

$9 00 130,000 shares (2) $100 $ 99125 l

$6 875 (3) $100 $ 99 25 (1) Per share plus accrued and unpaid dividends, if any.

(2) Comed has a non-cumulative ophon to increase the annual sinking fund payment on each l sinking fund redemption date to retire an additional number of shares, not in excess of the sinking fund requirement at the applicable redemption price

• (3) All shares are required to be redeemed on May 1,2000 Annual remaining sinking fund requirements through 2001 on Comed preference stock outstanding at December 31,1996 will aggregate $31 million in each of 1997-99, $88 million in 2000 and $18 million in 2001. During 1996,1995 and 1994,438 215 shares, 178,215 shares and 177,085 shares, respectively, of Comed preference stock subject to mandatory redemption requirements were teacquired to meet sinking fund requirements. l Sinking fund requirements due within one year are included in current liabilities.

(8) Comed-Obligated Mandatorily Redeemable Preferred Securities of Comed I"nancing i in September 1995, Comed Financing I (Trust), a wholly-owned subsidiary trust of Comed. ,

issued 8.000,000 of its 8.48% Comed-obligated mandatorily redeemable preferred secunties. The l l

B-32 )

I i

l UNICOM CORPORATION AND SUBSIDIARY COMPANIES ~ .

NOTES TO FINANCIAL STATEMENTS-Continued sole asset of the Trust is $206.2 million principal amount of Comed's 8.48% subordinated deferrable )

interest notes due September 30,2035. There is a full and unconditional guarantee by Comed of the Trust's obligations under the securities issued by the Trust. However, Comed's obligations are .

subordinate and junior in right of payment to certain other indebtedness of Comed. Comed has the right to defer payments of interest on the subordinated deferrable interest notes by extending the interest payment period, at any time, for up to 20 consecutive quarters, if interest payments on the subordinated def0rrable interest notes are so deferred, distributions on the preferred securities will a!so be deferred. During any deferral, distributions will continue to accrue with interest thereon. In addition, during any such deferral, Comed may not declare or pay any dividend or other distribution on, or redeem or purchase, any of its capital stock. ,

J The subordinated deferrable interest notes are redeemable by Comed, in whole or in part, from time to time, on or after September 30, 2000, or at any time in the event of certain income tax circumstances. If the subordinated deferrable interest notes are redeemed, the Trust must redeem preferred securities having an aggregate liquidation amount equal to the aggregate principal amount <

of the subordinated deferrable interest notes so redeemed. In the event of the dissolution, winding l up or termination of the Trust, the holders of the preferred securities will be entitled to receive., for each preferred security, a liquidation amount of $25 plus accrued and unpaid distributions thereon, including interest thereon, to the date of payment, unless in connection with the dissolution, the subordinated deferrable interest notes are distributed to the holders of the preferred securities.

(9) Long Term Debt Sinking fund requirements and scheduled maturities remaining through .2001 for Comed'r first mortgage bonds, sinking fund debentures and other Icng-term debt outstanding at December 31, 1996, after deducting sinking fund debentures reacquired for satisfaction of future sinking fund requirements, are summarized as follows: 1997-$539 million: 1998-$497 million; 1999-$150 million; 2000-$462 million; and 2001-$108 milkon. Unicom Enterprises' note payable to bank of $95 million will mature in 1998.

l l

l 6i e

B-33 L -

. 1

.' UNICOM CORPORATION AND SUBSIDIARY COMPANIES i

NOTES TO FINANCIAL STATEMENTS-Continued )

l At December 31,1996, Comed's outstanding first mortgage bonds ' maturing through 2001 were )

as follows:

'* Principal Amount Series (Thousands of Dollars) 7% due February 1,1997 $ 150,000 5%% due April 1,1997., , . . 50,000 6%% due October 1,1997 . 60,000 6%% due February 1,1998. 50,000 i 6% duo March 15,1998 130,000 . 1 6%% due July 1,1998 . , , . 50,000 l 4 6h% due October 1,1998 . . 75.000 )

l 9%% due February 15,2000, 125.000 6%% due April 15,2000, , 230,000 6h% due July 15,2000 .. . 100,000 7%% due January 1,2001 , 100 n00  ;

i

$1.120.000 Other long-term debt outstanding at December 31,1996 is summarized as follows: .

Principal Debt Security Amount Interest Rate

- (Thousarids of Dollars)

Unicara--

Loans Payable Loan due January 1,2003 $ 9,152 Interest rate of 8 31%

' Loan due January 1,2004 9.749 Interest rate of 8 44%

$ 18,901 Comed-Notes' Medium Term Notes, Series 1N due various dates rnrough Apnl 1,1998 $ 35,500 Interest rates ranging from 9 52% to 9 65%

Medium Term Notes, Series 3N due various dates through j October 15,2004 296.000 Interest rates ranging from 9.00% to 9 20%  !

Medium Term Notes, Series 4N l due May 15,1997 20,000 interest rate of 8 875% l Notes due February 15,1997 150,000 Interest rate of 7 00%

Notes duo July 15,1997 100,000 Interest rate of 6.50%

Notes due Octotrar 15,2005 235,000 Interest rate of 6 40%

$ 836.500 Long Term Note Payable to Bank ,

Note due June 1,1998 $ 150.000 Prevaihng interest rate of 6.08% at December 31,1996 i e Purchase Contract Obkgation due l April 30, 2005 $ 432 Interest rate of 3.00%

Total Comed $ 986,932 Unicom Enterposes- l Note Payable to Bank IJote due November 22,1998 $ 95,000 Prevaihng interest rate of 6 51% at December 31,1996 Total Unicom $1,100,833 Long-term debt maturing within one year has been included in current liabilities. '

B-34

\ I UNICOM CORPORATION AND SUBSIDIARY COMPANIES - -

NOTES TO FINANCIAL STATEMENTS--Continued Comed's outstanding first mortgage bonds are secured by a lien on substantially all property and franchises, other than expressly excepted property, owned by Comed.

Comed recorded an extraordinary loss of $33 million in the fourth quarter of 1995 related to the early redemption of $645 million of long-term debt which reduced net income by $20 million (after reflecting income tax effects of $13 million) or $0.09 per common share.

(10) Lines of Credit Comed had total bank lines of credit of $914 million and unused bank lines of credit of $906 million at December 31, 1996. Of that amount, $906 million (of which $175 million expires on September 29,1997 $63 million expires in equal quarterly installments commencing on March 31, 1997 and ending on September 30,1998 and $668 million expires in equal quarterly installments commencing on December 31,1997 and ending on September 30, 1999) may be borrowed on secured or unsecured notes of Comed at various interest rates. The interest rate is set at the time of a borrowing and is based on several floating rate bank indices plus a spread which is dependent upon the credit rating of Comed's outstanding first mortgage bonds or on a prime interest rate.

Amounts under the remaining lines of credit may be borrowed at prevailing prime interest rates on unsecured notes of Comed. Collateral, if required for the borrowings, would consist of first mortgage ,

bonds issued under and in accordance with the provisions of Comed's mortgage. Comed is obligated to pay commitmont fees with respect to $906 million of such lines of credit.

Unicom Enterpnses has a $200 million credit facility which will expire in 1999, of which $105 l million was unused as of December 31,1996. The credit facility can be used by Unicom Enterprises to finance investments in unregulated businesses and projects, including Unicom Thermal, and for general corporate purposes. The credit facility is guaranteed by Unicom and includes certain covenants with respect to Unicom's and Unicom Enterprises' operations. Such covenants include, )

among other things, (i) a requirement that Unicom and its consolidated subsidiaries maintain a j tangible net worth at least $10 million over that of Comed and its consolidated subsidiaries, (ii) a requirement that Unicom's consolidated debt to consolidated capitalization not exceed 0 65 to 1, (iii) restrictions on the indebtedness for borrowed money that Unicom (excluding Comed) and Unicom Enterprises may incur and (iv) a requirement that Unicom own 100% of the outstanding stock of Unicom Enterprises and at least 80% of the outstanding stock of Comed; and provide that Unicom may noi declare or pay dividends during the continuance of an event of default. Interest rates for borrowings under the credit facility are set at the time of a borrowing and are based on either a prime l interest rate or a floating rate bank index plus a spread which varies with the credit rating of Comed's outstanding first mortgage bonds.

(11) Disposal of Spent Nuclear Fuel Under the Nuclear Waste Policy Act of 1982, the DOE is responsible for the selection and development of repositories for, and the disposal of, spent nuclear fuel and high-level radioactive waste. Comed, as required by that Act, has signed a contract with the DOE to provide for the disposal of spent nuclear fuel and high-level radioactive waste from Comed's nuclear generating stations beginning not later than January 1998. The DOE advised Comed in December 1996 that it anticipates it will be unable to begin acceptance of scent nuclear fuel by January 1998. It is expected this delivery schedule will be delayed significantly. The contract with the DOE requires Comed to pay the DOE a one-time fee applicat,le to nuclear genemtion through April 6,1983 of approximately $277 1 million, with interest to date of payment, and a fee payable quarterly equal to one mill per kilowatthour of nuclear-generated and sold electricity after April 6,1983. As provided for under the contract,  !

l B-35 l

l

.' .UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS-Continued .

Comed has elected to pay the one-time fee, with interest, just prior to the first delivery of spent nuclear fuel to the DOE. The liability for the one-time fee and the related interest is reflected in the

.- Consolidated Balance Sheets.

(12) Fair Value of Financial Instruments The following methods and Mumptions were used to estimate the fair value of financial instruments either held or bued and outstanding. The disclosure of such information does not purport to be a market valuation of Unicom and subsidiary companies as a whole. The impact of any j realized or unrealized gains or losses related to such financial instruments on the financial position or  !

results of operations of Unicom and subsidiary companies is primarily dependent on the treatment ,

authorized under future Comed ratemaking proceedings,

/nvestments. Securities included in the nuclear decommissioning funds have been classified and i accounted for 'as "available for sale" securities. The estimated fair value of the nuclear  !

decommissioning funds, as determined by the trustee and based on published market data, as of l December 31,1996 and 1995 was as follows: i December 31,1996 December 31,1995  !

unrealized unrealized Cost Basis Gains Fair Value Cost Basis Gains Fair Value (Thousands of Dollars)

Short-term hwestments . $ 32,778 $ 38 $ 32.816 $ 40.575 $ 283 $ 40,858 U.S Govomment and Agency issues . 251,994 6.885 258,879 156.745 17.636 174,381 i 331,936 17,985 349,921 496,707 531,677 I Municipal bonds , 34.970 Common stock ,

539,392 201,304 740.696 348,866 107,280 456.146 Other . 69.867 4,181 74,048 29.757 4,708 34,465

$1,225,967 $230,393 $1.456,3GO $1,072.650 $164,877 $1,237,527 i i

At December 31,1996 the debt securities held by the nuclear decommissioning funds had the i following maturities:

Cost Basis Fair Value (Thousands of Dollars)

Within 1 year $ 32,778 $ 32,816 1 through 5 years . 161,625 164,907 ,

5 through 10 years . 221,264 229.382 i Over 10 years. 258.284 271,971 The net eamings of the nuclear decommissioning funds, which are recorded as increases to the accumulated provision for depreciation, for the years 1996,1995 and 1994 were as follows:

1996 1995 1994 (Thousands of Dollars)

Gross proceeds from sales of securities $2.335,974 $ 2.598.889 $ 811.368 Less cor,t based on specific identification . (2,300,038) (2.581,714) (811.997)

Realiiod gains (losses) on sales of secunties $ 35,936 $ 17,175 $ (629)

Other realized fund eamings net of expenses . 33,008 46.294 38.148 Total realized net eamings of the funds . $ 68,944 $ 63.469 $ 37,519 Unrealized gains (losses) . . 65,516 160.843 (57.948)

Total net eamings (losses) of the funds , $ 134.460 $ 224.312 $ (20,429)

Current Assets. Cash, temporary cash investments and other cash investments, which include U.S. Govemment Obligations and other short-term marketable securities, and special deposits, which B-36

UNICOM CORPORATION AND SUBSIDIARY COMPANIES . ,

NOTES TO FINANCIAL STATEMENTS-Continued primarily includes cash deposited for the redemption, refund or discharge of debt securities, are '

stated at cost, which approximates their fair value because of the short maturity of these instruments.

The securities included in these categories have been classified as "available for sale" securities. .

Capitalization. The estimated fair values of Comed preferred and preference stocks, Comed-obligated mandatorily redeemable preferred securities of the Trust and long-term debt were obtained from an independent consultant. The estimated fair values, which include the current portions of ,

redeemable preference stock and long-term debt but exclude accrued interest and dividends, as of December 31,1996 and 1995 were as follows:

December 31,1996 December 31,1996 v7ue Y Fair value Carry 6ng value Losese Fenr Value (Thousands of Dollers)

Comed preferred and preference nks. $ 755.931 $ 3,948 $ 759.879 $ 800,197 $ 14.769 $ 814,966 ComEdebhgated mandatorily redeemable preferred securities of the Trust $ 200,000 $ 1,000 $ 201,000 $ 200,000 $ 6.000 $ 206,000 Long-term debt . $6,345,533 $159,818 $6,505,351 $6.572,853 $470,175 $7,043,028 Long term notes payable, which are not included in the above table, amounted to $264 million and $212 million at December 31,1996 and 1995, respectively. Such notes, for which interest is paid at fixed and prevailing rates, are included in the consolidated financial statements at cost, which approximates their fair value.

Current Liabihties. The carrying value of notes payable, which consists of commercial paper and bank loans maturing within one year, approximates the fair value because of the short maturity of these instruments. See " Capitalization" above for a discussion of the fair value of the current portion of long-term debt and redeemable preference stock.

Other Noncurrent Liabilities. The carrying value of accrued spent nuclear fuel disposal fee and related interest represents the settlement value as of December 31,1996 and 1995; therefore, the carrying value is equal to the fair value.

(13) Pension Benefits Comed and the Indiana Company have non-contributory defined benefit pension plans which cover all regular employees. Benefits under these plans reflect each employee's compensation, years of service and age at retirement. During 1995, these plans were amended to more closely base retirement benef% on final pay, Funding is based upon actuarially determined contributions that take into account the amount deductible for income tax purposes and the minimum contribution required .

Under the Employee Retirement income Security Act of 1974, as amended. Actuarial valuations were determined as of January 1,1996 and 1995.

During 1994, the companies implemented an early retirement program for employees eligible to retire or who would become eligible to retire after December 31,1993 and before April 1,1995. A total of 679 employees accepted the program, resulting in the recognition of approximately $34 million of additional pension cost and an additional increase to the projected benefit obligation of that

$34 million and $41 million of unrecognized not loss. The charge to income was approximately $20.5 million, after reflecting income tax effects, as a result of the program.

B-37

1

, UNICOM CORPORATION AND SUBSIDIARY COMPANIES

~

NOTES TO FINANCIAL STATEMENTS-Continued l

The funded status of these plans at December 31,1996 and 1995 was as followsf l December 31

. 1996 1995 (Thousands of Dollars).

Actuarial present value of accumulated pension plan benefits:

Vected benefit obligation , $(3,025,000) $(2,904,000)

Nonvested benefit obligation - ,. , , (127,000) (122,000) l Accumulated benefit obligation. , , $(3,152,000) $(3,026,000)

Effect of projected future compensation levels ,, , (366,000) (352,000)

Projected benefit obligation , , , $(3,518,000) $(3,378,000)

Fair value of plan assets, invested primarily in U.S. Government, govemment-sponsored corporation and agency securities, fixed incorne funds, registered investment companies, equity index funds and other equity and fixed income funds 3.282,000 3,059.000 Plan assets less than projected benefit obligation , $ (236,000) $ (319,000)

Unrecognized prior service cost , , , , (69,000) (73,000)

Unrecognized transition asset . , , ,, , , (130,000) (142,000)

Unrecognized not loss, 58,000 189,000 Accrued pension liability , , , $ (377,000) $ (345,000) .

l The assumed discount rate was 7,5% at December 31,1996 and 1995, and the assumed annual  !

rate of increase in future compensation levels was 4.0% These rates were used in determining the projected benefit obligations, the accumulated benefit obligations and the vested benefit obligations, <

Pension costs were determined under the rules prescribed by SFAS No,87, including the use of the projected unit credit actuarial cost method and the following actuarial assumptions for the years 1996,1995 and 1994: )

1996 1995 1994 l

i Annual discount rate , , 7.50 % 8.00% 7.50 %

Annual rate of increase in future compensation levels . 4.00 % 403% 4.00 %

Annuallong-term rate of return on plan assets , , , 9.75 % 9.75 % 9.50 % 1 The components of pension costs, portions of which were recorded as components of construction costs, for the years 1996,1995 and 1994 were as follows: l 1996 1995 1994 (Thousands of Dollars)

Service cost . $ 92.000 $ 87,000 $ 97,000 Interest cost on projected benefit obligation , 246,000 225,000 213,000 Actual retum on plan assets , , (421,000) (681,000) 37,000 Early retirement program cost - - 34,000

• Net amortization and deferral , 115,000 418,000 (302,000)

$ 32.000 $ 49.000 $ 79,000 In addition, an employee savings and investment plan is available to eligible employees of L Comed and certain of its and Unicom's subsidiaries, During the fourth quarter of 1995 (the first quarter of 1996 for bargaining unit employees of the Indiana Company), the employee savings and ,

investment plan was amended, Under the p'an, as amended, each participating employee may contribute up to 20% of such employee's base pay and the participating companies match the first 6% of such contribution equal to 100% of the first 2% of contributed base salary,70% of the next 3%

of contributed base salary and 25% of the last 1% of contributed base salary. During 1996,1995 and 1994, the participating companies' contributions were $30 million, $25 million and $23 million,  ;

respectively, i

B-38

l UNICOM CORPORATION AND SUBSIDIARY COMPANIES . ,

NOTES TO FINANCIAL STATEMENTS-Continued (14) Postratirement Benefits Comed and the Indiana Company provide certain postretirement health care, dental care, vision

• care and life insurance for retirees and their dependents and for the surviving dependents of eligible employees and retirees. The employees become eligible for postretirement benefits when they reach age 55 with 10 years of service The liability for postretirement benefits is funded through trust funds based upon actuarially determined contributions that take into account the amount deductible for income tax purposes. The postretirement health care plan for Comed and the Indiana Company was amended, effective April 1,- 1995. Prior to that date, the postretirement health care plan was fully funded by the companies. With respect to employees who retire on or after April 1,1995, the plan is contributory, funded jointly by the companies and the participating employees. Actuarial valuations were determined as of January 1,1996 and 1995.

Postretirement health care costs in 1996 and 1995 included $4 million and $25 million, respectively, related to a voluntary separation offer for union employees who accepted and left Comed's employ combined with separation effers to selected groups of non-union employees.  ;

The funded status of the plan at December 31,1996 and 1995 was as follows:

December 31 1996 1995 (Thousands of Dollars)

Actuarial present value of accumulafod postretirement benefit obhgation:

Hetirees , $ (615.000) $(551.000)

Active fully chgible participants . , (23.000) (21.000)

Other participants (439.000) (418.000)

Accumulated benefit obligation . $(1,077,000) $(990.000) f air value of plan assets, invested pnmarily in S&P 500 common stocks, registered investment companies and U S. Government, govemment agency, municipal and hsted corporate obbgations 666.000 602.000 Plan assets less than accumulated postretirement benefit obkgabon . $ (4 t1,000) $(388.000)

Unrecognized transition obligation . 370.000 392,000 Unrecognized prior service cost . 45.000 48.000 Unrecognized net gain , (271.000) (267.000)

Accrued habikty for postretirement benefits . $ (267,000) $(215.000)

Different health care cost trends are used for pre-Medicare and post-Medicare expenses. Pre-Medicare trend rates were 9.0% and 9.5%, respectively, at December 31,1996 and 1995, grading down in 0.5% annual increments and leveling off at 5.0%. Post-Medicare trend rates were 7.0% and ,

7.5%, respectively, at December 31,1996 and 1995, grading down in 0.5% annual increments to 5.0%. The assumed discount rate was 7.5% at December 31,1996 and 1995. That rate was used to determine the accumulated benefit obligations. The effect of a 1% increase in the health care cost trend rate for each future year would increase the accumulated postretirement health care obligations by approximately $158 million.

B-39

I f

," .UNICOM CORPORATION AND SUBSIDIARY COMPANIES 5 . NOTES TO FINANCIAL STATEMENTS-Continued The components of postretirement health care costs, portions of which were recorded as components of construction costs, fo/ the years 1996,1995 and 1994 were as follows: l 1996 1995 1994 lc q (Thousands of Dollars)

Service cost $32,000 $ 31.000 $ 47,000 ,

Interest cost on accumulated benefit obligation , 73.000 69.000 81,000 j

Actual loss (retum) on plan assets (90.000) (137.000) 9.000

~

Amortization of transition obhgation . , 22.000 23,000 29,000 )

Severance plan cost . . 4,000 25.000 -

i

! Other . 29.000 83,000 (49.000)

$70.000 $ 94.000 $117,000 l Postretirement benefit costs were determined under the rules prescribed by SFAS No.106, including the use of the projected unit credit actuarial cost method. The discount rates used were l 7.5%, 8.0% and 7.5%, respectively, for 1996,1995 and 1994 and the estimated long-term rate of return of fund assets, net of income tax effects, were 9.38%,9.32% and 9.04%, respectively, for 1996, 1995 and 1994. Pre-Medicare health care cost trend rate was 14% for 1994, grading down in 0.5%

. annual increments to 5.0%. Post-Medicare health care cost trend rate was 11.5% for 1994, grading a l down in 0.5% annual increments to 5.0%. Pre-Medicare trend rates were 13.5% for the first three months of 1995 and 10% for the remainder of the year, grading down in 0.5% annual increments to 5.0%. Post-Medicare trend rates were 11% for the first three months of 1995 and 8% for the remainder of the year, grading down in 0.5% annual increments to 5.0%. The effect of a 1% increase in the health care cost trend rate for each future year would increase the aggregate of the service and

interest cost components of postretirement benefit costs by approximately $21 million for 1996.

(15) Separation Plan Costs Operation and maintenance expenses included $12 million for the year 1996 and $97 million for the year 1995 related to a. voluntary separation offer for union empicyees who accepted and left Comed's employ combined with separation plans offered to selected groups of non-union employees.

These employee separation plans reduced not income by $7 million or $0.03 per common share for the year 1996 and $59 miUion or $0.27 per common share for the year 1995.

(16) Income Taxes The components of the net deferred income tax liability at December 31,1996 and 1995 were as follows:

December 31

, , 1996 _ 1995 i

(Thousands of Dollars) d Defened income tax liabihties Accelerated cost reccuery and liberahred depreciation. net of removal costs . $3.514.300 $3.379.987 Overheads capitalized , 261.437 252,910 nepair allowance .. 228.426 219 585 .

Regulatory assets recoverable through future rates 1.649.037 1.689.832 )

Deferred income tax assets:

Postratiremont benefits . (269,180) (235.360)

Unbilled revenues . . . . (136.406) (116.274)

Alternative minie '" . .. (80,159) (145.019)

Unamortaed credes to be settlnd through future rates - (430297) (452.210' l Other regula be settled through future rates . (238.004) (148.792i '

Other-net - (44.998) (45.301)

Not deferred income tax liability $4.454.156 $4.399.358 l l

B-40

- UNICOM CORPORATION AND SUBSIDIARY COMPANIES, .

NOTES TO FINANCIAL STATEMENTS-Continued  ;

The $55 million increase in the net deferred income tax liability from December 31,1995 to December 31,1996 is comprised of $163 million increase of deferred income tax expense and a $108 million '

decrease in regulatory assets not of regulatory liabilities pertaining to income taxes for the year. The .

amount of regulatory assets included in deferred income tax liabilities primarily relates to the equity-component 'of AFUDC which is recorded on an after-tax basis, the borrowed funds component of .

' AFUDC which was previously recorded net of tax and other temporary differences for which the related tax effects were not previously recorded. The amount of other regulatory liabilities included in ^  ?

deforred income tax assets primarily relates to deferred income taxes provided at rates in excess of  !

the current statutory rate.

The effects of an income tax refund related to prior years were recorded in 1996, resulting in an increase to net income of $26 million or $0.12 per common share.

The components of net income tax expense charged to continuing operations for the years 1996, 1995 and 1994 were as follows:

1996 1995 1994 1 (Thousands of Dollars)

Operating income: '

Current income taxes . $328.369 $339.989 $158.342 Deferred income taxes. . 161.176 186.529 168.402 Investment tax credits deferred-tiet . (33.378) (28.710) (28.757)

,Other (income) and deductions (7.385) (7.685) (22.498)

Net income taxes charged to continuing operations . $448.782 $490.123 $275.489 Provisions for current and deferred federal and state income taxes and amortization of investment tax credits resulted in the following effective income tax rates for the years 1996,1995 and 1994: ,

1996 _ 1995 1994 ,

(Thousands of Dollars) <

Net income before extraordinary item . $ 666.100 $ 659.533 $354.934 ,

Net socome tases charged to continuing operations . 448,782 490.123 275.489 64.424 69.961 64.927 i Provision for dividends on Comed preferred and preference stocks Pre-tax income before provision for dividends $1.179.306 $1.219.617 $695.350 Effective income tax rato . 38.1 % 40.2% 39 6 %

The principal differences between net income taxes charged to continuing operations and the amounts computed at the federal statutory rate of 35% for the years 1996,1995 and 1994 were as follows; <

1996 1995 1994 ,

(Thousands of Dollars)

Federal income taxes computed at statutory rate . $412.757 $426.866 $243.373 Equity component of AFUDC which was excluded from taxable incomo (7,272) (4.595) (7.920)

Amorteation of investment tax credits . (33.378) (28.7.10) (28.810)

State income taxes, not of federal income taxes - 58.387 65.972 40.140

- Differences between book and tax accounting, pnmarily property-related deductions . 14,150 27,534 26.505 Other~. net 4.138 3,056 2.201 Net income taxes charged to continuing operations . $448.782 $490.123 $275.489 Current federal income tax liabilities which were recorded prior to 1995 included excess amounts of AMT over the regular federal income tax, which amounts were also recorded as decreases to deferred federal income taxes. The excess amounts of AMT were carried forward and portions were ,

B-41

,' . UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued applied as credits against the post-1994 regular federal income tax liabilities. The remaining excess cmounts of AMT can be carried forward indefinitely as credits against future years' regular federal ,

, income tax liabilities;--

(17) Taxes, Except income Taxes

~

Provisions for taxes, except income taxes, for the years 1996,1995 and 1994 were as followsr

>- 1996 1995 1994:

(Thousands of Dollars)

. Illinois public utdity revenue. , , $227.062 $229.546 $211.263 I

- Illinois invested capital 104,663 106.830 109.373 Municipal utdity gross receipts . 168.715 167.758 145,011 Real estate . 129.770 176.454 180.221 Municipal compensation . 78,544 .78.602 72.647 Other-net . 74.821 74.107 69.281'

$783.575 $833.297 $787.796 The reduction in Comed's real estate taxes in 1996 results primarily from ongoing challenges by Comed of the methodology used by local taxing authorities to assess the value of Comed's nuclear generating stations. Approximately half of the 1996 reduction in Comed's real estate taxes is related to the year:1995.

(18) Lease Obligations of Subsidiary Companies Under its nuclear fuel lease arrangement, Comed may sell and lease back nuclear fuel from a ,

lessor who may borrow an aggregate of $700 million, consisting of $300 million of commercial paper -]

or bank borrowings and $400 million of intermediate term notes, to finance the transactions. With I respect to the commercial paper / bank borrowing portion. $100 million will expire on November 23, 1998 and $200 million will expire on November 23,1999. With respect to the intermediate term notes, a portion expires in November 1997, and each November thereafter. .through November 2001 and in November. 2003. At December 31 1996, Comed's obligation to the lessor for leased nuclear fuel 1 amounted to approximately $687 million. Comed has agreed to make lease payments which cover the amortization of the nuclear fuel used in Comed's reactors plus the lessor's related financing costs.

Comed has an obligation for spent nuclear fuel disposal costs of leased nuclear fuel.

Future minimum rental payments, not of executory costs, at December 31,1996 for capital leases

~

are estimated to aggregate $788 million, including $241 million in 1997, $195 million in 1998,$150

, million in 1999,$91 million in 2000, $45 million in 2001 and $66 million in 2002-2043. The estimated interest component of such rental payments aggregates $106 million. The estimated portions of obhgations due within one year under capital leases of approximately $174 million and $168 million at December 31,1996 and 1995, respectively, are included in current liabilities.

Future ' minimum rental payments at December 31,1996 for operating leases are estimated to aggregate $173 million, including $12 million in 1997,$13 million in 1998, $12 million in 1999,$10 million in 2000. $10 million in 2001 and $116 million in 2002-2024.

(19) Joint Plant' Ownership' Comed has a 75% undivided ownership interest in the Ouad Cities nuclear generating station.

Further, Comed is fesponsible for 75% of all costs which are charged to appropriate investment, B-42

UNICOM CORPORATION AND SUBSIDIARY COMPANIES . '.

NOTES TO FINANCIAL STATEMENTS-Continued o ..

operation or maintenance accounts and provides its own financing. At December 31,1996, for its o

&Qg~ i share of ownership in the station, Comed had an investment of $641 million in production and y' transmission plant in service (before reduction of $197 million for the related accumulated provision . N for depreciation) and $21 million in construction work in progress.

u

[ >

3' -T';rm r

(20) Investments in Uranium-Related Properties kIt to 1994, Comed recorded a reduction in the carrying value of its investments in uranium-related ,

J properties after completing a review of various alternatives and reassessing the long-term 3

recoverability of those investments. The effects of the reduction reduced 1994 net income by $34 milhon or $0.16 per common share. 3 1 (21) Commitments and Contingent Liabilities Purchase commitments, principally related to construction and nuclear fuel, approximated $1,060 -

milhon at December 31,1996, comprised of approximately $1,018 million for Comed and the Indiana Company and approximately $42 million for Unicom Thermal. In addition, Comed has substantiat commitments for the purchase of coal. Comed's coal costs are high compared to those of'othe utilities Comed's western coal contracts and its rail contracts for delivery of the western coal provia for the purchase of certain coal at prices substantially above currently prevaihng market prices. E

" Management's Discussion and Analysis of Financial Condition and Results of Operaten subcaption " Liquidity and Capital Resources," for additional information regarding Comed's purch ,

commitments. <

W ;. a d Comed is a member of NML, established to provide insurance coverage against p >' ,

, m. g' damage to members' nuclear generating facihties. The members are subject to a retr  ? iWA premium adjustment in the event losses exceed accumulated reserve funds. Capital t accumulated in the reserve funds of NML to the extent that Comed would not be !: . , , m .

retrospective premium adjustment in the event of a single incident. However, ComE: , p vi 9 ,7))

subject to a marmum assessment of approximately $53 million in any policy year, in the s ',t un mouctM To date '

exceed accumulated reserve funds. T ,

Corned preserk gate fro Comed also is a member of NEIL. which provides insurance coverage again aw r replacement power obtained dunng certain prolonged accidental outages of nuclear p $ i' med o*f a p d of a and coverage for property losses in excess of $500 million occurring at nucle M! probable habihty for companies insured with NEIL are subject to retrospective premium adjustments if + pro >ur"dfely $25 milhon t accumulated reserve funds. Capital has been accumulated in the reserve funds of Ni J1.1996 and 1995, which r f that Comed would not be hable for a retrospective premium adjustment in the et USsociated with former MGP incident under the replacement power coverage and the property damage cove Comed could be subject to maximum assessments, in any policy year, of approxim milhon has been included on habihty associated w;!h and $73 milhon in the event losses exceed accumulated reserve funds under the rer Approximately half of th' and property damage coverages, respectively. formerly used as a tannery h eshmate that Comed's The NRC's indemnity for pubhc habikty coverage under the Price-Anderson Ac- sites pursuant to CER a rnandatory industry-wide program under which owners of nuclear generating f, financial posihon or results o assessed in the event of nuclear incidents. Based on the number of nuclear reactc currently available infor kcenses, Comed would currently be subject to a maximum assessment of $991 mill responding to site contamt an incident, hmited to a maximum of $125 million in any calendar year.

not yet been completed and e d' a B-43

+ UNICOM CORPORATION AND SUBSIDIAR MPANIES NOTES in addition, Comed TO FINANCIAL particioates in the A STATEMENTS-Contin ued Liabihty Underwriters Master Werker Program bodily injury caused by the nuclear merican Nuclear energy haz insurers d and Mutualy Atomic E related employment" began afte'The which ar provices January 1 1988coverage for C to workers whose worker tort claims fi assessment of approximately $36omEd coverage milhon in the applies event bel subject rto a maximum "nuclea would currently osses exceed accumulated reserve funds.

Comed and Cotter seeking unspecified damagDuring 1 Cotter has permitted radioactivees and andotherinjunctive haza d relief based on al In February 1994 a federaljury r ous material retumed to be nomiowned releasedeasfrom its or mill occup into in these cases, w,hich verdicts were upheld o r y amage and potential adverse health effects the subject of a settlement agreernent ren appeal. ente d Thei remaining claims in t settlement agreement is implemented, the 1989 acti nto by counsel for the plaintiffs and Cotter If the and Comed's determination isbethat theseAlthough actions willcase ons will dismissed. the remaining position or results of operations. contested issues of fact and law, Unicom's not have a material impact on their financial Comed is involved in administrative and legal and other matters. The outcome of these proceedin proceedings concerning air quahty, water quality subsidiaries are or are hkely to become gs may require increases in parties n operating procedures. Comed and its future construction toexpendit MGP sites, or may voluntarily hable under CERCLA.

undertake proceedings initiated by totheinagencies U.S. EPA stateand/or o vestigate and remediate sites e for which sites as part of the absorption of smaller utihties andComE rporate entity have b en constructed. To date, Comed has id but did, however, acquire MGP for remediation. Comed presently estimates entified 44thformer MGP sites for which it expected that the costs incurred over a period of approximately 20 t at its associated 0

costs of formerwith million in current-year MGP siteinvestigatioremed (1997) -

investigation and dollars It is I most probable hability for such ,

o MGP 30 n and years. costs remediation in acco Comed Because d of former is not MGP able to sites will bt determine approximately $25 million has been r the ance included on the Cstandards a reserve of withe accounting e

31,1990 and 1995, which reHects n low d ,

million has Deen ,

of the range included on oftheComed's Consohdated estimate of th B liabihty associated with cleanup costs nce Sheets, representing Comed's estim formerly used as a tannery of remediation which was sites other than former purchApproximately MGP sites. ha estimate that Comed's costs ofased investigatingby Comed and in 1973.y Unicom and C sites pursuant to CERCLA andremediating state environmental the former MGP l and other y remediation financial position or results of operations of U i responding to site contamination, ncom or Comed theThese extentcost estimates are b of contcurrently n

not yet been completed and the cleanup amination levels to at sites for which the investi 1 which sites are expected to have to be remediated B-44

---~ __ - --- - --~

,' . UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS--Continued applied as credits'against the post-1994 regular federal income tax liabilities. The remaining excess amounts of AMT can be carried forward indefinitely as credits against future ye'ars' regular federal

. income tax liabilities; (17) Taxes, Except income Taxes Provisions for taxes, except income taxes, for the years 1996,1995 and 1994 were as follows:

1996 1995 1994 (Thousands of Dollars)

Ilknois pubhc utshty revenue. , $227.062 $229.546 $211,263 tilinois invested capital , , , 104,663 106,830 109,373 Municipal utihty gross receipts , , ,, 168.715 167,758 145.011 Real estato . 129.770 176.454 180,221 Municipal compensabon . , 78.544 78.602 72.647 Other-net . 74.821 74.107 69.281

$783,575 $833.297 $787.796 The reduction in Comed's real estate taxes in 1996 results primarily from ongoing challenges by Comed of the methodology used by local taxing authorities to assess the value of Comed's nuclear generating stations. Approximately half of the 1996 reduction in Comed's real estate taxes is related to the year 1995.

(18) Lease Obligations of Subsidiary Companies Under its nuclear fuel lease arrangement, Comed may sell and lease back nuclear fuel from a lessor who may bonow an aggregate of $700 million, consisting of $300 million of commercial paper or bank borrowings and $400 million of intermediate term notes, to finance the transactions. With respect to the commercial.. paper / bank borrowing portion, $100 million will expire on November 23, 1998 and $200 million will expire on November 23,1999. With respect to the intermediate term notes, a portion expires in November 1997, and each November thereafter, through November 2001 and in November 2003. At December 31,1996, Comed's obligation to the lessor for leased nuclear fuel amounted to approximately $687 million. Comed has agreed to make lease payments which cover the amortization of the nuclear fuel used in Comed's reactors plus the lessor's related financing costs.

Comed has an obligation for spent nuclear fuel disposal costs of leased nuclear fuel.

Future minimum rental payments, net of executory costs, at December 31,1996 for capital leases are estimated to aggregate $788 million, including $241 million in 1997,$195 million in 1998,$150

, million in'1999, $91 million in 2000, $45 million in 2001 and $66 million in 2002-2043. The estimated interest component of such rental payments aggregates $106 million. The estimated portions of obligations due within one year under capital leases of approximately $174 million and $168 million at December 31,1996 and 1995, respectively. are included in current liabilities.

Future minimum rantal payments at December 31,1996 for operating leases are estimated to aggregate $173 million, including $12 million in 1997,$13 million in 1998,$12 million in 1999,$10 million in 2000, $10 million in 2001 and $116 million in 2002-2024.

(19) Joint Plant Ownership Comed has a 75% undivided ownership interest in the Quad Cities nuclear generating station.

Further, Comed is responsible for 75% of all costs which are charged to appropriate investment, B-42

UNICOM CORPORATION AND SUBSIDIARY COMPANIES . .

NOTES TO FINANCIAL STATEMENTS-Continued operation or maintenance accounts and provides its own financing. At December 31i 1996, for its share of ownership in the station, Comed had an investment of $641 million in production and transmission plant in service (before reduction of $197 million for the related accumulated provision .

for depreciation) and $21 million in construction work in progress.

(20) investments in Uranium-Related Properties in 1994, Comed recorded a reduction in the carrying value of its investments in uranium-related properties after completing a review of various alternatives and reassessing the long-term recoverability of those investments. The effects of the reduction reduced 1994 net income by $34 million or $0.16 per common share.

(21) Commitments and Contingent Liabilities Purchase commitments, principally related to construction and nuclear fuel, approximated $1,060 million at December 31,1996, comprised of approximately $1,018 million for Comed and the indiana Company and approximately $42 million for Unicom Thermal. In addition, Comed has substantial commitments for the purchase of coal. Comed's coal costs are high compared to those of other utilities. Comed's western coal contracts and its rail contracts for delivery of the western coal provide for the purchase of certain coal at prices substantially above currently prevailing market prices. See

" Management's Discussion and Analysis of Financial Condition and Results of Operations,"

subcaption " Liquidity and Capital Resources," for additional information regarding Comed's purchase commitments.

Comed is a member of NML, established to provide insurance coverage against property I damaj 'o members' nuclear generating facilities. The members are subject to a retrospective ,

premium adjustment in the event losses exceed accumulated reserve funds. Capital has been I accumulated in the reserve funds of NML to the extent that Comed would not be liable for a retrospective premium adjustment in the event of a single incident. However, Comed could be I

subject to a maximum assessment of approximately $53 million in any policy year, in the event losses exceed accumulated reserve funds.

l Comed also is a member of NEIL, which provides insurance coverage against the cost of replacement power obtained during certain prolonged accidental outages of nuclear generating units

' and coverage for property losses in excess of $500 million occurring at nuclear stations. All companies insured with NEIL are subject to retrospective premium adjustments if losses exceed accumulated reserve funds. Capital has been accumulated in the reserve funds of NEIL to the extent that Comed would not be liable for a retrospective premium adjustment in the event of a single incident under the replacement power coverage and the property damage coverage. However, Comed could be subject to maximum assessments, in any policy year, of approximately $21 million and $73 million in the event losses exceed accumulated reserve funds under the replacement power and property damage coverages, respectively.

The NRC's indemnity for public liabihty coverage under the Price-Anderson Act is supported by a mandatory industry-wide program under which owners of nuclear generating facilities could be i assessed in the event of nuclear incidents. Based on the number of nuclear reactors with operating q licenses, Comed would currently be subject to a maximum assessment of $991 million in the event of an incident, limited to a maximum of $125 milkon in any calendar year, I

B-43 i

u_____ _ _ _ __ ____--__ _ _ _ _ _ . _--__

~

• UNICOM CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS-Continued in addition Comed participates in the American Nuclear Insurers and Mutual Atomic Energy Liability Underwriters Master Worker Program which provides coverage for worker tort cla:ms filed for a bodily injury caused by the nuclear energy hazard. The coverage applies to workers whose " nuclear related employment" began after January 1,1988. Comed would currently be subject to a maximum assessment of approximately $36 million in the event losses exceed accumulated reserve funds.

During 1989 and 1991, actions were brought in federal and state courts in Colorado against Comed and Cotter seeking unspecified damages and injunctive relief based on allegations that Cotter has permitted radioactive and other hazardous material to be released from its mill into areas owned or occupied by the plaintiffs resulting in property damage and potential adverse health effects.

In February 1994, a federal jury retumed nominal dollar verdicts on eight bellwether plaintiffs' claims-in these cases, which verdicts were upheld on appeal. The remaining claims in the 1989 actions are l

the subject of a settlement agreement ontered into by counsel for the plaintiffs and Cotter. If the settlement agreement is implemented, the 1989 actions will be dismissed. Although the remaining cases will necessarily involve the resolution of numerous contested issues of fact and law, Unicom's and Comed's determination is that these actions will not have a material impact on their financial position or results of operations.

Comed is involved in administrative and legal proceedings concerning air quakty, water quality and other matters. The outcome of these proceedings may require increases in future construction

[ expenditures and operating expenses and changes in operating procedums. Comed and its l subsidiaries are or are likely to become parties to proceedings initiated by the U.S. EPA, state l agencies and/or other responsible parties under CERCLA with respect to a number of sites, including MGP sites. or may voluntarily undertake to investigate and remediate sites for which they may be liable under CERCLA.

Comed generally did not operate MGPs as a corporate entity but did, however, acquire MGP sites as part of the absorption of smaller utilities and as vacant real estate on which Comed facilities have been constructed To date, Comed has identified 44 former MGP sites for which it may be liable for remediation. Comed presently estimates that its costs of former MGP site investigation and remediation will aggregate from $25 million to $150 million in current-year (1997) dollars. It is expected that the costs associated with investigation and remediation of former MGP sites will be incurred over a period of approximately 20 to 30 years. Because Comed is not able to determine the most probable liability for such MGP costs, in accordance with accounting standards, a reserve of approximately $25 million has been included on the Consolidated Balance Sheets as of December 31,1996 and 1995, which reflects the low end of the range of Comed's estimate of the liability asscciated with former MGP sites. In addition, as of December 31,1996 and 1995, a reserve of $8 million has been included on the Consolidated Balance Sheets, representing Comed's estimate of the liability associated with cleanup costs of remediation sites other than former MGP sites.

Approximately half of this reserve relates to anticipated cleanup costs associated with a property formerly used as a tannery which was purchased by Comed in 1973. Unicom and Comed presently estimate that Comed's costs of investigating and remediating the former MGP and other remediation sites pursuant to CERCLA and state environmental laws will not have a material impact on the financial position or results of operations of Unicom or Comed. These cost estimates are based on currently available information regarding the responsible parties likely to share in the costs of responding to site contamination, the extent of contamination at sites for which the investigation has not yet been completed and the cleanup levels to which sites are expected to have to be remediated.

B-44

UNICOM CORPORATION AND SUBSIDIARY COMPANIES

• NOTES TO FINANCIAL STATEMENTS-Concluded (22) Quarterly Financial Information Average Number of Earnings .

Common Per Operating Operating Not Shares Common Revenues income income Outstanding Shore Three Months Ended -

(Thousands Except Per Share Data)

$1,578,136 $260,579 $ 88.601 214,429 $0,41 March 31,1995 Jure 30,1995 $1,559.521 $276.584 $108.866 214.677 $0.51

$2,190.862 $582,006 $407,433 214,769 $1.90 September 30,1995 ,

December 31,1995, . ,

$1.581,526 $219,327 $ 34.611 214.889 $016

$1,683,929 $297,551 $136.932 215,248 $0.64 March 31,1996 June 30,1996 $1,547,916 $253,063 $100,313 215.438 $0 47

$2,0C7.901 $474.895 . 5334,980 215,568 $1.55 September 30,1996.

$1,637,278 $237,799 $ 93,875 215,747 $044 December 31,1996.

(23) Subsequent Events

[.

in January 1997, Comed issued $150 million principal amount of 7.375% Notes due January 15, 2004, $150 million principai amount of 7.625% Notes due January 15,2007 and $150 million principal amount of Company-obligated preferred securities of subsidiary trust.

On January 24,1997, Comed announced that it would redeem on March 11,1997 all of its $200 million principal amount of First Mortgage 9W% Bonds, Series 57, due May 1,2016.

I B-45

~

SUBSEQUENT EVENTS Nuclear Matters. As noted under " Regulation-Nuclear Matters" in " Management's Discussion and Analysis of Financial Condition and Results of Operations"in the financial statements included in this Exhibit, Comrnonwealth Edison Company (" Comed") has been working on improvements in operating and personnel procedures as well as the repair and replacement of equipment at its o nuclear generating stations. As a part of these activities, Comed's management has decided to continue the present outages at its LaSalle nuclear generating station until the performance issues identified with r%pect to that station have been appropriately addressed. Comed presently expects .

4 the LaSalle outage to extend into the fall of 1997.

In February 1997, an operational event occurred in the control roorn of Comed's Zion nuclear generating station. As a result, the Regional staff of the Nuclear Regulatory Commission ("NRC") has issued a letter confirming Comed's commitment to conduct a comprehensive assessment of the event and to develop and implement a program to ensure adequate personnel performance in the future, including upgraded operator training. Comed must brief the staff on the results of its investigation, its proposed corrective actions and other matters prior to restarting either Zion unit. The current Zion Unit 2 outage is expected to extend into and likely beyond the summer of 1997., and Zion Unit 1 is enpected to be out of service until early 1998.

The LaSalle and Zion outages are part of several outages of nuclear and fossil generating stations that several utilities operating in the Midwestern power grid (including Comed) are expecting l during 1997. Comed is evaluating the need for reinforcement of its available generating and l transmission capacity and the availability of power from third parties in light of these regional l circumstances. Such evaluation includes consideration of additional expenditures of approximately l $50 million, a portion of which is capital, relating to enhancing generating station availability, l transmission reinforcement and purchasing power from other utilities, as well as consideration of

! methods of managing customer demand for power. Such expenditures could include demand charges for purchased power which are not recoverable through the fuel adjustment clause under these circumstances, but do not reflect the related energy costs for such purchased power.

As also noted under " Regulation-Nuclear Matters" in " Management's Discussion and Analysis of Financial Condition and Results of Operations, in late January 1997, the NRC required Comed to submit information to allow the NRC to determine what actions, if any, should be taken to assure that Comed can safely operate its six nuclear generating stations while sustaining performance improvement at each site. Comed submitted its response to the NRC's request on March 28,1997.

Other information. See Unicom Corporation's and Comed's Annual Reports on Form 10-K for the year ended December 31,1996, for additionalinformation regarding events affecting their businesses since the preparation of the financial statements contained in this Exhibit.

O B-46