-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QO69E9qE7kfVkfivnEgNPr6rYSksav4ZbVc6arH28Rc2QriLeiOz2Ybm5MdN9Uaa n7BuFzFBRrNNvh39bhCMSQ== 0000950116-99-000642.txt : 19990409 0000950116-99-000642.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950116-99-000642 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PECO ENERGY CO CENTRAL INDEX KEY: 0000078100 STANDARD INDUSTRIAL CLASSIFICATION: 4931 IRS NUMBER: 230970240 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01401 FILM NUMBER: 99584184 BUSINESS ADDRESS: STREET 1: 2301 MARKET ST STREET 2: P O BOX 8699 CITY: PHILADELPHIA STATE: PA ZIP: 19101 BUSINESS PHONE: 2158414000 FORMER COMPANY: FORMER CONFORMED NAME: PHILADELPHIA ELECTRIC CO DATE OF NAME CHANGE: 19920703 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission File Number 1-1401 --------------------- PECO ENERGY COMPANY (Exact name of registrant as specified in its charter) Pennsylvania 23-0970240 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) P.O. Box 8699 2301 Market Street, Philadelphia, PA (215) 841-4000 19101 (Address of principal executive offices) (Registrant's telephone number, including area code) (Zip Code)
--------------------- Securities registered pursuant to Section 12(b) of the Act: First and Refunding Mortgage Bonds (Listed on the New York Stock Exchange):
5 5/8% Series due 2001 6 1/2% Series due 2003 7 1/8% Series due 2023 7 1/4% Series due 2024 7 3/8% Series due 2001 6 3/8% Series due 2005 7 3/4% Series 2 due 2023 Cumulative Preferred Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges): $4.68 Series $4.40 Series $4.30 Series $3.80 Series
Common Stock -- without par value (Listed on the New York and Philadelphia Stock Exchanges) 9.00% Cumulative Monthly Income Preferred Securities, Series A, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Listed on the New York Stock Exchange) Trust Receipts of PECO Energy Capital Trust II, each representing an 8.00% Cumulative Monthly Income Preferred Security, Series C, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Listed on the New York Stock Exchange) Trust Receipts of PECO Energy Capital Trust III, each representing an 7.38% Cumulative Monthly Income Preferred Security, Series D, $1,000 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Listed on the New York Stock Exchange) Securities registered pursuant to Section 12(g) of the Act: Cumulative Preferred Stock -- without par value: $7.48 Series $6.12 Series --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's common stock (only voting stock) held by non-affiliates of the registrant was $9,305,227,737 at March 26, 1999. Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Common Stock -- without par value: 203,392,956 shares outstanding at March 26, 1999. --------------------- DOCUMENTS INCORPORATED BY REFERENCE (In Part) Annual Report of PECO Energy Company to Shareholders for the year 1998 is incorporated in part in Parts I, II and IV hereof, as specified herein. Proxy Statement of PECO Energy Company in connection with its 1999 Annual Meeting of Shareholders is incorporated in part in Part III hereof, as specified herein. ================================================================================ Page No. -------- PART I ITEM 1. BUSINESS ......................................................... 1 The Company ...................................................... 1 Deregulation and Rate Matters .................................... 1 Electric -- Retail .............................................. 2 Electric -- Wholesale ........................................... 5 Gas ............................................................. 6 Competition. .................................................... 6 Electric Operations .............................................. 7 General ......................................................... 7 Limerick Generating Station .....................................10 Peach Bottom Atomic Power Station ...............................12 Salem Generating Station ........................................12 Fuel .............................................................13 Nuclear .........................................................13 Coal. ...........................................................15 Oil .............................................................15 Natural Gas .....................................................15 Gas Operations ...................................................16 Year 2000 Readiness Disclosure ...................................16 Segment Information ..............................................17 Capital Requirements and Financing Activities. ...................17 Construction .....................................................19 Employee Matters .................................................20 Environmental Regulations ........................................20 Water ...........................................................20 Air .............................................................21 Solid and Hazardous Waste .......................................21 Costs ...........................................................24 AmerGen Energy Company, LLC ......................................24 Telecommunications Ventures ......................................24 PECO Energy Capital Corp. and Related Entities ...................25 Executive Officers of the Registrant. ............................26 ITEM 2. PROPERTIES .......................................................28 ITEM 3. LEGAL PROCEEDINGS ................................................29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. .............30 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .............................................30 ITEM 6. SELECTED FINANCIAL DATA ..........................................31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ..........................................31 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. ......31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ......................31 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE ........................................31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ...............31 ITEM 11. EXECUTIVE COMPENSATION. ..........................................31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ................................................. ...32 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ...................32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ................................................. ...33 Financial Statements and Financial Statement Schedule ............33 REPORT OF INDEPENDENT ACCOUNTANTS. ...............................34 SCHEDULE II-- VALUATION AND QUALIFYING ACCOUNTS. .................35 Exhibits .........................................................36 Reports on Form 8-K ..............................................39 SIGNATURES i PART I ITEM 1. BUSINESS The Company Incorporated in Pennsylvania in 1929, PECO Energy Company (Company) is primarily a vertically integrated utility that historically has provided regulated retail electric and natural gas service to customers in its franchised service territory in southeastern Pennsylvania. Beginning in 1999, the Electricity Generation Customer Choice and Competition Act (Competition Act) requires the unbundling of retail electric services in Pennsylvania into separate generation, transmission and distribution services with open retail competition for generation services. With the advent of deregulation, the Company serves as the local distribution company providing electric distribution services in southeastern Pennsylvania and bundled electric service to customers who cannot or do not choose an alternate electric generation supplier (EGS). Through its Exelon division, the Company is a competitive generation supplier offering a variety of unregulated energy and utility infrastructure services, including electric supply, to businesses and residential customers across Pennsylvania. The Company also engages in the wholesale marketing of electricity on a national basis. The Company also participates in joint ventures which provide telecommunication services in the Philadelphia metropolitan region. At December 31, 1997, the Company discontinued the use of regulatory accounting in its financial statements for its electric generation operations. In connection with the discontinuance of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company performed a market value analysis of its generation assets and wrote-off $1.8 billion (net of income taxes) of unrecoverable electric plant costs and regulatory assets. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1998. The Company is a public utility under the Pennsylvania Public Utility Code and a transmitting utility and electric utility under the Federal Power Act. As a result, the Company is subject to regulation by the Pennsylvania Public Utility Commission (PUC) as to electric distribution, certain retail electric rates, retail gas rates, issuances of securities and certain other aspects of the Company's operations and by the Federal Energy Regulatory Commission (FERC) as to transmission rates. Specific operations of the Company are also subject to the jurisdiction of various other federal, state, regional and local agencies, including the United States Nuclear Regulatory Commission (NRC), the United States Environmental Protection Agency (EPA), the United States Department of Energy (DOE), the Delaware River Basin Commission (DRBC) and the Pennsylvania Department of Environmental Protection (PDEP). The Company's Muddy Run Pumped Storage Project and the Conowingo Hydroelectric Project are subject to the licensing jurisdiction of the FERC. Due to its ownership of subsidiary- company stock, the Company is a holding company as defined by the Public Utility Holding Company Act of 1935 (1935 Act); however, it is predominantly an operating company and, by filing an exemption statement annually, is exempt from all provisions of the 1935 Act, except Section 9(a)(2) relating to the acquisition of securities of a public utility company. The Company established specific goals to increase its generation capacity from 9 gigawatts to 25 gigawatts by 2003. The Company is targeting a balanced portfolio of nuclear, hydro and clean burning fossil capacity through the acquisition of plants and long-term supply agreements. In order to meet this strategic objective the Company may require significant capital resources. Deregulation and Rate Matters Historically, all of the Company's retail electric and gas revenues have been derived pursuant to bundled rates regulated by the PUC and all of the Company's wholesale electric revenue has been derived pursuant to 1 rates regulated by the FERC. As a result of the adoption of the Competition Act and deregulation initiatives by the FERC, electric services are being unbundled into separate generation, transmission and distribution services with open competition for both retail and wholesale generation services. Certain transmission and distribution services will remain subject to regulation. Electric -- Retail The Competition Act was enacted in December 1996 and provides for the restructuring of the electric utility industry in Pennsylvania. The Competition Act requires the unbundling of electric services into separate generation, transmission and distribution services with open retail competition for generation services. Generation services may be provided by EGSs licensed by the PUC. Under the Competition Act, EGSs are subject to certain limited financial and disclosure requirements but are otherwise unregulated by the PUC. The Competition Act required utilities to submit restructuring plans, including their stranded costs which will result from retail competition for generation services. Stranded costs include regulatory assets, nuclear decommissioning costs and long-term purchase power commitments for which full recovery is allowed and other costs, including investment in generating plants, spent fuel disposal, retirement costs and reorganization costs, for which an opportunity for recovery is allowed in an amount determined by the PUC as just and reasonable. As a mechanism for utilities to recover their allowed stranded costs, the Competition Act provides for the imposition and collection of non-bypassable charges on customers' bills called competitive transition charges (CTCs). CTCs are assessed to and collected from all retail customers who have been assigned stranded cost responsibility and access the utilities' transmission and distribution systems and may be collected over a maximum period of nine years, except as such period may be extended by the PUC for good cause shown. As the CTCs are based on access to the utility's transmission and distribution system, they will be assessed regardless of whether such customer purchases electricity from the utility or an EGS. The Competition Act provides, however, that the utility's right to collect CTCs is contingent on the continued operation at reasonable availability levels of the assets for which the stranded costs were awarded, except where continued operation is no longer cost efficient because of the transition to a competitive market. The Competition Act also authorizes the PUC to issue qualified rate orders approving the issuance of transition bonds to facilitate the recovery or financing of qualified transition expenses of an electric utility or its assignee. Under the Competition Act, proceeds of transition bonds are required to be used principally to reduce qualified transition expenses, including stranded costs, and the related capitalization costs of the utility. The transition bonds are payable from intangible transition charges (ITCs) which are collected in lieu of CTCs. In accordance with the provisions of the Competition Act, in April 1997, the Company filed with the PUC a comprehensive restructuring plan detailing its proposal to implement full customer choice of electric generation suppliers. The Company's restructuring plan identified $7.5 billion of retail electric generation-related stranded costs. In August 1997, the Company and various intervenors in the Company's restructuring proceeding filed with the PUC a Joint Petition for Partial Settlement (Joint Petition). In December 1997, the PUC rejected the Joint Petition and entered an Opinion and Order, revised in January and February 1998 (PUC Restructuring Order), which deregulated the Company's electric generation operations. The PUC Restructuring Order authorized the Company to recover stranded costs of $4.9 billion on a discounted basis, or $5.3 billion on a book value basis, over 8 1/2 years beginning in 1999. In January 1998, the Company and numerous other parties filed petitions for review of the PUC Restructuring Order in the Commonwealth Court of Pennsylvania and the Company filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania seeking injunctive relief. On April 29, 1998, the Company and all but one of the 25 parties who had challenged the Company's restructuring plan filed a joint petition and settlement (Settlement) with the PUC. In May 1998, the PUC entered an Opinion and Order (Final Restructuring Order) approving the Settlement. The intervenor who had not joined the Settlement appealed the Final Restructuring Order to the Commonwealth Court. After full briefing and oral argument, the Commonwealth Court dismissed the appeal thus affirming the Final Restructuring Order. The intervenor filed a petition for allowance of appeal with the Pennsylvania Supreme Court which was denied. The intervenor subsequently filed a petition for writ of certiorari with the United States Supreme Court, which was also denied. Once this petition 2 for writ of certiorari was denied, the Company and all other parties withdrew their pending appeals at the Commonwealth Court and the Eastern District of Pennsylvania. All appeals of the Final Restructuring Order have either been finally resolved by a court or withdrawn by the parties. The Settlement authorizes the Company to recover $5.26 billion of stranded costs, together with a return of 10.75% thereon. For good cause shown, the PUC authorized the recovery of stranded costs over a 12 year transition period beginning January 1, 1999 and ending December 31, 2010. Stranded costs and the allowed return thereon are recovered through CTCs and, at the Company's election to issue or cause the issuance of transition bonds, ITCs, designed to recover the $5.26 billion of stranded costs. The CTCs have been established assuming annual growth in sales of 0.8% and will be reconciled annually to actual sales. The following table shows the estimated average levels of CTCs and/or ITCs for the years 1999 through 2010, based on estimated 0.8% annual sales growth assumed in the Settlement. TABLE 1 Annual Stranded Cost Amortization And Return
Revenue Excluding Annual CTC Gross Receipts Tax Year Sales and/or ITC(2) Total Return @ 10.75% Amortization - - ------- ------------ --------------- ----------- ----------------- ------------- MWh(1) $/kWh ($000) ($000) ($000) 1999 33,569,358 $ 0.0172 $551,988 $566,134 $ (14,146) 2000 33,837,913 0.0192 621,102 564,222 56,879 2001 34,108,616 0.0251 818,457 547,777 270,680 2002 34,381,485 0.0251 825,004 516,869 308,135 2003 34,656,537 0.0247 818,352 482,401 335,951 2004 34,933,789 0.0243 811,540 444,798 366,742 2005 35,213,260 0.0240 807,933 403,555 404,378 2006 35,494,966 0.0266 902,623 353,070 549,553 2007 35,778,925 0.0266 909,844 290,627 619,217 2008 36,065,157 0.0266 917,123 220,312 696,811 2009 36,353,678 0.0266 924,459 141,229 783,231 2010 36,644,507 0.0266 931,855 52,381 879,474
- - ------------ (1) Subject to reconciliation of actual sales and collections. (2) Both the CTCs and the ITCs are subject to adjustment. The Settlement required the Company to unbundle its retail electric rates on January 1, 1999 into the following components: (i) distribution and transmission charges, (ii) CTCs and, if applicable, ITCs and (iii) a capacity and energy charge for generation, which is the maximum amount the Company, as the provider of last resort (PLR), can charge customers who do not or cannot choose to purchase electricity from alternate EGS. The Settlement requires the Company to reduce rates during 1999 and 2000 by 8% and 6%, respectively, from rates in existence on December 31, 1996. The Settlement also extends the rate caps on generation rates at higher levels than required by the Competition Act, until December 1, 2010 and extends rate caps on transmission and distribution rates until June 30, 2005. The Company's unbundled rates, rate reductions and rate caps are reflected in the schedule of system-wide average rates included in the Settlement and shown in Table 2 below. 3 TABLE 2 Schedule of System-Wide Average Rates (dollars per kilowatthour (kWh))(1)
T&D CTC Shopping Generation Effective Date Transmission(2) Distribution Rate Cap and/or ITC(3) Credit Rate Cap - - ----------------- ----------------- ----------------- ----------------- --------------- ------------ -------------- (1) (2) (3)=(1) + (2) (4) (5) (6)=(4) + (5) January 1, 1999 $ 0.0045 $ 0.0253 $ 0.0298 $ 0.0172 $ 0.0446 $ 0.0618 January 1, 2000 0.0045 0.0253 0.0298 0.0192 0.0446 0.0638 January 1, 2001 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698 January 1, 2002 0.0045 0.0253 0.0298 0.0251 0.0447 0.0698 January 1, 2003 0.0045 0.0253 0.0298 0.0247 0.0451 0.0698 January 1, 2004 0.0045 0.0253 0.0298 0.0243 0.0455 0.0698 January 1, 2005 0.0045 (4) 0.0253 (4) 0.0298 (4) 0.0240 0.0458 0.0698 January 1, 2006 N/A N/A N/A 0.0266 0.0485 0.0751 January 1, 2007 N/A N/A N/A 0.0266 0.0535 0.0801 January 1, 2008 N/A N/A N/A 0.0266 0.0535 0.0801 January 1, 2009 N/A N/A N/A 0.0266 0.0535 0.0801 January 1, 2010 N/A N/A N/A 0.0266 0.0535 0.0801
- - ------------ (1) All charges reflect average retail billing for all rate classes (including gross receipts tax). (2) The transmission charge listed is for unbundled rates only. The PUC does not regulate the rates for transmission service. (3) Both the CTCs and the ITCs are subject to adjustment. (4) Effective until June 30, 2005. Under the Settlement, customer choice of EGSs is being phased in between January 1, 1999 and January 2, 2000 with one-third of each rate class entitled to choose their EGS by January 1, 1999, an additional one-third by January 2, 1999 and the remaining one-third by January 1, 2000. If on January 1, 2001 and January 1, 2003 less than 35% and 50%, respectively, of all of the Company's residential and commercial customers by rate class are obtaining generation service from alternate EGSs, non-shopping customers will be randomly assigned to EGSs, including those affiliated with the Company, to meet those thresholds. Assignment of non-shopping customers will be through a PUC-approved process. Customers assigned to a PLR, other than the Company will be counted as customers receiving service from an alternate EGS. Under the Settlement, the Company may securitize up to $4 billion of its $5.26 billion of stranded cost recovery through the issuance of transition bonds. The ITCs associated with the issuance of transition bonds must terminate no later than December 31, 2010. The rate reductions and rate caps described in Table 2 included as part of the Settlement anticipate the benefits of the securitization, and no adjustment in the Company base rates will be made upon issuance of any transition bonds. After January 1, 1999, CTCs (or the Company's distribution rates) will be reduced by the amount of ITCs. For additional information see "Capital Requirements and Financing Activities." On January 1, 1999, the Company unbundled its retail electric rates for metering, meter reading, and billing and collection services to provide credits for those customers that have elected to have alternate suppliers perform these services. Effective January 1, 1999, PUC-licensed entities, including EGSs, may act as agents to provide a single bill and provide associated billing and collection services to retail customers located in the Company's retail electric service territory. In such event, the EGS or other third party would replace the customer as the obligor with respect to the customer's bill and the Company will generally have no right to collect such receivable from the customer. To the extent that customers choose consolidated billing by an EGS or other third party, the Company will be relying on a small number of EGSs and other third parties rather than a large number of customers for the collection of billings, including ITCs. The PUC-licensed entities, including EGSs, may also finance, install, own, maintain, calibrate and remotely read advanced meters for service to retail customers located in the Company's retail electric service territory. An EGS or other third party that bills on behalf of the Company must comply with all applicable billing and disclosure requirements absent waiver by the PUC, including the unbundling of transmission and distribution rates. Only the Company can physically disconnect or reconnect a customer's distribution service. Physical termination of the service may only be permitted for failure to pay transmission and distribution service or PLR service. 4 Under the Restructuring Plan, the Company will act as a PLR for all retail electric customers in its retail electric service territory who do not choose or cannot choose to purchase power from an alternative EGS through December 31, 2010, subject to certain terms, conditions and qualifications. In February 1999, certain utilities, customer advocates and EGSs convened to develop proposed regulations on Competitive Default Service. On February 26, 1999, the chairman of the group forwarded a suggested procedure for choosing a Competitive Default Supplier to the PUC. Under those suggested procedures, entities that desire to act as a Competitive Default Supplier have until April 1, 2000 to submit both their qualifications to act as a Competitive Default Supplier and their bid for providing such service. Competitive Default Service will begin on January 1, 2001 for 20% of the Company's residential customers. The suggested procedures would require an EGS to provide, among other things, proof that it has received the requisite licenses from the state and federal governments, proof that it meets certain creditworthiness standards and assurances that it can acquire additional bonding as necessary. The supplier of Competitive Default Service will be required to provide billing, including its payment of ITCs and other revenues, to the Company on the terms and conditions set forth in the Company tariff for those entities who currently provide competitive billing services to customers. The suggested procedures will not become final until the PUC adopts them. The PUC may choose to reject or modify the suggested procedures. The PUC has no time deadline for rendering its decision on this issue. The PUC may allow a public comment period before reaching a final resolution of these issues. The Settlement also provides for flexible generation service pricing for customers served by Competitive Default Service, authorization of the Company to transfer its generation assets to a separate subsidiary, inclusion of a sustainable energy and economic development fund (funded at a rate of .01 cents per kilowatthour on all power sold, to be included in the capped transmision and distribution rates) and expansion and modification of the Company's program for low-income customers. Electric -- Wholesale During 1996, the FERC issued Order No. 888 which requires all public utilities that own, control or operate interstate transmission facilities to file open-access transmission tariffs for wholesale transmission services in accordance with non-discriminatory terms and conditions established by the FERC. The FERC's stated goal in promulgating Order No. 888 and related orders is to remove impediments to competition in the wholesale bulk power market place and to bring more efficient, lower cost power to electricity consumers. In response to Order No. 888, on July 3, 1996, the Company filed an individual compliance tariff with the FERC which became effective July 9, 1996. In December 1996, the Company and the other members of the PJM Interconnection LLC (PJM) filed a joint compliance filing with the FERC. The PJM is a power pool which integrates, through central dispatch, the generation and transmission operations of its member companies across a 50,000 square-mile territory in the Mid-Atlantic region. That filing included a PJM regional transmission tariff. Under the PJM tariff, which became effective on March 1, 1997, transmission service is provided on a pool-wide, open-access basis using the transmission facilities of the PJM members at rates based on the costs of the transmission system at the point of delivery. On March 31, 1997, the members of the PJM converted that organization from an unincorporated association into a limited liability company and filed with the FERC a revised PJM operating agreement to reflect that change. In November 1997, the FERC issued an order authorizing the establishment of an independent system operator (ISO) for the PJM on January 1, 1998 and designated the PJM's Office of the Interconnection as the ISO. The ISO is responsible for operation of the PJM control area and administration of the PJM open-access transmission tariff and the hourly energy market in the PJM known as the PJM Power Exchange (PJM PX). In that same order, the FERC directed the Company and the other transmission owners in the PJM to turn over control of their transmission facilities to the ISO and put in place a new PJM regional transmission tariff and energy market arrangement. Although the Company cannot predict the long-term economic effect of the restructured pooling arrangements approved by the FERC, the arrangements could adversely affect the Company's ability to fully recover its transmission costs. 5 On March 10, 1999, the FERC issued an order granting a pending application by other PJM utilities for market-based rate authority for sales of energy and certain ancillary services into the PJM PX. Although the Company has not been a party to that application, the FERC expressly granted the Company market-based rate authority for sales of energy and ancillary services into the PJM PX. Previously, the FERC restricted generators located within PJM, including the Company, to cost-based bids. The recent order expands the Company's existing ability to engage in wholesale trading of power and certain associated ancillary services at market-based rates to include trading with the PJM PX. The FERC also granted anyone else with market-based rate authority the same right. On March 10, 1999, the FERC also entered an order establishing a Market Monitoring Plan (MMP) for the PJM control area. The MMP will be administered by a newly created Market Monitoring Unit (MMU) under the PJM and authorizes the MMU to monitor and report on market activity and alleged exercises of market power by market participants. The FERC order directs additional modifications to the proposed MMP that will increase the level of coordination of the MMU with various governmental authorities. It is unclear what impact either the MMP or the MMU ultimately will have on power trading within the PJM PX in particular and on wholesale bilateral transactions generally. On September 21, 1998, the PUC entered an Order directing holders of installed capacity resources in PJM (including the Company) to immediately release or offer capacity for sale in the wholesale markets during 1999 at a presumptive price of $19.72 per kilowattyear, a price below the current competitive wholesale market prices at that time. On October 21, 1998, the Company filed a Petition for Review of the PUC Order in Commonwealth Court seeking a declaration that the PUC's Order is preempted because it attempts to regulate matters within the exclusive federal jurisdiction of the FERC. On October 28, 1998, the Company entered into a settlement with the PUC under which the Company agreed to make certain of its wholesale capacity available to new market entrants serving retail load within the Company's service territory at specified prices during 1999. On October 30, 1998, the PUC approved the settlement. Gas The Company's gas sales and gas transportation revenues are derived pursuant to rates regulated by the PUC. The PUC has established through regulatory proceedings the base rates that the Company may charge for gas service in Pennsylvania. The Company's gas rates are subject to a purchased gas cost (PGC) adjustment clause and a State Tax Adjustment Surcharge (STAS). The PGC is designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. The PGC is adjusted quarterly. The STAS is designed to recover or refund increases or decreases in certain state taxes not recovered in base rates. On November 4, 1998, the PUC issued an order approving the Company's PGC No. 15 rates for the period December 1, 1998 to November 30, 1999, which reflects a $0.0068 per thousand cubic feet (mcf) increase in natural gas sales rates. PGC No. 15 became effective December 1, 1998. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase competition. FERC policies have required interstate gas pipelines to unbundle their gas sales service from other regulated tariff services, such as transportation and storage. In anticipation of these changes, the Company modified its gas purchasing arrangements to enable the purchase and transportation of gas at lower costs. The Company, through Exelon Energy, is participating in pilot programs outside the Company's gas service territory to market natural gas and other services to retail customers. Legislation has been introduced in the Pennsylvania legislature to deregulate the gas industry. The effort to deregulate the gas industry has the support of the Governor of Pennsylvania. The Company cannot predict whether the Pennsylvania legislature will enact legislation that deregulates the gas industry or whether the Governor of Pennsylvania will ultimately sign into law any such legislation. The Company cannot predict the ultimate effect of gas industry deregulation on its future financial condition and results of operations. Competition The Company competes in both the retail electric generation market in Pennsylvania and other states and the wholesale electric generation market nationally. 6 Retail competition for electric generation supply in Pennsylvania commenced in January 1999, with two-thirds of the Company's electric utility consumers having the right to choose their supplier. The Company is actively competing for a share of the generation supply market in its traditional service territory through PECO Energy Distribution (PED) and throughout Pennsylvania through Exelon Energy, the Company's new competitive supplier. Generation services provided by PED are at the energy and capacity charge mandated by the Final Restructuring Order. Generation services offered by Exelon Energy are at competitive market prices. Customers who choose to take generation service from PED may choose an alternate generation supplier at any time. As of January 12, 1999, approximately 12% of the Company's residential and small commercial customers and approximately 50% of its large commercial and industrial customers had selected an alternate EGS. As of that date, Exelon Energy was providing generation service to approximately 135,000 commercial, industrial and residential customers throughout Pennsylvania. The Company actively competes in the developing wholesale markets for electricity. The Company's wholesale marketing activities include the sale of energy from the Company's installed capacity, the purchase of energy to meet the Company's retail requirements, the resale of energy purchased from unaffiliated utilities and others and the marketing of energy of other generators. The Company enters into both long-term and short-term commitments to buy and sell power. Currently, the Company's long-term commitments, together with the energy the Company expects to market from the Company's installed capacity, make the Company a net power seller. The Company competes in the wholesale market for electricity on the bases of price, dependability of service and execution of transactions. For additional information regarding competition, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1998. Electric Operations General During 1998, 92% of the Company's operating revenues and 94% of its operating income were from electric operations. Annual and quarterly operating results can be significantly affected by weather. Traditionally, sales of electricity are higher in the first and third quarters due to colder weather and warmer weather, respectively. Electric sales and operating revenues for 1998 by class of customer are set forth below: Operating Sales Revenues (millions of kWh) (millions of $) ------------------- ---------------- Residential ............................. 10,623 $1,377 Small commercial and industrial ......... 6,888 784 Large commercial and industrial ......... 15,678 1,067 Other ................................... 803 150 Change in unbilled ...................... 131 1 ------ ------ Service territory .................... 34,123 3,379 Interchange sales ....................... 3,483 211 Sales to other utilities ................ 37,258 1,221 ------ ------ Total ................................ 74,864 $4,811 ====== ====== The Company is engaged in the wholesale marketing of electricity on a national basis. The Company's wholesale marketing activities include the sale of energy from the Company's installed capacity, the purchase of energy to meet the Company's retail requirements, the resale of energy purchased from unaffiliated utilities and others and the marketing of energy of other generators. During 1998, the Company purchased 45.1% of its total kilowatthours sold and estimates that for 1999 it will purchase 46.9% of its total kilowatthours sold. At December 31, 1998, the Company had long-term commitments to purchase from unaffiliated utilities and others energy associated with 632 MW of capacity in 1999, energy associated with 2,054 MW of capacity during the period 2000 through 2002 and energy associated with 2,431 MW of capacity thereafter. Under some of 7 these contracts, the Company may purchase, at its option, additional power as needed. These purchases will be utilized through a combination of retail sales to customers, sales to other utilities and EGSs and open-market sales. At December 31, 1998, the Company had entered into long-term agreements with unaffiliated utilities to sell energy associated with 5,094 MW of capacity, of which 1,030 MW of these agreements are for 1999, 2,202 MW are for 2000 through 2002 and the remaining 1,862 MW extend through 2009. See Note 5 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1998. The net installed electric generating capacity (summer rating) of the Company and its subsidiaries at December 31, 1998 was as follows: Type of Capacity MW % of Total ---------------- ----- ---------- Nuclear .................................. 4,119 44.4% Mine-mouth, coal-fired ................... 709 7.7 Service-area, coal-fired ................. 725 7.8 Oil-fired ................................ 1,176 12.7 Gas-fired ................................ 267 2.9 Hydro (includes pumped storage) .......... 1,422 15.4 Internal combustion ...................... 844 9.1 ----- ----- Total .................................... 9,262(1) 100.0% ===== ===== - - ------------ (1) See "Fuel" for sources of fuels used in electric generation. The all-time maximum hourly demand on the Company's system was 7,390 MW which occurred on July 15, 1997. The all-time maximum PJM demand of 49,406 MW occurred on July 15, 1997. PJM's installed capacity (summer rating) is more than 56,000 MW. The Company's installed capacity is expected to be sufficient to meet its obligation to supply its PJM reserve margin share during the period 1998-2001. See "Deregulation and Rate Matters." The Company's nuclear-generated electricity is supplied by Limerick Generating Station (Limerick) Units No. 1 and No. 2, Peach Bottom Atomic Power Station (Peach Bottom) Units No. 2 and No. 3, which are operated by the Company, and Salem Generating Station (Salem) Units No. 1 and No. 2, which are operated by Public Service Electric and Gas Company (PSE&G). The Company owns 100% of Limerick, 42.49% of Peach Bottom and 42.59% of Salem. Limerick Units No. 1 and No. 2 have a capacity of 1,134 MW and 1,115 MW respectively; Peach Bottom Units No. 2 and No. 3 each has a capacity of 1,093 MW, of which the Company is entitled to 464 MW of each unit; and Salem Units No. 1 and No. 2 each has a capacity of 1,106 MW, of which the Company is entitled to 471 MW of each unit. The Company's nuclear generating facilities represent approximately 44.4% of its installed generating capacity. In 1998, approximately 39.4% of the Company's electric output was generated from the Company's nuclear generating facilities. Changes in regulations by the NRC that require a substantial increase in capital expenditures for the Company's nuclear generating facilities or that result in increased operating costs of nuclear generating units could adversely affect the Company. The Price-Anderson Act currently limits the liability of nuclear reactor owners to $9.7 billion for claims that could arise from a single incident. The limit is subject to change to account for the effects of inflation and changes in the number of licensed reactors. The Company carries the maximum available commercial insurance of $200 million and the remaining $9.5 billion is provided through mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $88 million per reactor per incident, payable at no more than $10 million per reactor per incident per year. This assessment is subject to inflation and state premium taxes. In addition, the U.S. Congress could impose revenue raising measures on the nuclear industry to pay claims if the damages from an incident at a licensed nuclear facility exceed $9.7 billion. The Price-Anderson Act and the extensive regulation of nuclear safety by the NRC do not preclude claims under state law for personal, property or punitive damages related to radiation hazards. Property insurance in the amount of $2.75 billion is maintained for each nuclear power plant in which the Company has an ownership interest. The Company is responsible for its proportionate share of such insurance 8 based on its ownership interest. The Company's insurance policies provide coverage for decontamination liability expense, premature decommissioning and loss or damage to its nuclear facilities. These policies require that insurance proceeds first be applied to assure that, following an accident, the facility is in a safe and stable condition and can be maintained in such condition. Within 30 days of stabilizing the reactor, the licensee must submit a report to the NRC which provides a clean-up plan, including the identification of all clean-up operations necessary to decontaminate the reactor to permit either the resumption of operations or decommissioning of the facility. Under the Company's insurance policies, proceeds not already expended to place the reactor in a stable condition must be used to decontaminate the facility. If, as a result of an accident, the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund which the Company is required by the NRC to maintain to provide funds for decommissioning the facility. These proceeds would be paid to the fund to make up any difference between the amount of money in the fund at the time of the early decommissioning and the amount that would have been in the fund if contributions had been made over the normal life of the facility. The Company is unable to predict what effect these requirements may have on the timing of the availability of insurance proceeds to the Company for the Company's bondholders and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, the Company could be assessed up to $30 million for losses incurred at any plant insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the Company's financial condition or results of operations. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The policy contains a waiting period before recovery of costs can commence. The premium for this coverage is subject to assessment for adverse loss experience. The Company's maximum share of any assessment is $10 million per year. NRC regulations require that licensees of nuclear generating facilities demonstrate that funds will be available in certain minimum amounts at the end of the life of the facility to decommission the facility. Based on estimates of decommissioning costs for each of the nuclear facilities in which the Company has an ownership interest, the PUC permits the Company to collect from its customers and deposit in segregated accounts amounts which, together with earnings thereon, will be used to decommission such nuclear facilities. Through 1998, the Company's current estimate of its nuclear facilities' decommissioning cost is $1.5 billion in 1997 dollars which was being collected through electric rates over the life of each generating unit. Beginning in 1999, decommissioning costs are recoverable through regulated rates. At December 31, 1998, the Company held $378 million in trust accounts, representing amounts recovered from customers and net realized and unrealized investment earnings thereon, to fund future decommissioning costs. In an Exposure Draft issued in 1996, the Financial Accounting Standards Board (FASB) proposed changes in the accounting for closure and removal costs of production facilities, including the recognition, measurement and classification of decommissioning costs for nuclear generating stations. The FASB has expanded the scope of the Exposure Draft to include closure or removal liabilities that are incurred at any time during the operating life of the related long-lived asset. The FASB is proceeding towards a revised Exposure Draft, currently expected in the second quarter of 1999. If current electric utility industry accounting practices for decommissioning are changed, annual provisions for decommissioning costs could increase and the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation, and the increased cost would be recognized as a regulatory asset to the extent recoverable through regulated rates. For additional information concerning nuclear decommissioning, see Note 5 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1998. In 1996, the NRC requested that all nuclear plant operators inform the NRC whether their nuclear units are operated and maintained within the design bases of the facilities and confirm that any deviations have been or will be reconciled in a timely manner. The Company responded to the NRC's request on February 4, 1997 with a detailed description of ongoing activities and new initiatives to ensure that Limerick and Peach Bottom are operated and maintained within their design bases. PSE&G provided a similar response to the NRC on February 11, 1997 concerning Salem. Since the information that was submitted will be used by the NRC to determine follow-up inspection activity or potential enforcement actions, the Company cannot predict what impact the NRC's request will have. 9 On September 16, 1998, the NRC suspended its Systematic Assessment of License Performance (SALP) program for an interim period until the NRC staff completes a review of its nuclear power plant performance assessment process. During the interim period while the SALP program is suspended, the NRC will utilize the results of its plant performance reviews to provide nuclear power plant performance information to licensees, state and local officials and the public. These reviews are intended to identify performance trends since the previous assessment and make any appropriate changes to the NRC's inspection plans. At the end of the process, the NRC will decide whether to resume the SALP program or substitute an alternative program. Limerick Generating Station Limerick Unit No. 1 achieved a capacity factor of 77% in 1998 and 85% in 1997. Limerick Unit No. 2 achieved a capacity factor of 95% in 1998 and 85% in 1997. Limerick Units No. 1 and No. 2 are each on a 24-month refueling cycle. The last refueling outages for Units No. 1 and No. 2 were in the spring of 1998 and 1997, respectively. On May 9, 1997, the NRC issued its periodic SALP report for Limerick for the period April 2, 1995 to March 29, 1997. Limerick achieved ratings of "1," the highest of three rating categories, in the areas of Operations, Maintenance and Plant Support. In the area of Engineering, Limerick achieved a rating of "2." The NRC stated that the overall performance of Limerick remained excellent. Strong management involvement and conservative decision making were exhibited in day-to-day activities. Self-assessment and quality assurance activities continued to be effective. The performance enhancement process continued to be an effective program for identifying, evaluating and correcting issues with appropriate thresholds and priorities. Oversight and independent review committees contributed to the corrective actions program effectiveness. While noting strengths in design, analysis and modifications, the NRC stated that earlier engineering intervention could have prevented equipment problems that resulted in a number of plant trips and forced shutdowns. The NRC also noted that management has recognized this performance weakness and has initiated remedial actions. In October 1990, General Electric Company (GE) reported that crack indications were discovered near the seam welds of the core shroud assembly in a GE Boiling Water Reactor (BWR) located outside the United States. As a result, GE issued a letter requesting that the owners of GE BWRs take interim corrective actions, including a review of fabrication records and visual examinations of accessible areas of the core shroud seam welds. Each of the reactors at Limerick and Peach Bottom is a GE BWR. Initial examination of Limerick Unit No. 1 was completed during the February 1996 refueling outage. Although crack indications were identified at one location, the Company concluded that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 1 for a minimum of the next two operating cycles. In accordance with industry experience and guidance, initial examination of Limerick Unit No. 2 has been scheduled for the refueling outage planned for April 1999. Peach Bottom Unit No. 3 was initially examined during its refueling outage in the fall of 1993. Although crack indications were identified at two locations, the Company presented its findings to the NRC and recommended continued operation of Unit No. 3 for a two-year cycle. Unit No. 3 was re-examined during its refueling outage in the fall of 1995 and the extent of cracking identified was determined to be within industry-established guidelines. The Company has concluded, and the NRC has concurred, that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 3. Peach Bottom Unit No. 2 was initially examined during its October 1994 refueling outage and the examination revealed a minimal number of flaws. Unit No. 2 was re-examined during its refueling outage in September 1996. Although the examination revealed additional minor flaw indications, the Company concluded, and the NRC concurred, that neither repair nor modification to the core shroud was necessary. The Company is also participating in a GE BWR Owners Group to develop long-term corrective actions. As a result of several BWRs experiencing clogging of some emergency core cooling system suction strainers, which are part of the water supply system for emergency cooling of the reactor core, the NRC issued a bulletin in May 1996 to operators of BWRs requesting that measures be taken to minimize the potential for clogging. The NRC proposed three resolution options, including the installation of large capacity passive strainers, with a request that actions be completed by the end of the unit's first refueling outage after January 1997. Strainers were installed at Peach Bottom Unit No. 3 during the October 1997 refueling outage. Strainers were 10 installed at Peach Bottom Unit No. 2 and Limerick Unit No. 1 during their refueling outages in October 1998 and April 1998, respectively. For Limerick Unit No. 2, the NRC granted the Company's request to defer the installation of strainers until its scheduled refueling outage in April 1999. The Company cannot predict what other actions, if any, the NRC may take in this matter. The NRC has raised concerns that the Thermo-Lag 330 fire barrier systems used to protect cables and equipment at certain nuclear facilities, including Limerick and Peach Bottom, may not provide the necessary level of fire protection and has requested licensees to describe short-term and long-term measures being taken to address this concern. The Company has informed the NRC that it has taken short-term corrective actions to address the inadequacies of the Thermo-Lag barriers installed at Limerick and Peach Bottom and is participating in an industry-coordinated program to provide long-term corrective solutions. By letter dated December 21, 1992, the NRC stated that the Company's interim actions were acceptable. The Company has been in contact with the NRC regarding the Company's long-term measures to address Thermo-Lag fire barrier issues. In 1995, the Company completed its engineering re-analysis for both Limerick and Peach Bottom. This re-analysis identified proposed modifications to be performed over the next several years at both plants in order to implement the long-term measures addressing the concern over Thermo-Lag use. The Company met with the NRC during 1997 regarding the Company's plans for the resolution of the Thermo-Lag issue. In August 1997, the NRC informed the Company that it was satisfied with the progress to date on this issue. On May 19, 1998, the NRC issued a confirmatory order modifying the license for Peach Bottom Units No. 2 and No. 3 requiring that the Company complete final implementation of corrective actions on the Thermo-Lag 330 issue by completion of the October 1999 refueling outage of Peach Bottom Unit No. 3. In addition, the NRC issued a confirmatory order modifying the license for Limerick Units No. 1 and No. 2 requiring that the Company complete final implementation of corrective actions on the Thermo-Lag 330 issue by completion of the April 1999 refueling outage of Limerick Unit No. 2. The Company continues to work towards completion of activities to resolve this issue by the previously committed dates of April 1999 for Limerick and October 1999 for Peach Bottom. Water for the operation of Limerick is drawn from the Schuylkill River adjacent to Limerick and from the Perkiomen Creek, a tributary of the Schuylkill River. During certain periods of the year, generally the summer months but possibly for as much as six months or more in some years, the Company would not be able to operate Limerick without the use of supplemental cooling water due to existing regulatory water withdrawal constraints applicable to the Schuylkill River and the Perkiomen Creek. Supplemental cooling water for Limerick is provided by a supplemental cooling water system which draws water from the Delaware River at the Point Pleasant Pumping Station, transports it to the Bradshaw Reservoir (Point Pleasant Project), then to the east and main branches of the Perkiomen Creek and finally to Limerick. The supplemental cooling water system also provides water for public use to two Montgomery County water authorities. Certain of the permits relating to the operation of the supplemental cooling water system must be renewed periodically. The Company has entered into an agreement with a municipality to secure a backup source of water for the operation of Limerick should the amount of water from the supplemental cooling water system not be sufficient. Should the supplemental cooling water system be completely unavailable, this backup source is capable of providing cooling water to operate both Limerick units simultaneously at 70% of rated capacity for short periods of time. 11 Peach Bottom Atomic Power Station Peach Bottom Unit No. 2 achieved a capacity factor of 80% in 1998 and 100% in 1997. Peach Bottom Unit No. 3 achieved a capacity factor of 92% in 1998 and 79% in 1997. Peach Bottom Units No. 2 and No. 3 are each on a 24-month refueling cycle. The last refueling outages for Units No. 2 and No. 3 were in the fall of 1998 and 1997, respectively. On July 17, 1997, the NRC issued its periodic SALP report for Peach Bottom for the period October 15, 1995 to June 7, 1997. Peach Bottom achieved a rating of "1," in the areas of Plant Operations, Maintenance and Plant Support. In the area of Engineering, Peach Bottom achieved a rating of "2." Overall, the NRC observed excellent performance at Peach Bottom during the assessment period. The NRC stated that station management provided excellent oversight and control of engineering activities throughout the period. The NRC noted that, while overall engineering performance was good, there were several instances where operating procedures, surveillances, and tests were not consistent with the design and licensing bases. The Company, Delmarva Power & Light Company (Delmarva) and PSE&G have agreed to an operating performance standard through December 31, 2007 for Peach Bottom and through December 31, 2011 for Salem. Under the standard, the operator of each respective station would be required to make payments to the non-operating owners if the three-year capacity factor, determined annually, of such station falls below 40 percent, subject to a maximum of $25 million per year. The initial three-year period began on January 1, 1998 and April 17, 1998 for Peach Bottom and Salem, respectively. The parties have also agreed to forego litigation in the future, except for limited cases in which the operator would be responsible for damages of no more than $5 million per year. In addition to the matters discussed above, see "Limerick Generating Station" for a discussion of certain matters which affect both Peach Bottom and Limerick. Salem Generating Station As previously reported, Salem Units No. 1 and No. 2 were taken out of service by PSE&G in the second quarter of 1995. Salem Unit No. 2 returned to service on August 30, 1997. Salem Unit No. 1 returned to service on April 17, 1998. In July 1998, the NRC removed Salem Units No. 1 and No. 2 from the NRC Watch List. The Company has been informed by PSE&G that the NRC noted that plant material condition, safety culture and management oversight and effectiveness had substantially improved. The NRC also observed that, while the maintenance backlog resulting from discovery efforts during the outage remains high, PSE&G is effectively managing the prioritization and resolution of those items. Additionally, the NRC noted that PSE&G's management team has instituted robust safety oversight and self-assessment at the site and that Salem has demonstrated sustained successful plant performance. The Company has been informed by PSE&G that on September 15, 1998, the NRC issued its latest SALP for Salem for the period March 1, 1997 to August 1, 1998. In the areas of Maintenance and Engineering, Salem achieved a rating of "2". In the areas of Operations and Plant Support, Salem achieved a rating of "1". The NRC noted improved performance overall during the period, as demonstrated by the nearly event-free return of both units to operation following the extended outage. The NRC identified strong management oversight, safe and conservative operations, good engineering support and effective programs for independent oversight and self-assessment. The NRC also noted that although human performance has improved significantly due to extensive training interventions, continued close management attention is warranted in the Operations and Maintenance areas. The Company has been informed by PSE&G that predecisional enforcement conferences were held on December 9, 1997 to discuss two allegations concerning security program issues which occurred at Salem in 1996. On April 24, 1998, the NRC issued a severity Level III violation for one of these matters and informed PSE&G that it would await issuance of the Secretary of Labor's Administrative Review Board decision before making an enforcement decision in the other matter. There was no civil penalty issued by the NRC for this violation. PSE&G did not contest this violation. The Company cannot predict what other actions, if any, the NRC may take in regard to the second matter. 12 The Company has been informed by PSE&G that, in April 1997, as part of an NRC inspection of fire barrier systems to protect equipment necessary for the safe shutdown of the plant in the event of a fire, the NRC noted certain weaknesses in Salem's fire barrier systems. PSE&G sent a letter to the NRC in June 1997 addressing these issues concerning the qualifications of fire wrap barriers used to protect electrical cabling at Salem. The letter outlined a resolution plan and schedule to address the fire wrap issues. PSE&G has committed to alternative measures in the form of fire watches until this plan is implemented. A review of the installed fire barrier materials and safe shutdown analysis is currently in progress. If certain modifications are necessary to comply with NRC requirements, it is expected that the costs will not be material. However, failure to resolve these fire barrier issues could result in potential NRC violations, fines and/or plant shutdown which could have a material adverse impact to the Company's financial condition and results of operations. In addition to the matters discussed above, see "Environmental Regulations - - -- Water." See also "Peach Bottom Atomic Power Station" Fuel The following table shows the Company's sources of electric output for 1998 and as estimated for 1999: 1998 1999 (Est.) ------ ----------- Nuclear ................................................ 39.4% 39.1% Mine-mouth, coal-fired ................................. 7.3 6.1 Service-area, coal-fired ............................... 4.5 4.5 Oil-fired .............................................. 1.8 1.9 Hydro (includes pumped storage) ........................ 1.7 1.3 Internal combustion .................................... 0.2 0.2 Purchased, interchange and nonutility generated ........ 45.1 46.9 ----- ----- 100.0% 100.0% ===== ===== Nuclear The cycle of production and utilization of nuclear fuel includes the mining and milling of uranium ore into uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride; the enrichment of the uranium hexafluoride; the fabrication of fuel assemblies; and the utilization of the nuclear fuel in the generating station reactor. The Company does not anticipate difficulty in obtaining the necessary uranium concentrates or conversion, enrichment or fabrication services for Limerick or Peach Bottom. PSE&G has informed the Company that it presently has sufficient contracts for uranium and services related to the nuclear fuel cycle to fully meet its current projected requirements. The following table summarizes the years through which the Company has contracts for the segments of the nuclear fuel supply cycle:
Concentrates (1) Conversion (2) Enrichment Fabrication ------------------ ---------------- ------------ ------------ Limerick Unit No. 1 .............. 2002 2001 2004 2003 Limerick Unit No. 2 .............. 2002 2001 2004 2004 Peach Bottom Unit No. 2 .......... 2002 2001 2004 2002 Peach Bottom Unit No. 3 .......... 2002 2001 2004 2003
- - ------------ (1) The Company's contracts for uranium concentrates are allocated to Limerick and Peach Bottom on an as-needed basis. (2) The Company also has commitments for at least 60% of the conversion services requirements for Limerick and Peach Bottom through 2002. There are no commercial facilities for the reprocessing of spent nuclear fuel currently in operation in the United States, nor has the NRC licensed any such facilities. The Company currently stores all spent nuclear fuel from its nuclear generating facilities in on-site, spent fuel storage pools. Limerick has on-site facilities with capacity to store spent fuel with full core discharge until 2007. Peach Bottom has on-site facilities with capacity to store spent fuel until 2000 for Unit No. 2 and 2001 for Unit No. 3. The Company has begun construction 13 of a dry spent-fuel storage facility at Peach Bottom to maintain full core discharge capacity in the spent fuel pools. Construction will continue through early 2000. The facility, including the first nine storage casks, is expected to cost approximately $33.5 million. The independent spent fuel storage facility is expected to provide life of plant storage capacity. The Company expects to purchase storage casks to maintain spent fuel storage capacity at an estimated cost of $6 million per year. The Company has been informed by PSE&G that as a result of reracking the two spent fuel pools at Salem, spent fuel storage capacity of Salem Units No. 1 and No. 2 is estimated to be 2012 and 2016, respectively. PSE&G is also currently assessing available options which could satisfy the potential need for additional storage capacity, including the option of constructing an on-site storage facility that would satisfy the spent-fuel storage needs of Salem. Under the Nuclear Waste Policy Act of 1982 (NWPA), the DOE is required to begin taking possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. Based on recent public pronouncements, it is not likely that a permanent disposal site will be available for the industry before 2015, at the earliest. In reaction to statements from the DOE that it was not legally obligated to begin to accept spent fuel in 1998, a group of utilities and state government agencies filed a lawsuit against the DOE which resulted in a decision by the U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that the DOE had an unequivocal obligation to begin to accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per kilowatthour of net nuclear generation for the cost of nuclear fuel long-term storage and disposal. This fee may be adjusted prospectively in order to ensure full cost recovery. Because of inaction by the DOE following the D.C. Court of Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998, a group of forty-two utility companies, including the Company, and forty-six state agencies, filed suit against the DOE seeking authorization to suspend further payments to the U.S. government under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes effective action to meet is 1998 obligations. In November 1997, the D.C. Court of Appeals issued a decision in which it held that the DOE had not abided by its prior determination that the DOE has an unconditional obligation to begin disposal of spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded the DOE from asserting that it was not required to begin receiving spent nuclear fuel because it had not yet prepared a permanent repository or an interim storage facility. The DOE and one of the utility companies filed Petitions for Reconsideration of the decision which were denied, as were petitions seeking U.S. Supreme Court review of the decision. In addition, the DOE is exploring other options to address delays in the waste acceptance schedule. In January 1999, legislation was introduced in the U.S. House of Representatives authorizing the construction of a temporary storage facility which could accept spent nuclear fuel from utilities prior to operation of a permanent repository. As a by-product of their operations, nuclear generating units, including those in which the Company owns an interest, produce low level radioactive waste (LLRW). LLRW is accumulated at each facility and permanently disposed of at a federally licensed disposal facility. The Company is currently shipping LLRW generated at Peach Bottom and Limerick to the disposal site located in Barnwell, South Carolina and Clive, Utah for disposal. On-site storage facilities have been constructed at Peach Bottom and Limerick, with twenty-five year and five-year storage capacities, respectively. The Company is also pursuing alternative disposal strategies for LLRW generated at Peach Bottom and Limerick, including a LLRW reduction program. Pennsylvania which had agreed to be the host site for a LLRW disposal facility for generators located in Pennsylvania, Delaware, Maryland and West Virginia suspended the search for a permanent disposal site. The Company contributed $12 million towards the total cost of a permanent Pennsylvania disposal site prior to its suspension. Salem has on-site LLRW storage facilities with a five-year storage capacity. The Company has been informed by PSE&G that PSE&G ships LLRW generated at Salem to Barnwell, South Carolina and currently uses the Salem facility for interim storage. In 1991, New Jersey enacted legislation providing for funding of the estimated $70 million cost to establish a LLRW disposal facility. New Jersey would recover the costs through fees paid by LLRW generators. The Company as a Salem co-owner, has paid $857,000 as its share of the New Jersey siting costs. New Jersey established a volunteer siting process to establish a LLRW disposal facility by 2000. Public meetings were held across the State in an effort to provide information to and obtain feedback from the public; however, no voluntary sites were identified. Consequently, on February 10, 1998, the New Jersey 14 agency responsible for this program recommended to the Governor of New Jersey that this volunteer plan be abandoned. The Governor of New Jersey has accepted the agency's plan to reduce the scope of siting activities since the development of a disposal facility in New Jersey may not be economically feasible in light of current out-of-state disposal options. As a result, the refund of the unspent funds paid by waste generators in New Jersey to finance the siting process needs to be addressed. The Company expects to partially recover the funds paid in connection with this effort. The National Energy Policy Act of 1992 (Energy Act) requires, among other things, that utilities with nuclear reactors pay for the decommissioning and decontamination of the DOE nuclear fuel enrichment facilities. The total costs to domestic utilities are estimated to be $150 million per year for 15 years, of which the Company's share is $5 million per year. The Energy Act provides that these costs are to be recoverable in the same manner as other fuel costs. The Company has recorded the liability and a related regulatory asset of $47 million for such costs at December 31, 1998. The Company is currently recovering these costs through regulated rates. The Company is currently recovering in rates the costs for nuclear decommissioning and decontamination and spent-fuel storage. The Company believes that the ultimate costs of decommissioning and decontamination, spent-fuel disposal and any assessment under the Energy Act will continue to be recoverable through rates. For additional information concerning decommissioning, see "Electric Operations -- General." Coal The Company has a 20.99% ownership interest in Keystone Station (Keystone) and a 20.72% ownership interest in Conemaugh Station (Conemaugh), coal-fired, mine-mouth generating stations in western Pennsylvania operated by GPU Generating Corp. A majority of Keystone's fuel requirements is supplied by one coal company under a contract which expires on December 31, 2004. The contract calls for between 3.0 and 3.5 million tons for 1999 and a total of 6.5 million tons of coal purchases for the years 2000 through 2004. Approximately 80% of Conemaugh's 1999 fuel requirements are secured by a long-term contract and the remainder by several short-term contracts or spot purchases. The Company has entered into contracts for a significant portion of its coal requirements and makes spot purchases for the balance of coal required by its Philadelphia-area, coal-fired units at Eddystone Station (Eddystone) and Cromby Station (Cromby). At January 1, 1999, the Company had contracts with two suppliers for 1.5 million tons per year or approximately 80% of expected annual requirements. Both contracts expire on December 31, 2000. Purchases pursuant to these contacts represented approximately 3% of the Company's Fuel and Energy Interchange Expense in 1998. Oil The Company purchases fuel oil through a combination of short-term contracts and spot market purchases. The contracts are normally not longer than one year in length. Fuel oil inventories are managed such that in the winter months sufficient volumes of fuel are available in the event of extreme weather conditions and during the remaining months inventory levels are managed to take advantage of favorable market pricing. Natural Gas The Company obtains natural gas for electric generation through a combination of short-term contracts and spot purchases as well as through the Company's own gas tariff. The Company obtains the limited quantities of natural gas used by the auxiliary boilers and pollution control equipment at Eddystone through the same means. The Company has the capability to use either oil or natural gas at Cromby Unit No. 2 and Eddystone Units No. 3 and No. 4. 15 Gas Operations During 1998, 8% of the Company's operating revenues and 6% of its operating income were from gas operations. Gas sales and operating revenues for 1998 by class of customer are set forth below: Operating Sales Revenues (mmcf) (millions of $) ---------- ---------------- House heating .................................. 28,402 $236 Residential (other than house heating) ......... 1,496 16 Commercial and industrial ...................... 16,757 125 Other .......................................... 554 2 Change in unbilled ............................. (440) (3) ------ ---- Total gas sales ............................... 46,769 376 Gas transported for customers .................. 28,204 24 ------ ---- Total gas sales and gas transported ........... 74,973 $400 ====== ==== Annual and quarterly operating results can be significantly affected by weather. Traditionally, sales of gas are higher in the first and fourth quarters due to colder weather. The Company's natural gas supply is provided by purchases from a number of suppliers for terms of up to five years. These purchases are delivered under several long-term firm transportation contracts with Texas Eastern Transmission Corporation (Texas Eastern) and Transcontinental Gas Pipe Line Corporation (Transcontinental). The Company's aggregate annual entitlement under these firm transportation contracts is 87.5 million dekatherms. Peak gas is provided by the Company's liquefied natural gas facility and propane-air plant. See "ITEM 2. PROPERTIES." The Company has under contract 21.5 million dekatherms of underground storage through service agreements with Texas Eastern, Transcontinental, Equitrans, Inc. and CNG Transmission Corporation. Natural gas from underground storage represents approximately 40% of the Company's 1998-99 heating season supplies. The gas industry is continuing to undergo structural changes in response to FERC policies designed to increase competition. In addition, there is a renewed initiative in the Pennsylvania legislature to deregulate the gas industry, which has the support of the Governor of Pennsylvania. See "Deregulation and Rate Matters." Year 2000 Readiness Disclosure Due to the severity of the potential impact of the Year 2000 (Y2K) issue on the electric utility industry, the Company has adopted a comprehensive schedule to achieve Y2K readiness. The Company has dedicated extensive resources to its Y2K Project (Project). The Project is addressing the issue resulting from computer programs using two digits rather than four to define the applicable year and other programming techniques that constrain date calculations or assign special meanings to certain dates. Any of the Company's computer systems that have date-sensitive software or microprocessors may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including a temporary inability to process transactions, send bills, operate generating stations, or engage in similar normal business activities. The Company is utilizing both internal and external resources to reprogram, or replace and test software and computer systems for the Project. The Project is scheduled for completion by July 1, 1999, except for a small number of modifications, conversions or replacements that are impacted by vendor dates and/or are being incorporated into scheduled plant outages between July and October 1999. On July 17, 1998, an order was entered by the PUC instituting a formal investigation by the Office of Administrative Law on Year 2000 compliance by jurisdictional fixed utilities and mission-critical service providers such as the PJM. The order requires, (1) a written response to a list of compliance program questions by 16 August 6, 1998 and, (2) all jurisdictional fixed utilities be Year 2000 compliant by March 31, 1999 or, if a utility determines that mission-critical systems cannot be Year 2000 compliant on or before March 31, 1999, the utility is required to file a detailed contingency plan. The PUC adopted the federal government's definition for Year 2000 compliance and further defined Year 2000 compliance as a jurisdictional utility having all mission-critical Year 2000 hardware and software updates and/or replacements installed and tested on or before March 31, 1999. On August 6, 1998, the Company filed its written response, in which the Company stated that with a few carefully-assessed and closely-managed exceptions, the Company will have all mission-critical systems Year 2000 ready by June 1999. Pursuant to the formal investigation on Year 2000 compliance, the Company presented testimony before the PUC on November 20, 1998 On February 19, 1999, the PUC issued a Secretarial Letter notifying the Company that it had hired a consultant to perform an assessment of the Company and thirteen other utilities to evaluate the accuracy of their responses to the compliance program questions and testimony provided before the PUC. The Company complied with the PUC's directive in the Secretarial Letter to file updated written responses to compliance questions by March 8, 1999, and to meet with the consultant during a one-day on-site review session on March 8, 1999. On May 11, 1998, the NRC issued a generic letter requiring all nuclear plant operators to provide the NRC with information concerning the operators' programs, planned or implemented, to address Year 2000 computer and system issues at its facilities, (1) submission of a written response within 90 days, indicating whether the operator has pursued and continues to pursue implementation of Year 2000 programs and addressing the program's scope, assessment process, plans for corrective actions, quality assurance measures, contingency plans and regulatory compliance, and (2) submission of a written response, no later than July 1, 1999, confirming that such facilities are Year 2000 ready, or will be Year 2000 ready, by the year 2000 with regard to compliance with the terms and conditions of the license(s) and NRC regulations. On July 30, 1998, the Company filed its 90-day required written response indicating that the Company has pursued and is continuing to pursue a Year 2000 program which is similar to that outlined in Nuclear Utility Year 2000 Readiness, NEI/NUSMG 97.07. From November 3 to November 5, 1998, members of the NRC staff conducted an audit of the Company's Year 2000 Program for the Limerick Generating Station, Units No. 1 and No. 2. Some of the observations of the audit team included in their written report issued on December 18, 1998, were that (1) the Company's readiness program is comprehensive and based on the guidance contained in NEI/NUSMG 97.07, (2) the program is receiving proper management support and oversight, and (3) project schedules are being aggressively pursued. For additional information regarding the Year 2000 Readiness Disclosure see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1998. Segment Information Segment information is incorporated herein by reference to Note 2 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1998. Capital Requirements and Financing Activities The following table shows the Company's most recent estimate of capital requirements for 1999: (Millions of $) ---------------- Construction .......................................... $440 New ventures (1) ...................................... 129 Long-term debt maturities and sinking funds. .......... 362 ---- Total capital requirements. ....................... $931 ==== - - ------------ (1) A portion of these expenditures will be expensed. Under the Company's mortgage (Mortgage), additional mortgage bonds may not be issued on the basis of property additions or cash deposits unless earnings before income taxes and interest during 12 consecutive calendar months of the preceding 15 calendar months from the month in which the additional mortgage bonds are 17 issued are at least two times the pro forma annual interest on all mortgage bonds outstanding and then applied for. For the purpose of this test, the Company has not included Allowance for Funds Used During Construction which is included in net income in the Company's consolidated financial statements. The coverage under the earnings test of the Mortgage for the twelve months ended December 31, 1998 was 5.47 times. As a result of the extraordinary charge in December 1997, the Company did not meet the earnings test under the Mortgage required for the issuance of additional bonds against property additions for the twelve months ended December 31, 1997. Earnings coverage under the Mortgage for the twelve months ended December 31, 1996 was 4.39 times. At December 31, 1998, the Company had at least $2.26 billion of available property additions against which $1.36 billion of mortgage bonds could have been issued. In addition at December 31, 1998, the Company was entitled to issue approximately $4.4 billion of mortgage bonds without regard to the earnings and property additions tests against previously retired mortgage bonds. Under the Company's Amended and Restated Articles of Incorporation (Articles), the issuance of additional preferred stock requires an affirmative vote of the holders of two-thirds of all preferred shares outstanding unless certain tests are met. Under the most restrictive of these tests, additional preferred stock may not be issued without such a vote unless earnings after income taxes but before interest on debt during 12 consecutive calendar months of the preceding 15 calendar months from the month in which the additional shares of stock are issued are at least 1.5 times the aggregate of the pro forma annual interest and preferred stock dividend requirements on all indebtedness and preferred stock. Coverage under this earnings test of the Articles for the twelve months ended December 31, 1998 was 2.81 times. As a result of the extraordinary charge in December 1997, the Company did not meet the earnings test of the Articles for the twelve months ended December 31, 1997. Earnings coverage under the Articles for the twelve months ended December 31, 1996 was 2.50 times. The following table sets forth the Company's ratios of earnings to fixed charges and the ratios of earnings to combined fixed charges and preferred stock dividends for the periods indicated:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges .......... 3.61 2.71 3.29 3.41 2.66 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends .............. 3.45 2.50 3.04 3.12 2.32
For purposes of these ratios, (i) earnings consist of income from continuing operations before income taxes and fixed charges and (ii) fixed charges consist of all interest deductions and the financing costs associated with capital leases. For purposes of calculating these ratios, income from continuing operations for 1998 does not include the extraordinary charge against income of $33 million ($20 million net of income taxes) and for 1997 does not include the extraordinary charge against income of $3.1 billion ($1.8 billion net of income taxes). The Company has a $900 million unsecured revolving credit facility with a group of banks. The credit facility is composed of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support the Company's commercial paper program. At December 31, 1998, the Company had a total of $400 million outstanding under an unsecured term-loan agreement with banks maturing in 1999. Most of the Company's unsecured debt agreements contain cross-default provisions to the Company's other debt obligations. The Company has a $600 million commercial paper program. At December 31, 1998, there was $125 million of commercial paper outstanding. At December 31, 1998, the Company and its subsidiaries had available formal and informal lines of credit with banks aggregating $100 million. As of December 31, 1998, the Company had no compensating balance agreements with any bank. On March 25, 1999, PECO Energy Transition Trust (PETT), an independent statutory business trust organized under the laws of Delaware and a wholly owned subsidiary of the Company, issued $4 billion aggregate principal amount of PECO Energy Transition Trust Transition Bonds to securitize a portion of the Company's authorized stranded costs recovery. The Transition Bonds are solely obligations of PETT, secured by Intangible Transition Property (ITP), representing the right to collect ITC, sold by the Company to PETT concurrently with the issuance of the Transition Bonds. The ITC will be allocated from CTC and variable distribution charges (both of which are usage-based charges). ITCs will be allocated first from CTCs, then, to the extent ITCs exceed such amounts, from variable distribution charges. The ITCs collected by PETT, which will be used to pay debt service on the Transition Bonds and related expenses, will reduce the Company's collection of CTCs on a dollar-for-dollar basis. 18 The Transition Bonds were sold by PETT in seven separate classes with average maturities ranging from 1.3 to 8.9 years. Two of the classes bear interest at floating rates; the remaining five classes bear interest at fixed rates with coupons ranging from 5.4% to 6.13%. The Company had entered into treasury forwards and forward starting interest rate swaps to manage interest rate exposure associated with the anticipated issuance of Transition Bonds. On March 18, 1999, these instruments were settled with net proceeds to the Company of approximately $80 million which will be deferred and amortized over the life of the Transition Bonds, consistent with the Company's hedge accounting policy. The net proceeds to the Company from the securitization of a portion of its allowed stranded cost recovery, after payment of fees and expenses and the capitalization of PETT, was approximately $3.9 billion. In accordance with the provisions of the Competition Act, the Company is utilizing these proceeds principally to reduce its stranded costs and related capitalization. The Company plans to apply the proceeds to reduce capitalization as follows: $1.2 billion to retire fixed-rate debt, $.7 billion to reduce floating-rate debt and commercial paper, $.3 billion to redeem preferred securities and $1.7 billion to repurchase common stock. On March 26, 1999, the Company called for redemption three series of its First Mortgage Bonds, 7.75% Series due 2023, 7.25% Series due 2024 and 7.125% Series due on 2023. On March 26, 1999, the Company repaid $400 million of borrowings under a term credit facility. The Company plans to call for redemption in May 1999 First Mortgage Bonds, 7.75% Series 2 due 2023. The Company also plans to call for redemption in August 1999 the Company's Obligated Mandatorily Redeemable Preferred Securities, 9% Series due 2043. On March 26, 1999, the Company physically settled forward purchase agreements relating to the Company's Common Stock resulting in the purchase by the Company of 21.5 million shares of Common Stock for an aggregate purchase price of $696 million. The Company currently anticipates that it will complete its repurchase of Common Stock equity through open market purchases from time to time in compliance with the Securities and Exchange Commission rules. The number of shares to be purchased and the timing and manner of purchases are, however, dependent upon market and other conditions. Although the Transition Bonds are solely obligations of PETT, the Transition Bonds will be included in the consolidated capitalization of the Company and PETT's revenue from the ITC, as well as all interest expense associated with the Transition Bonds and amortization expense associated with the ITP will be reflected on the Company's consolidated financial statements. The Company currently estimates that the impact of additional interest expense resulting from the issuance of the Transition Bonds combined with the anticipated reduction of common equity will result in earnings per share benefits of approximately $0.15 in 1999 and $0.50 in 2000. These estimated earnings per share benefits could change and are largely dependent upon the timing and price of the Company's repurchase of Common Stock. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1998. Construction The following table shows the Company's most recent estimate of capital expenditures for plant additions and improvements for 1999: (Millions of $) ---------------- Electric: Production ............................... $165 Nuclear fuel ............................. 60 Transmission and distribution. ........... 155 ---- Total electric ...................... 380 Gas ........................................ 40 Other ...................................... 20 ---- Total. ................................... $440 ==== 19 The Company's current construction program does not include any new generating facilities. At December 31, 1998, construction work in progress, excluding nuclear fuel, aggregated $273 million. Nuclear fuel requirements exclude the Company's share of the requirements for Peach Bottom and Salem which are provided by an independent fuel company under a capital lease. See Note 16 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1998. Employee Matters The Company and its subsidiaries had 6,815 employees at December 31, 1998. None of the employees of the Company or its subsidiaries are represented by a union. Over the past several years, a number of unions have filed petitions with the National Labor Relations Board to hold certification elections with regard to different segments of employees within the Company. In all cases, the Company employees have rejected union representation. The Company expects that such petitions will continue to be filed in the future. As part of the Cost Competitiveness Review (CCR), in April 1998, the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance benefit program to achieve targeted workforce reductions. See Note 21 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the Year 1998. Environmental Regulations Environmental controls at the federal, state, regional and local levels have a substantial impact on the Company's operations due to the cost of installation and operation of equipment required for compliance with such controls. In addition to the matters discussed below, see "Electric Operations - - -- General" and "Electric Operations -- Limerick Generating Station." An environmental issue with respect to construction and operation of electric transmission and distribution lines and other facilities is whether exposure to electro-magnetic fields (EMF) causes adverse human health effects. A large number of scientific studies have examined this question and certain studies have indicated an association between exposure to EMF and adverse health effects, including certain types of cancer. However, the scientific community still has not reached a consensus on the issue. Additional research intended to provide a better understanding of EMF is continuing. The Company supports further research in this area and is funding and monitoring such studies. Public concerns about the possible health risks of exposure to EMF have adversely affected, and are expected in the future to adversely affect, the costs of, and time required to, site new distribution and transmission facilities and upgrade existing facilities. The Company cannot predict at this time what effect, if any, this issue will have on other future operations. Water The Company has been informed by PSE&G that PSE&G is implementing the 1994 New Jersey Pollutant Discharge Elimination System permit issued for Salem which requires, among other things, water intake screen modifications and wetlands restoration. The estimated capital cost of compliance with the final permit, the preparation of a renewal submittal and the activities required to obtain a renewed permit is approximately $140 million. The project is approximately 90% complete. Under the 1994 permit, which remains in effect until such time as a renewal permit is issued, PSE&G is continuing to restore wetlands and to conduct the requisite management and monitoring associated with the implementation of the special conditions of that permit. The existing permit remains in full force and effect indefinitely upon submission of a timely renewal filing. The Company's share of such costs is 42.59% and is included in the Company's capital requirements. PSE&G must apply to the New Jersey Department of Environmental Protection (NJDEP) to renew the Salem permit in 1999. On March 4, 1999, PSE&G filed a comprehensive application for the renewal of Salem's NJDEP permit. The Company cannot currently predict the outcome of the review of this application. An unfavorable determination could have a material adverse effect on the Company's financial condition and results of operations. The DRBC issued a revised Docket for Salem in 1995 (Revised Docket) approving a modification to the 1970 Salem Docket that approved the construction and operation of the station's cooling water system. The 20 Revised Docket authorized, among other things, the continued operation of Salem's cooling water system for an additional five years. The Revised Docket provides that the authorization expires September 27, 2000 absent review of the Docket on or before August 31, 1999 and renewal by the DRBC. DRBC review of the matter is planned to commence in the second quarter of 1999. Air Air quality regulations promulgated by the EPA, the PDEP and the City of Philadelphia in accordance with the Federal Clean Air Act and the Clean Air Act Amendments of 1990 (Amendments) impose restrictions on emission of particulates, sulfur dioxide (SO(2)), nitrogen oxides (NO(x)) and other pollutants and require permits for operation of emission sources. Such permits have been obtained by the Company and must be renewed periodically. The Amendments establish a comprehensive and complex national program to substantially reduce air pollution. The Amendments include a two-phase program to reduce acid rain effects by significantly reducing emissions of SO(2) and NO(x) from electric power plants. Flue-gas desulfurization systems (scrubbers) have been installed at Conemaugh Units No. 1 and No. 2 to reduce SO(2) emissions to meet the Phase I requirements of the Amendments. Keystone Units No. 1 and No. 2 are subject to the Phase II SO(2) and NO(x) limits of the Amendments which must be met by January 1, 2000. The Company and the other Keystone co-owners are evaluating the Phase II compliance options for Keystone, including the purchase of SO2 emission allowances. The Company's service-area, coal-fired generating units at Eddystone and Cromby are equipped with scrubbers and their SO(2) emissions meet the SO(2) emission rate limits of both Phase I and Phase II of the Amendments. The Company has completed the implementation of measures, including the installation of NO(x) emissions controls and the imposition of certain operational constraints, to comply with the Reasonably Available Control Technology limitations of the Amendments. The Company expects that the cost of compliance with anticipated air-quality regulations may be substantial due to further limitations on permitted NO(x) emissions. On September 24, 1998, the EPA announced the issuance of a final regulation which will require 22 states and the District of Columbia to reduce emissions of NO(x) by more than 1 million tons annually beginning in 2003. The main goal of the regulation is to limit the transport of ozone pollution into the northeastern states, including Pennsylvania, by reducing NO(x) emissions in southern and midwestern states. Pennsylvania utilities, including the Company, are already subject to strict NO(x) emission limits. A group of southern and midwestern states and utilities have appealed the issuance of the EPA regulation to the Federal Court of Appeals. The PDEP has adopted a NO(x) allowance program which could restrict the operation of the Company's fossil-fired units, require the purchase of NO(x) emission allowances from others or require the installation of additional control equipment. Many other provisions of the Amendments affect the Company's business. The Amendments establish stringent control measures for geographical regions which have been determined by the EPA to not meet National Ambient Air Quality Standards; establish limits on the purchase and operation of motor vehicles and require increased use of alternative fuels; establish stringent controls on emissions of toxic air pollutants and provide for possible future designation of some utility emissions as toxic; establish new permit and monitoring requirements for sources of air emissions; and provide for significantly increased enforcement power, and civil and criminal penalties. Solid and Hazardous Waste The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 and the Superfund Amendments and Reauthorization Act of 1986 (collectively CERCLA) authorize the EPA to cause potentially responsible parties (PRPs) to conduct (or for the EPA to conduct at the PRPs' expense) remedial action at waste disposal sites that pose a hazard to human health or the environment. Parties contributing hazardous substances to a site or owning or operating a site typically are viewed as jointly and severally liable for conducting or paying for remediation and for reimbursing the government for related costs incurred. PRPs may agree to allocate liability among themselves, or a court may perform that allocation according to equitable factors deemed appropriate. In addition, the Company is subject to the Resource Conservation and Recovery Act (RCRA) which governs treatment, storage and disposal of solid and hazardous wastes. 21 By notice issued in November 1986, the EPA notified over 800 entities, including the Company, that they may be PRPs under CERCLA with respect to releases of radioactive and/or toxic substances from the Maxey Flats disposal site, a low-level radioactive waste disposal site near Moorehead, Kentucky, where Company wastes were deposited. Approximately 90 PRPs, including the Company, formed a steering committee and entered into an administrative consent order with the EPA to conduct a remedial investigation and feasibility study (RI/FS), which was substantially revised based on the EPA comments. In September 1991, following public review and comments, the EPA issued a Record of Decision in which it selected a natural stabilization remedy for the Maxey Flats disposal site. The steering committee has preliminarily estimated that implementing the EPA proposed remedy at the Maxey Flats site would cost $60-$70 million in 1993 dollars. A settlement has been reached among the federal and private PRPs, the Commonwealth of Kentucky and the EPA concerning their respective roles and responsibilities in conducting remedial activities at the site. Under the settlement, the private PRPs will perform the initial remedial work at the site and the Commonwealth of Kentucky will assume responsibility for long-range maintenance and final remediation of the site. The Company estimates that it will be responsible for $600,000 of the remediation costs to be incurred by the private PRPs. On April 18, 1996, a consent decree, which included the terms of the settlement, was entered by the United States District Court for the Eastern District of Kentucky. The PRPs have entered into a contract for the design and implementation of the remedial plan and preliminary work has commenced. By notice issued in December 1987, the EPA notified several entities, including the Company, that they may be PRPs under CERCLA with respect to wastes resulting from the treatment and disposal of transformers and miscellaneous electrical equipment at a site located in Philadelphia, Pennsylvania (the Metal Bank of America site). Several of the PRPs, including the Company, formed a steering committee to investigate the nature and extent of possible involvement in this matter. On May 29, 1991, a Consent Order was issued by the EPA pursuant to which the members of the steering committee agreed to perform the RI/FS as described in the work plan issued with the Consent Order. The Company's share of the cost of the RI/FS was approximately 30%. On October 14, 1994, the PRPs submitted to the EPA the RI/FS which identified a range of possible remedial alternatives for the site from taking no action to removal of essentially all contaminated material with an estimated cost range of $2 million to $90 million. On July 19, 1995, the EPA issued a proposed plan for remediation of the site which involves removal of contaminated soil, sediment and groundwater and which the EPA estimates would cost approximately $17 million to implement. On October 18, 1995, the PRPs submitted comments to the EPA on the proposed plan which identified several inadequacies with the plan, including substantial underestimates of the costs associated with remediation. In December 1997, the EPA finalized its record of decision (ROD) for the site. In January 1998, the EPA sent letters to approximately 20 PRPs, including the Company, giving them 60 days to negotiate with the EPA to perform the proposed remedy. The Company, along with the nine other PRPs in the utility PRP group, responded to the EPA's letter by offering to conduct the Remedial Design (RD) but not the Remedial Action (RA) outlined in the ROD. The EPA rejected the PRP group's offer and, on June 26, 1998, issued an Order to the non-de minimis PRP Group members, and others, including the owner, to implement the RD and RA. The PRP Group is proceeding as required by the Order. It has selected a contractor which has been approved by the EPA and, on November 5, 1998, submitted the draft RD work plan. Implementation of the RD will continue through 1999. The Company's share of the cost of the RD will be approximately 25%. By notice issued in September 1985, the EPA notified the Company that it has been identified as a PRP for the costs associated with the cleanup of a site (Berks Associates/Douglassville site) where waste oils generated from Company operations were transported, treated, stored and disposed. In August 1991, the EPA filed suit in the Eastern District Court against 36 named PRPs, not including the Company, seeking a declaration that these PRPs are jointly and severally liable for cleanup of the Berks Associates/Douglassville site and for costs already expended by the EPA on the site. Simultaneously, the EPA issued an Administrative Order against the same named defendants, not including the Company, which requires the PRPs named in the Administrative Order to commence cleanup of a portion of the site. On September 29, 1992, the Company and 169 other parties were served with a third-party complaint joining these parties as additional defendants. Subsequently, an additional 150 parties were joined as defendants. A group of approximately 100 PRPs with allocated shares of less than 1%, including the Company, have formed a negotiating committee to negotiate a settlement offer with the EPA. In December 1994, the EPA proposed a de minimis PRP settlement which would have required the Company to pay approximately $992,000 in exchange for the EPA agreeing not to sue. Subsequently, the non-de minimis 22 parties successfully challenged the Record of Decision (ROD) remedy. A ROD amendment was finalized and, on October 27, 1998, the EPA settled with the de minimis parties. Under the provisions of the settlement, the Company would be required to pay approximately $520,000 for liabilities resulting from the government's past and potential future costs. The Department of Justice must approve the settlement. In October 1995, the Company, along with over 500 other companies, received a General Notice from the EPA advising that the Company had been identified as having sent hazardous substances to the Spectron/Galaxy Superfund Site and requesting the companies to conduct an RI/FS at the site. The Company had previously been identified as a de minimis PRP and paid $2,100 to settle an earlier phase. Additionally, the Company had participated in a PRP agreement and consent order related to further work at the Spectron site. In conjunction with the EPA's General Notice, the existing PRP group has proposed a settlement which, based on the volume of hazardous substances sent to the Spectron site by the Company, would allow the Company to settle the matter as a de minimis party for less than $10,000. On October 16, 1989, the EPA and the NJDEP commenced a civil action in the United States District Court for the District of New Jersey (New Jersey District Court) against 26 defendants, not including the Company, alleging the right to collect past and future response costs for cleanup of the Helen Kramer landfill located in New Jersey. In October 1991, the direct defendants joined the Company and over 100 other parties as third-party defendants. The third-party complaint alleges that the Company generated materials containing hazardous substances that were transported to and disposed at the landfill by a third party. The Company, together with a number of other direct and third-party defendants, has agreed to participate in a proposed de minimis settlement which would allow the Company to settle its potential liability at the site for approximately $40,000. The Company has been named as a defendant in a Superfund matter involving the Greer Landfill in South Carolina. The plaintiff's motion to dismiss the complaint against the Company was granted, although the third-party defendant's cross-claims against the Company remain. The Company is currently involved in settlement discussions with the third-party defendants. On November 18, 1996, the Company received a notice from the EPA that the Company is a PRP at the Malvern TCE Superfund Site, located in Malvern, Pennsylvania. In April 1998, the Company was notified of a de minimus settlement under which the Company is allocated a total cost of $16,000 for EPA past and future costs. The settlement is still pending. On February 3, 1997, the Company was served with a third-party complaint involving the Pennsauken Sanitary Landfill. The Company is currently unable to estimate the amount of liability it may have with respect to this site. In June 1989, a group of PRPs (Metro PRP Group) entered into an Administrative Order of Consent with the EPA pursuant to which they agreed to perform certain removal activities at the Metro Container Superfund Site located in Trainer, Pennsylvania. In January 1990, the Metro PRP Group notified the Company that the group considered the Company to be a PRP at the site. Since that time, the Company has reviewed, and continues to review its files and records and has been unable to locate any information which would indicate any connection to the site. The Company does not believe that it has any liability with respect to this site. In November 1987, the Company received correspondence from the EPA which indicated that the EPA was investigating the release of hazardous substances from the Blosenski Landfill located in West Caln Township, Chester County, Pennsylvania. The Company has been unable to locate any information which would indicate any connection to this site. The Company does not believe it has any liability with respect to this site. The Company has identified 28 sites where former manufactured gas plant activities may have resulted in site contamination. Past activities at several sites have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The PDEP has approved the Company's clean-up of three sites. Eight other sites are currently under some degree of active study and/or remediation. At December 31, 1998, the Company had accrued $33 million for investigation and remediation of these manufactured gas plant sites that currently can be reasonably estimated. 23 The Company has also responded to various governmental requests, principally those of the EPA pursuant to CERCLA, for information with respect to the possible deposit of Company waste materials at various disposal, processing and other sites. On June 4, 1993, the Company entered into a Corrective Action Consent Order (CACO) from the EPA under the Resource Conservation and Recovery Act (RCRA). The CACO order requires the Company to investigate the extent of alleged releases of hazardous wastes and to evaluate corrective measures, if necessary, for a site located along the Delaware River in Chester, Pennsylvania, which had previously been leased to Chem Clear, Inc. Chem Clear operated an industrial waste water pretreatment facility on the site. In October 1994, the Company entered into an agreement with Clean Harbors, the successor to Chem Clear, pursuant to which the Company will be responsible for approximately 25% of the costs incurred under the CACO and Clean Harbors will be responsible for 75% of the costs. The required investigation was completed in the summer of 1998 and a comprehensive RCRA Facility Investigation Report (RFI) is being prepared for submission to the EPA. The Company performed interim measures at the site. In January 1998, the Chester Waterfront Redevelopment Project was developed as an alternative to an expanded RCRA Corrective Action Project. The Company together with the EPA and the PDEP have agreed that potential remediation of the Chem Clear property and the investigation and potential remediation of all contiguous properties be moved from the EPA's RCRA Program to the PDEP Act 2 program. Act 2 is a land recycling program allowing remediation of properties more efficiently through redevelopment. At December 31, 1998, the Company had spent approximately $3.6 million to comply with the CACO and $700,000 on the Chester Waterfront Project. At the completion of the required RCRA investigation, the Company will combine the projects and will be able to predict the nature and cost of any potential corrective action. Costs At December 31, 1998, the Company had accrued $60 million for various investigation and remediation costs that can be reasonably estimated, including approximately $33 million for investigation and remediation of former manufactured gas plant sites as described above. The Company cannot currently predict whether it will incur other significant liabilities for additional investigation and remediation costs at sites presently identified or additional sites which may be identified by the Company, environmental agencies or others or whether all such costs will be recoverable through rates or from third parties. The Company's budget for capital requirements for 1999 for compliance with environmental requirements total approximately $14 million. In addition, the Company may be required to make significant additional expenditures not presently determinable. AmerGen Energy Company, LLC In 1997, the Company and British Energy, plc of Edinburgh, Scotland formed AmerGen Energy Company, LLC (AmerGen) to pursue opportunities to acquire and operate nuclear generating stations in the United States. The Company and British Energy, Inc., a wholly owned subsidiary of British Energy, plc, each own a 50% equity interest in AmerGen. In October 1998, AmerGen entered into a definitive asset purchase agreement with GPU, Inc. and certain of its subsidiaries (GPU) to acquire GPU's 786 MW Three Mile Island Unit No. 1 Nuclear Generating Facility for approximately $23 million in cash, $77 million for nuclear fuel payable over five years and certain contingent payments based upon future wholesale market prices. Telecommunications Ventures In 1995, the Company and Hyperion Telecommunications, Inc., a subsidiary of Adelphia Cable Company, formed PECO Hyperion Telecommunications. The partnership is a Competitive Local Exchange Carrier (CLEC) and provides local phone service in the Philadelphia metropolitan region. PECO Hyperion utilizes a large-scale fiber optic cable-based network that currently extends over 700 miles and is connected to major long-distance carriers and local businesses. The Company and Hyperion Telecommunications, Inc. each holds a 50% interest in the partnership. 24 In 1996, the Company and AT&T Corp. formed AT&T Wireless PCS of Philadelphia, LLC to provide a new digital wireless Personal Communications Services (PCS) network in the Philadelphia metropolitan trading area. The Company has completed the initial build-out of the new digital wireless PCS network. Commercial launch of PCS in the Philadelphia area occurred in October 1997. The Company holds a 49% equity interest in the venture. Due to their start-up nature, these joint ventures and investments are expected to negatively affect earnings in the near future. See Note 19 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1998. PECO Energy Capital Corp. and Related Entities PECO Energy Capital Corp., a wholly owned subsidiary, is the sole general partner of PECO Energy Capital, L.P., a Delaware limited partnership (Partnership). The Partnership was created solely for the purpose of issuing preferred securities, representing limited partnership interests and lending the proceeds thereof to the Company and entering into similar financing arrangements. The loans to the Company are evidenced by the Company's subordinated debentures (Subordinated Debentures), which are the only assets of the Partnership. The only revenues of the Partnership are interest on the Subordinated Debentures. All of the operating expenses of the Partnership are paid by PECO Energy Capital Corp. As of December 31, 1998, the Partnership held $349.4 million aggregate principal amount of the Subordinated Debentures. PECO Energy Capital Trust I (Trust I) was created in October 1995 as a statutory business trust under the laws of the State of Delaware solely for the purpose of issuing trust receipts (Trust I Receipts), each representing an 8.72% Cumulative Monthly Income Preferred Security, Series B (Series B Preferred Securities) of the Partnership. The Partnership is the sponsor of the Trust. On May 15, 1998, Trust I fully redeemed all outstanding Trust Receipts. Distributions were made on the Trust I Receipts during 1998 in the aggregate amount of $2.4 million. Expenses of the Trust for 1998 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. PECO Energy Capital Trust II (Trust II) was created in June 1997 as a statutory business trust under the laws of the State of Delaware solely for the purpose of issuing trust receipts (Trust II Receipts) each representing an 8.00% Cumulative Monthly Income Preferred Security, Series C (Series C Preferred Securities) of the Partnership. The Partnership is the sponsor of the Trust II. As of December 31, 1998, the Trust II had outstanding 2,000,000 Trust II Receipts. At December 31, 1998, the assets of the Trust II consisted solely of 2,000,000 Series C Preferred Securities with an aggregate stated liquidation preference of $50 million. Distributions were made on the Trust II Receipts during 1998 in the aggregate amount of $4 million. Expenses of the Trust II for 1998 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. The Trust II Receipts are issued in book-entry only form. PECO Energy Capital Trust III (Trust III) was created in April 1998 as a statutory business trust under the laws of the State of Delaware solely for the purpose of issuing trust receipts (Trust III Receipts) each representing an 7.38% Cumulative Monthly Income Preferred Security, Series D (Series D Preferred Securities) of the Partnership. The Partnership is the sponsor of the Trust III. As of December 31, 1998, the Trust III had outstanding 78,105 Trust III Receipts. At December 31, 1998, the assets of the Trust III consisted solely of 78,105 Series D Preferred Securities with an aggregate stated liquidation preference of $78.1 million. Distributions were made on the Trust III Receipts during 1998 in the aggregate amount of $4.1 million. Expenses of the Trust III for 1998 were approximately $50,000, all of which were paid by PECO Energy Capital Corp. The Trust III Receipts are issued in book-entry only form. 25 Executive Officers of the Registrant at December 31, 1998
Age at Effective Date of Election Name Dec. 31, 1998 Position to Present Position - - ---- --------------- -------- ------------------- C. A. McNeill, Jr ..... 59 Chairman of the Board, President and Chief Executive Officer ................................ July 1, 1997 N. J. Bessey .......... 45 President, Power Team ............................. April 8, 1998 G. R. Rainey .......... 49 President and Chief Nuclear Officer, PECO Nuclear .......................................... June 1, 1998 G. A. Cucchi .......... 49 Senior Vice President, Corporate and President, PECO Energy Ventures. ............................ June 22, 1998 J. W. Durham .......... 61 Senior Vice President and General Counsel ......... October 24, 1988 M. J. Egan. ........... 45 Senior Vice President, Finance and Chief Financial Officer ................................ October 13, 1997 K. G. Lawrence ........ 51 Senior Vice President, Corporate and President, PECO Energy Distribution ......................... June 22, 1998 J. M. Madara, Jr ...... 55 Senior Vice President, Power Generation Group ............................................ March 1, 1994 W. H. Smith, III ...... 50 Senior Vice President, Business Services Group ............................................ November 7, 1997 D. W. Woods ........... 41 Senior Vice President, Corporate and Public Affairs .......................................... December 1, 1998 J. B. Cotton .......... 53 Vice President, Special Projects, PECO Nuclear .......................................... August 14, 1998 J. Doering, Jr ........ 55 Vice President, Peach Bottom Atomic Power Station, PECO Nuclear. ........................... March 2, 1998 G. N. Dudkin .......... 41 Vice President, Operations, PECO Energy Distribution ..................................... April 8, 1998 D. B. Fetters ......... 47 Vice President, Nuclear Development, PECO Nuclear .......................................... June 22, 1998 J. H. Gibson .......... 42 Vice President and Controller. .................... May 31, 1998 P. E. Haviland ........ 44 Vice President, Corporate Development ............. March 4, 1998 T. P. Hill, Jr ........ 50 Vice President, Regulatory and External Affairs, PECO Energy Distribution ................ April 9, 1998 C. A. Jacobs .......... 46 Vice President, Support Services .................. November 9, 1998 S. L. Keenan .......... 34 Vice President, Customer and Marketing Services, PECO Energy Distribution ............... April 8, 1998 C. A. Matthews ........ 48 Vice President, Information Technology and Chief Information Officer ........................ July 28, 1997 J. P. McElwain ........ 48 Vice President, Nuclear Projects, PECO Nuclear .......................................... April 9, 1997 J. B. Mitchell ........ 51 Vice President, Treasury and Evaluation, and Treasurer ........................................ December 1, 1994 J. D. von Suskil ...... 52 Vice President, Limerick Generating Station, PECO Nuclear ..................................... January 26, 1998 R. G. White ........... 40 Vice President, Corporate Planning. ............... September 28, 1998 K. K. Combs ........... 48 Corporate Secretary. .............................. November 1, 1994
Each of the above executive officers holds such office at the discretion of the Company's Board of Directors until his or her replacement or earlier resignation, retirement or death. Prior to his election to his current position, Mr. McNeill was President and Chief Executive Officer, President and Chief Operating Officer and Executive Vice President -- Nuclear. Prior to her election to her current position, Ms. Bessey was Vice President-Power Transactions. Prior to joining the Company in 1994, Ms. Bessey was Vice President of U.S. Generating Company, an independent power producer. 26 Prior to his election to his current position, Mr. Rainey was Vice President -- Peach Bottom Atomic Power Station, Vice President -- Nuclear Services and Plant Manager -- Eddystone Generating Station; Prior to his election to his current position, Mr. Cucchi was Vice President -- Power Delivery, Vice President -- Corporate Planning and Development, Director of System Planning and Performance, and Manager -- System Planning. James W. Durham has held the position of Senior Vice President and General Counsel for over five years. Prior to joining the Company, Mr. Egan was Senior Vice President and Chief Financial Officer of Aristech Chemical Company and Vice President of Planning and Control of ARCO Chemical Company, Americas. Prior to his election to his current position, Mr. Lawrence was Senior Vice President --Local Distribution Company, Senior Vice President -- Finance and Chief Financial Officer, and Vice President -- Gas Operations. Prior to his election to his current position, Mr. Madara was Vice President -- Production. Prior to his election to his current position, Mr. W. H. Smith, III was Vice President and Group Executive -- Telecommunications Group, Vice President - - -- Station Support, Vice President -- Planning and Performance, and Manager -- Corporate Strategy and Performance. Prior to joining the Company in 1998, Mr. Woods was the Chief of Staff for the Pennsylvania Senate Majority Leader. Prior to her election to her current position, Ms. Gibson was Director of Audit Services and Director of the Tax Division. Prior to joining the Company in 1998, Mr. Haviland was Senior Vice President -- Planning and Administration with Bovis Construction Group. Prior to his election to his current position, Mr. Hill was Vice President and Controller. Prior to joining the Company in 1998, Ms. Jacobs was Vice President of Industrial Operations, Americas and Vice President Professional Deveolpment and Senior Director of Materials Management with Rhone-Polenc Rorer Corporation. Prior to her election to her current position, Ms. Keenan was acting General Manager -- Customer Services, Director -- Field Services, Director -- Reengineering and Performance and Manager -- Regulatory Performance. Prior to her election to her current position, Ms. Matthews was Director of Consumer Energy Information Systems and Distributed Information Officer. Prior to joining the Company in 1996, Ms. Matthews was Vice President of Strategic Business Development for Europe Online S.A. Luxembourg. Prior to his election to his current position, Mr. von Suskil was Director - - -- Engineering, Manager -- Planning and Assistant Manager -- Outages. Prior to joining the Company in 1995, Mr. von Suskil was a Captain in the United States Navy. Prior to joining the Company, Mr. White was Corporate Finance Manager and Corporate Operations Consultant for ARCO Chemical Company. Prior to their election to the positions shown above, the following executive officers held other positions with the Company since January 1, 1994: Mr. Cotton was Director -- Nuclear Engineering, Director -- Nuclear Quality Assurance and Superintendent -- Operations; Mr. Doering was Plant Manager -- Limerick, Director -- Nuclear Strategies Support, and General Manager Operations; Mr. Dudkin was Acting General Manager -- Power Delivery, Regional Director Power Delivery and Manager -- Electric Operations; Mr. Fetters was Vice President -- Nuclear Planning and Development, Director -- Nuclear Engineering, Director -- Limerick Maintenance and a Project Manager; Mr. McElwain was Director of Outage Management -- Peach Bottom; Mr. Mitchell was Director of Financial Operations and Assistant Treasurer; and Ms. Combs was an Assistant General Counsel. There are no family relationships among directors or executive officers of the Company. 27 ITEM 2. PROPERTIES The principal plants and properties of the Company are subject to the lien of the Mortgage under which the Company's First and Refunding Mortgage Bonds are issued. The following table sets forth the Company's net electric generating capacity by station at December 31, 1998:
Net Generating Estimated Capacity (1) Retirement Station Location (Kilowatts) Year ------- -------- ----------- ---- Nuclear Limerick ............................ Limerick Twp., PA ................... 2,249,000 2024, 2029 Peach Bottom ........................ Peach Bottom Twp., PA ............... 928,000(2) 2013, 2014 Salem ............................... Hancock's Bridge, NJ. ............... 942,000(2) 2016, 2020 Hydro Conowingo ........................... Harford Co., MD. .................... 512,000 2014 Pumped Storage Muddy Run ........................... Lancaster Co., PA ................... 910,000 2014 Fossil (Steam Turbines) .............. Cromby .............................. Phoenixville, PA .................... 345,000 (3) Delaware ............................ Philadelphia, PA .................... 250,000 (3) Eddystone ........................... Eddystone, PA ....................... 1,341,000 2009, 2010, 2011 Schuylkill .......................... Philadelphia, PA .................... 166,000 (3) Conemaugh ........................... New Florence, PA .................... 352,000(2) 2005, 2006 Keystone ............................ Shelocta, PA ........................ 357,000(2) 2002, 2003 Fossil (Gas Turbines) ................ Chester ............................. Chester, PA ......................... 39,000 (3) Croydon ............................. Bristol Twp., PA .................... 380,000 (3) Delaware ............................ Philadelphia, PA .................... 56,000 (3) Eddystone ........................... Eddystone, PA ....................... 60,000 (3) Fairless Hills ...................... Falls Twp., PA ...................... 60,000 (3) Falls ............................... Falls Twp., PA ...................... 51,000 (3) Moser ............................... Lower Pottsgrove Twp., PA. .......... 51,000 (3) Pennsbury ........................... Falls Twp., PA ...................... 6,000 (3) Richmond ............................ Philadelphia, PA .................... 96,000 (3) Schuylkill .......................... Philadelphia, PA .................... 30,000 (3) Southwark ........................... Philadelphia, PA .................... 52,000 (3) Salem ............................... Hancock's Bridge, NJ. ............... 16,000(2) (3) Fossil (Internal Combustion) ......... Cromby. ............................. Phoenixville, PA .................... 2,700 (3) Delaware ............................ Philadelphia, PA .................... 2,700 (3) Schuylkill .......................... Philadelphia, PA .................... 2,800 (3) Conemaugh ........................... New Florence, PA .................... 2,300(2) 2006 Keystone ............................ Shelocta, PA ........................ 2,300(2) 2003 ----------- Total .................................................................. 9,261,800 ===========
- - ------------ (1) Summer rating. (2) Company portion. (3) Retirement dates are under on-going review by the Company. Current plans call for the continued operation of these units beyond 1999. 28 The following table sets forth the Company's major transmission and distribution lines in service at December 31, 1998: Voltage in Kilovolts (Kv) Conductor Miles ------------------------- ---------------- Transmission: 500 Kv......................... 891 220 Kv......................... 1,634 132 Kv......................... 15 66 Kv ......................... 570 33 Kv and below ............... 29 Distribution: 33 Kv and below ............... 48,222 At December 31, 1998, the Company's principal electric distribution system included 21,009 pole-line miles of overhead lines and 21,002 cable miles of underground cables. The following table sets forth the Company's gas pipeline miles at December 31, 1998: Pipeline Miles --------------- Transmission .................... 28 Distribution .................... 5,788 Service piping .................. 4,621 ----- Total ........................ 10,437 ====== The Company has a liquefied natural gas facility located in West Conshohocken, Pennsylvania which has a storage capacity of 1,200,000 mcf and a sendout capacity of 157,000 mcf/day and a propane-air plant located in Chester, Pennsylvania, with a tank storage capacity of 1,980,000 gallons and a peaking capability of 28,800 mcf/day. In addition, the Company owns 24 natural gas city gate stations at various locations throughout its gas service territory. At December 31, 1998, the Company had 577 miles of fiber optic cable. The Company owns an office building in downtown Philadelphia, in which it maintains its headquarters, and also owns or leases elsewhere in its service area a number of properties which are used for office, service and other purposes. Information regarding rental and lease commitments is incorporated herein by reference to Note 16 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1998. The Company maintains property insurance against loss or damage to its principal plants and properties by fire or other perils, subject to certain exceptions. Although it is impossible to determine the total amount of the loss that may result from an occurrence at a nuclear generating station, the Company maintains its $2.75 billion proportionate share for each station. Under the terms of the various insurance agreements, the Company could be assessed up to $30 million for property losses incurred at any plant insured by the insurance companies (see "ITEM 1. BUSINESS -- Electric Operations -- General"). The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Any such losses could have a material adverse effect on the Company's financial condition and results of operations. ITEM 3. LEGAL PROCEEDINGS On April 9, 1998, Grays Ferry Cogneration Partnership (Grays Ferry), two of three partners of Grays Ferry and Trigen-Philadelphia Energy Corporation, filed a complaint in Philadelphia County Court of Common Pleas against the Company arising out of the Company's termination of two power purchase agreements (PPAs) that the Company had entered into with Grays Ferry. The complaint alleged among other things, breach of contract, the fraud and breach of implied covenant of good faith and fair dealing. The plaintiff seeks specific performance, damages in excess of $200 million and punitive damages. A preliminary injunction was entered against the Company on May 5, 1998, enjoining the Company from terminating the PPAs. On September 4, 1998, the Chase Manhattan Bank, as agent for a syndicate of banks that are lenders to Grays Ferry, filed a complaint against the Company alleging tortious interference by the Company in the credit agreements between Grays Ferry and the banks and breach of the letter agreement between the Company and the banks. These matters have been 29 consolidated. On March 9, 1999, the Court entered a partial judgment in favor of Grays Ferry declaring, as a matter of law, that the Company's termination of the PPAs was in breach of those agreements. Trial in the remaining issues was scheduled for March 29, 1999. On May 29, 1998, Westinghouse Power Generation filed a complaint in the Philadelphia Court of Common Pleas against the Company for tortious interference with two contracts that Westinghouse has with Grays Ferry. That case is scheduled for trial on April 19, 1999. The Company cannot predict the outcome of these matters. On May 27, 1998, the United States Department of Justice, on behalf of the Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric Power Cooperative Inc. (Cajun), filed an action claiming breach of contract against the Company in the United States District Court for the Middle District of Louisiana arising out of the Company's termination of the contract to purchase Cajun's interest in the River Bend nuclear power plant. This action seeks $67 million in damages. The Company cannot predict the outcome of this matter. During the shutdown of Salem, examinations of the steam generator tubes at Salem Unit No. 1 revealed significant cracking. On February 27, 1996, the Company, PSE&G, Atlantic Electric Company and Delmarva, the co-owners of Salem, filed an action in the New Jersey District Court against Westinghouse Electric Corporation, the designer and manufacturer of the Salem steam generators. The suit alleges that the significant cracking of the steam generator tubes is the result of defects in the design and fabrication of the steam generators and that Westinghouse knew that the steam generators supplied to Salem were defective and that Westinghouse deliberately concealed this from PSE&G. The suit alleges violations of both the federal and New Jersey Racketeer Influenced and Corrupt Organizations Acts (RICO), fraud, negligent misrepresentation and breach of contract. Westinghouse has filed a motion for summary judgment on the grounds that the claim of the plaintiffs is barred by the statute of limitations. On November 6, 1998, the New Jersey District Court granted summary judgment in favor of Westinghouse. The plaintiff co-owners, including the Company, have filed an appeal of the federal claims with the United States Circuit Court for the Third Circuit Court of Appeals. The plaintiff co-owners are also pursuing an action on the state law claims in the New Jersey state courts. The Company cannot predict the outcome of these proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is listed on the New York and Philadelphia Stock Exchanges. At January 31, 1999, there were 142,794 owners of record of the Company's common stock. The information with respect to the prices of and dividends on the Company's common stock for each quarterly period during 1998 and 1997 is incorporated herein by reference to "Operating Statistics" in the Company's Annual Report to Shareholders for the year 1998. The book value of the Company's common stock at December 31, 1998 was $13.61 per share. Dividends may be declared on common stock out of funds legally available for dividends whenever full dividends on all series of preferred stock outstanding at the time have been paid or declared and set apart for payment for all past quarter-yearly dividend periods. No dividends may be declared on common stock, however, at any time when the Company has failed to satisfy the sinking fund obligations with respect to certain series of the Company's preferred stock. Future dividends on common stock will depend upon earnings, the Company's financial condition and other factors, including the availability of cash. The Company's Articles prohibit payment of any dividend on, or other distribution to the holders of, common stock if, after giving effect thereto, the capital of the Company represented by its common stock together with its Other Paid-In Capital and Retained Earnings is, in the aggregate, less than the involuntary liquidating value of its then outstanding preferred stock. At December 31, 1998, such capital ($3.1 billion) amounted to about 13 times the liquidating value of the outstanding preferred stock ($230.2 million). 30 The Company may not declare dividends on any shares of its capital stock in the event that: (1) the Company exercises its right to extend the interest payment periods on the Subordinated Debentures which were issued to the Partnership; (2) the Company defaults on its guarantee of the payment of distributions on the Cumulative Monthly Income Preferred Securities of the Partnership; or (3) an event of default occurs under the Indenture under which the Subordinated Debentures are issued. ITEM 6. SELECTED FINANCIAL DATA Selected financial data for each of the last five years for the Company and its subsidiaries is incorporated herein by reference to "Financial Statistics" and "Operating Statistics" in the Company's Annual Report to Shareholders for the year 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information with respect to this caption is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information with respect to this caption is incorporated herein by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information with respect to this caption is incorporated herein by reference to "Consolidated Financial Statements" and "Financial Statistics" in the Company's Annual Report to Shareholders for the year 1998. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) Identification of Directors. The information required for Directors is included in the Proxy Statement of the Company in connection with its 1999 Annual Meeting of Shareholders to be held April 27, 1999, under the heading "Election of Directors" and is incorporated herein by reference. (b) Identification of Executive Officers. The information required for Executive Officers is set forth in "PART I. ITEM 1. BUSINESS - Executive Officers of the Registrant" of this Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The information with respect to this caption is included in the Proxy Statement of the Company in connection with its 1999 Annual Meeting of Shareholders to be held April 27, 1999, under the heading "Executive Compensation Disclosure" and is incorporated herein by reference. 31 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information with respect to this caption is included in the Proxy Statement of the Company in connection with its 1999 Annual Meeting of Shareholders to be held April 27, 1999, under the heading "Election of Directors" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information with respect to this caption is included in the Proxy Statement of the Company in connection with its 1999 Annual Meeting of Shareholders to be held April 27, 1999, under the heading "Election of Directors" and is incorporated herein by reference. 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Financial Statements and Financial Statement Schedule
Reference (Page) ---------------------------------- Form 10-K Annual Report Index Annual Report to Shareholders - - ----- --------------- ---------------- Data incorporated by reference from the Annual Report to Shareholders for the year 1998: Report of Independent Accountants ..................... -- 23 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 ............... -- 24 Consolidated Balance Sheets as of December 31, 1998 and 1997 ............................................. -- 26 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ............... -- 25 Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock for the years ended December 31, 1998, 1997 and 1996 ......... -- 28 Notes to Consolidated Financial Statements ............ -- 29 Data submitted herewith: Report of Independent Accountants ..................... 34 -- Schedule II--Valuation and Qualifying Accounts for the years ended December 31, 1998, 1997 and 1996 ................................. 35 --
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto. With the exception of the consolidated financial statements and the independent accountants' report listed in the above index and the information referred to in Items 1, 2, 5, 6, 7 and 8, all of which is included in the Company's Annual Report to Shareholders for the year 1998 and incorporated by reference into this Form 10-K, the Annual Report to Shareholders for the year 1998 is not to be deemed filed as part of this Form 10-K. 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors PECO Energy Company: Our audits of the consolidated financial statements referred to in our report dated February 5, 1999 (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14 of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 5, 1999 34 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Thousands of Dollars)
Column A Column B Column C Additions Column D Column E -------- -------- ------------------------- ------------- ---------- Charged to Balance at Charged to Other Balance at Beginning of Costs and Accounts Deductions End of Description Period Expenses Describe Describe(1) Period ----------- ------------ ---------- ----------- ----------- ---------- FOR THE YEAR ENDED DECEMBER 31, 1998 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS..... $133,810 $71,667 $ -- $83,338 $122,139 -------- ------- ---- ------- -------- TOTAL .................................. $133,810 $71,667 $ -- $83,338 $122,139 ======== ======= ==== ======= ======== FOR THE YEAR ENDED DECEMBER 31, 1997(2) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS . $128,459 $88,263 $ -- $82,912 $133,810 -------- ------- ---- ------- -------- TOTAL .................................. $128,459 $88,263 $ -- $82,912 $133,810 ======== ======= ==== ======= ======== FOR THE YEAR ENDED DECEMBER 31, 1996(2) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS..... $118,525 $93,104 $ -- $83,170 $128,459 -------- ------- ---- ------- -------- TOTAL .................................. $118,525 $93,104 $ -- $83,170 $128,459 ======== ======= ==== ======= ========
- - ------------ (1) Write-off of individual accounts receivable. (2) Restated to reflect valuation allowance activity for Customer Assistance Program and Special Agreement accounts. 35 Exhibits Certain of the following exhibits have been filed with the Securities and Exchange Commission (Commission) pursuant to the requirements of the Acts administered by the Commission. Such exhibits are identified by the references following the listing of each such exhibit and are incorporated herein by reference under Rule 12b-32 of the Securities and Exchange Act of 1934, as amended. Certain other instruments which would otherwise berequired to be listed below have not been so listed because such instruments do not authorize securities in an amount which exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis and the Company agrees to furnish a copy of any such instrument to the Commission upon request. Exhibit No. Description - - ------------- ---------------------------------------------------------------- 3-1 Amended and Restated Articles of Incorporation of PECO Energy Company (1993 Form 10-K, Exhibit 3-1). 3-2 Bylaws of the Company, adopted February 26, 1990 and amended January 26, 1998. (1997 Form 10-K, Exhibit 3-2) 4-1 First and Refunding Mortgage dated May 1, 1923 between The Counties Gas and Electric Company (predecessor to the Company) and Fidelity Trust Company, Trustee (First Union National Bank, successor), (Registration No. 2-2881, Exhibit B-1). 4-2 Supplemental Indentures to the Company's First and Refunding Mortgage: Dated as of File Reference Exhibit No. --------------------------------------------------------------------- May 1, 1927 2-2881 B-1(c) March 1, 1937 2-2881 B-1(g) December 1, 1941 2-4863 B-1(h) November 1, 1944 2-5472 B-1(i) December 1, 1946 2-6821 7-1(j) September 1, 1957 2-13562 2(b)-17 May 1, 1958 2-14020 2(b)-18 March 1, 1968 2-34051 2(b)-24 March 1, 1981 2-72802 4-46 March 1, 1981 2-72802 4-47 December 1, 1984 1984 Form 10-K 4-2(b) July 15, 1987 Form 8-K dated July 21, 1987 4(c)-63 July 15, 1987 Form 8-K dated July 21, 1987 4(c)-64 October 15, 1987 Form 8-K dated October 7, 1987 4(c)-66 October 15, 1987 Form 8-K dated October 7, 1987 4(c)-67 April 15, 1988 Form 8-K dated April 11, 1988 4(e)-68 April 15, 1988 Form 8-K dated April 11, 1988 4(e)-69 October 1, 1989 Form 8-K dated October 6, 1989 4(e)-72 October 1, 1989 Form 8-K dated October 18, 1989 4(e)-73 April 1, 1991 1991 Form 10-K 4(e)-76 December 1, 1991 1991 Form 10-K 4(e)-77 April 1, 1992 March 31, 1992 Form 10-Q 4(e)-79 June 1, 1992 June 30, 1992 Form 10-Q 4(e)-81 July 15, 1992 June 30, 1992 Form 10-Q 4(e)-83 September 1, 1992 1992 Form 10-K 4(e)-85 March 1, 1993 1992 Form 10-K 4(e)-86 March 1, 1993 1992 Form 10-K 4(e)-87 May 1, 1993 March 31, 1993 Form 10-Q 4(e)-88 36 Dated as of File Reference Exhibit No. --------------------------------------------------------------------- May 1, 1993 March 31, 1993 Form 10-Q 4(e)-89 May 1, 1993 March 31, 1993 Form 10-Q 4(e)-90 August 15, 1993 Form 8-A dated August 19, 1993 4(e)-91 August 15, 1993 Form 8-A dated August 19, 1993 4(e)-92 November 1, 1993 Form 8-A dated October 27, 1993 4(e)-94 November 1, 1993 Form 8-A dated October 27, 1993 4(e)-95 May 1, 1995 Form 8-K dated May 24, 1995 4(e)-96 4-3 Indenture, dated as of July 1, 1994, between the Company and First Union National Bank, as successor trustee (1994 Form 10-K, Exhibit 4-5). 4-4 First Supplemental Indenture, dated as of December 1, 1995, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994 (1995 Form 10-K, Exhibit 4-7). 4-5 Second Supplemental Indenture, dated as of June 1, 1997, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994. (1997 Form 10-K, Exhibit 4-5). 4-6 Third Supplemental Indenture, dated as of April 1, 1998, between the Company and First Union National Bank, as successor trustee, to Indenture dated as of July 1, 1994. 4-7 Payment and Guarantee Agreement, dated July 27, 1994, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series A of PECO Energy Capital, L.P. (1994 Form 10-K, Exhibit 4-7). 4-8 Payment and Guarantee Agreement, dated as of December 19, 1995, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series B of PECO Energy Capital, L.P (1995 Form 10-K, Exhibit 4-10). 4-9 Payment and Guarantee Agreement, dated as of June 6, 1997, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series C of PECO Energy Capital, L.P. (1997 Form 10-K, Exhibit 4-8). 4-10 Payment and Guarantee Agreement, dated as of April 6, 1998, executed by the Company in favor of the holders of Cumulative Monthly Income Preferred Securities, Series D of PECO Energy Capital, L.P. 4-11 Revolving Credit Agreement, dated as of October 7, 1997, among the Company, as borrower, and certain banks named therein. (1997 Form 10-K, Exhibit 4-9). 4-12 364-day Credit Agreement, dated as of October 7, 1997, among the Company, as borrower, and certain banks named therein. (1997 Form 10-K, Exhibit 4-10). 4-13 Term Loan Agreement, dated as of November 30, 1998, among the Company as borrower, and certain banks named therein. 4-14 PECO Energy Company Dividend Reinvestment and Stock Purchase Plan, as amended January 28, 1994 (Post-Effective Amendment No. 1 to Registration No. 33-42523, Exhibit 28). 10-1 Amended and Restated Operating Agreement of PJM Interconnection, L.L.C., dated June 2, 1997, (Revised December 31, 1997). (1997 Form 10-K, Exhibit 10-1). 10-2 Agreement, dated November 24, 1971, between Atlantic City Electric Company, Delmarva Power & Light Company, Public Service Electric and Gas Company and the Company for ownership of Salem Nuclear Generating Station (1988 Form 10-K, Exhibit 10-3); supplemental agreement dated September 1, 1975; supplemental agreement dated January 26, 1977 (1991 Form 10-K, Exhibit 10-3); and supplemental agreement dated May 27, 1997. (1997 Form 10-K, Exhibit 10-2). 37 10-3 Agreement, dated November 24, 1971, between Atlantic City Electric Company, Delmarva Power & Light Company, Public Service Electric and Gas Company and the Company for ownership of Peach Bottom Atomic Power Station; supplemental agreement dated Septem- ber 1, 1975; supplemental agreement dated January 26, 1977 (1988 Form 10-K, Exhibit 10-4) and supplemental agreement dated May 27, 1997. (1997 Form 10-K, Exhibit 10-3). 10-4 Deferred Compensation and Supplemental Pension Benefit Plan.* (Form 10-K, Exhibit 10-4). 10-5 Management Group Deferred Compensation and Supplemental Pension Benefit Plan.* (Form 10-K, Exhibit 10-5). 10-6 Unfunded Deferred Compensation Plan for Directors.* (Form 10-K, Exhibit 10-6). 10-7 Forms of Agreement between the Company and certain officers (1995 Form 10-K, Exhibit 10-5). 10-8 PECO Energy Company 1989 Long-Term Incentive Plan, amended April 9, 1997 (1997 Proxy Statement, Appendix B).* 10-9 PECO Energy Company Management Incentive Compensation Plan (1997 Proxy State- ment, Appendix A).* 10-10 PECO Energy Company 1998 Stock Option Plan (Registration No. 333-67367, Exhibit 4.2). 10-11 Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., dated July 25, 1994 (1994 Form 10-K, Exhibit 10-7). 10-12 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit 10-8). 10-13 Amendment No. 2 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. (1995 Form 10-K, Exhibit 10-9). 10-14 Amendment No. 3 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. 10-15 Amended and Restated Trust Agreement of PECO Energy Capital Trust I, dated as of December 19, 1995. (1995 Form 10-K, Exhibit 10-10). 10-16 Amended and Restated Trust Agreement of PECO Energy Capital Trust III, dated as of April 6, 1998. 10-17 Form of Amended and Restated Trust Agreement for PECO Energy Transition Trust among George Shicora and Diana Moy Kelly, as Beneficiary Trustees, First Union Trust Company, National Association, as Issuer Trustee, Delaware Trustee and Independent Trustee, and PECO Energy Company, as Grantor and Owner (Post- Effective Amendment No. 1 to Registration Statement No. 333-58055, Exhibit 4.1.2). 10-18 Form of Intangible Transition Property Sale Agreement between PECO Energy Transition Trust and PECO Energy Company (Post-Effective Amendment No. 1 to Registration Statement No. 333-58055, Exhibit 10.1). 10-19 Form of Master Servicing Agreement between PECO Energy Transition Trust and PECO Energy Company (Post-Effective Amendment No. 1 to Registration Statement No. 333-58055, Exhibit 10.2). 12-1 Ratio of Earnings to Fixed Charges. 12-2 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends. 13 Management's Discussion and Analysis of Financial Condition and Results of Operations, Consolidated Financial Statements, Notes to Consolidated Financial Statements, Financial Statistics, and Operating Statistics of the Annual Report to Shareholders for the year 1998. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 24 Powers of Attorney. 27 Financial Data Schedule. - - ------------ * Compensatory plans or arrangements in which directors or officers of the Company participate and which are not available to all employees. 38 Reports on Form 8-K During the quarter ended December 31, 1998, the Company filed Current Reports on Form 8-K, dated: October 15, 1998 reporting information under "ITEM 5. OTHER EVENTS" regarding AmerGen Energy Company, LLC, the joint venture between the Company and British Energy Company, and GPU, Inc. signing a definitive asset purchase agreement to purchase Unit No. 1 at the Three Mile Island Nuclear Generating Station. Subsequent to December 31, 1998, the Company filed Current Reports on Form 8-K, dated: March 8, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding the United States Supreme Court's denial of the petition of certiorari in an action relating to Pennsylvania's Electricity Generation Customer Choice and Competition Act. March 25, 1999 reporting information under "ITEM 5. OTHER EVENTS" regarding the issuance, by PECO Energy Transition Trust, a wholly owned subsidiary of the Company, of $4 billion of Transition Bonds. 39 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, PECO ENERGY COMPANY, has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, and Commonwealth of Pennsylvania, on the 31st day of March 1999. PECO ENERGY COMPANY By /s/ C.A. McNeill, Jr. ------------------------------- C.A. McNeill, Jr., Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ C. A. McNeill, Jr. Chairman of the Board, President, Chief March 31, 1999 - - --------------------- Executive Officer and Director (Principal C. A. McNeill, Jr. Executive Officer) /s/ M. J. Egan Senior Vice President -- Finance and Chief March 31, 1999 - - --------------------- Financial Officer (Principal Financial and M. J. Egan Accounting Officer)
This annual report has also been signed below by C. A. McNeill, Jr., Attorney-in-Fact, on behalf of the following Directors on the date indicated: SUSAN W. CATHERWOOD ROSEMARIE B. GRECO DANIEL L. COOPER JOHN M. PALMS M. WALTER D'ALESSIO JOSEPH F. PAQUETTE, JR. G. FRED DIBONA, JR. RONALD RUBIN R. KEITH ELLIOTT ROBERT SUBIN RICHARD H. GLANTON By /s/ C. A. McNeill, Jr. March 31, 1999 - - ------------------------- 40 EX-4.6 2 EXHIBIT 4.6 THIRD SUPPLEMENTAL INDENTURE, dated as of April 1, 1998, by and between PECO Energy Company, a Pennsylvania corporation (the "Company"), and First Union National Bank, a national association, as successor Trustee, to an Indenture, dated as of July 1, 1994 (the "Original Indenture"), by and between the Company and Meridian Trust Company, the original Trustee, which was supplemented by a First Supplemental Indenture (the "First Supplemental Indenture") dated as of December 1, 1995 and a Second Supplemental Indenture (the "Second Supplemental Indenture") dated as of June 1, 1997 (the Original Indenture, as supplemented, the "Indenture"). WHEREAS, the Company has formed a wholly owned subsidiary, PECO Energy Capital Corp., which is the general partner of PECO Energy Capital, L.P., a Delaware limited partnership ("PECO Energy Capital"), to issue in series from time to time its limited partner interests ("Preferred Securities") and to loan the proceeds thereof, together with the investment by PECO Energy Capital Corp. in PECO Energy Capital, to the Company and to effect other similar arrangements. WHEREAS, the Company has duly executed and delivered to the Trustee the Original Indenture to provide for the issuance of one or more series of deferrable interest subordinated debentures (herein sometimes called the "Debentures"), issuable as in the Indenture provided, and authorized and issued the initial series of Debentures which were designated therein as the 9% Deferrable Interest Subordinated Debentures, Series A. WHEREAS, the Company has duly executed and delivered to the Trustee the First Supplemental Indenture authorizing and providing for the issuance of the second series of Debentures which were designated the 8.72% Deferrable Interest Subordinated Debentures, Series B. WHEREAS, the Company has duly executed and delivered to the Trustee the Second Supplemental Indenture authorizing and providing for the issuance of the third series of Debentures which were designated the 8% Deferrable Interest Subordinated Debentures, Series C. WHEREAS, the Company desires to authorize and to effect the issuance of a fourth series of Debentures in an aggregate principal amount of $80,520,619 and to designate such series 7.38% Subordinated Deferrable Interest Debentures, Series D (the "Series D Subordinated Debt Securities") under this Third Supplemental Indenture. WHEREAS, all things necessary to make the Series D Subordinated Debt Securities when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company, and to make this Third Supplemental Indenture a valid and binding agreement of the Company, in accordance with its terms, have been done. NOW THEREFORE: Each of the Company and the Trustee, intending to be legally bound hereby, agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders of the Series D Subordinated Debt Securities: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01. Definitions. "Additional Interest", with respect to the Series D Subordinated Debt Securities, means amounts, if any, which PECO Energy Capital would be required to pay as taxes, duties, assessments or governmental charges of whatever nature (other than withholding taxes) imposed by the United States, or any other taxing authority, with respect to the Series D Subordinated Debt Securities. "Issue Date" means April 6, 1998. "Series D Subordinated Debt Securities" means any of the Company's 7.38% Subordinated Deferrable Interest Debentures, Series D issued under this Third Supplemental Indenture. "Series D Subordinated Debt Securityholder" or "Series D Holder" means a Person in whose name a Series D Subordinated Debt Security is registered on the Registrar's books. "Series D Preferred Securities" means the 7.38% Cumulative Preferred Securities, Series D, representing limited partner interests of PECO Energy Capital. Unless otherwise defined herein, all other capitalized terms used herein have the meanings set forth in the Original Indenture. ARTICLE 2 THE SERIES D SUBORDINATED DEBT SECURITIES SECTION 2.01. Form of the Series D Subordinated Debt Securities; Denominations. The Series D Subordinated Debt Securities and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A attached hereto. The terms and provisions contained in the Series D Subordinated Debt Securities, a form of which is annexed hereto as Exhibit A, shall constitute, and are hereby expressly made, a part of this Third Supplemental Indenture. The Company and the Trustee, by their execution and delivery of this Third Supplemental Indenture, expressly agree to such terms and provisions and to be bound thereby. The Trustee shall authenticate and make available for delivery the Series D Subordinated Debt Securities for original issuance in the aggregate principal amount of $80,520,619 to evidence the Company's obligation with respect to the loan from PECO Energy Capital, upon receipt by the Trustee of a Board of Directors resolution and a written order of the Company signed by two Officers of the Company, but without any further action by the Company. Such order shall specify the amount of the Series D Subordinated Debt Securities to be authenticated and the date on which the original issuance of Series D Subordinated Debt Securities is to be authenticated and delivered to evidence the Company's obligation with respect to the loan from PECO Energy Capital. The aggregate principal amount of Series D Subordinated Debt Securities outstanding at any time may not exceed $80,520,619 except as provided in Section 2.09 of the Original Indenture. The Series D Subordinated Debt Securities shall be issuable only in registered form without coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 2.09. Replacement Debentures. If (a) any mutilated Debenture is surrendered to the Company or the Trustee, or (b) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Debenture, and there is delivered to the Company and the Trustee such Debenture or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Debenture has been acquired by a protected purchaser, the Company shall execute in exchange for any such mutilated Debenture or in lieu of any such destroyed, lost or stolen Debenture, a new Debenture of like tenor and principal amount, bearing a number not contemporaneously outstanding, and the Trustee shall authenticate and make such new Debenture available for delivery. In case any such mutilated, destroyed, lost or stolen Debenture has become or is about to become due and payable, or is about to be redeemed by the Company pursuant to Article 3 hereof, the Company in its discretion may, instead of issuing a new Debenture, pay or purchase such Debenture, as the case may be. Upon the issuance of any new Debentures under this Section 2.09, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) in connection therewith. Every new Debenture issued pursuant to this Section 2.09 in lieu of any mutilated, destroyed, lost or stolen Debenture shall constitute an original additional contractual obligation of the Company whether or not the mutilated, destroyed, lost or stolen Debenture shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and ratable with any and all other Debentures duly issued hereunder. The provisions of this Section 2.09 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Debentures. ARTICLE 3 REDEMPTION SECTION 3.01. Redemption; Notice to Trustee. (a) The Series D Subordinated Debt Securities are subject to redemption prior to maturity as provided in the form thereof attached hereto as Exhibit A. (b) If any or all of the Series D Subordinated Debt Securities are to be redeemed pursuant to paragraph (a) above, in addition to the notices required by the Original Indenture, the Company shall give notice by first class mail, postage prepaid, to the Trustee at least 40 days prior to the date of such redemption. Any such notice of redemption shall state the date and price of redemption. SECTION 3.02. Compliance with Terms of Indenture. In case the Company shall desire to exercise such right to redeem all or any part of said Series D Subordinated Debt Securities as hereinbefore provided, it shall comply with all the terms and provisions of Article III of the Original Indenture applicable thereto, and such redemption shall be made under and subject to the terms and provisions of said Article III and in the manner and with the effect therein provided, but at the time or times and at the respective redemption rates and upon mailing of notice, all as hereinbefore set forth in Section 3.01 of this Article. ARTICLE 4 EXTENSION PERIOD SECTION 4.01. Limitation on Right of Company to Extend Interest Payment Period. (b) Notwithstanding paragraph (a) of this Section 4.01 or any other provision herein to the contrary, the Company shall have the right in its sole and absolute discretion at any time and from time to time while the Debentures are outstanding, so long as an Event of Default has not occurred and is continuing, to extend the interest payment period for up to 60 consecutive months, provided that such extended interest period shall not extend beyond the stated maturity date or redemption date of any series of Debentures, and provided further that at the end of each Extension Period the Company shall pay all interest then accrued and unpaid (provided that with respect to any series of Debentures payable other than on a monthly basis, the Company shall, at the end of each Extension Period, pay all interest then accrued and payable), together with interest thereon compounded daily to the extent permitted by applicable law at the rate per annum borne by the Debentures. Prior to the termination of an Extension Period, the Company may shorten or may further extend the interest payment period, provided that such Extension Period together with all such further extensions may not exceed 60 months. The Company shall give the Trustee notice of its selection of such extended or shortened interest payment period at least one Business Day prior to the earlier of (i) the date selected by the Company to make the interest payment or (ii) the date PECO Energy Capital is required to give notice of the record or payment date of such related distribution to any national securities exchange on which the Preferred Securities are then listed or other applicable self-regulatory organization, but in any event not less than two Business Days prior to such record date fixed by the Company for the payment of such interest. The Company shall give or cause the Trustee to give such notice of the Company's selection of such extended interest payment period to the Holders. ARTICLE 5 CONCERNING THE TRUSTEE The Trustee hereby reaffirms acceptance of the trust herein declared and provided and agrees to perform the same upon the terms and conditions set forth in the Indenture, as supplemented by the First Supplemental Indenture, the Second Supplemental Indenture and this Third Supplemental Indenture, and upon the following terms and conditions: SECTION 5.01. Not Responsible for Recitals. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Third Supplemental Indenture or the due execution thereof by the Company or for or in respect of the recitals contained herein, all of which recitals are made solely by the Company. SECTION 5.02. Qualification Under Trust Indenture Act of 1939. The Trustee hereby acknowledges that the Company proposes to qualify this Third Supplemental Indenture under the Trust Indenture Act of 1939, as amended. ARTICLE 6 MISCELLANEOUS SECTION 6.01. Trust Indenture Act Controls. If any provision of this Third Supplemental Indenture limits, qualifies or conflicts with the duties imposed by operation of subsection (c) of Section 318 of the TIA, the imposed duties shall control. The provisions of Sections 310 to 317, inclusive, of the TIA that impose duties on any Person (including provisions automatically deemed included in an indenture unless the indenture provides that such provisions are excluded) as a part of and govern this Third Supplemental Indenture, except as, and to the extent, they are expressly excluded from this Third Supplemental Indenture, as permitted by the TIA. SECTION 6.02. Severability Clause. If any provision in this Third Supplemental Indenture or in the Series D Subordinated Debt Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 6.03. Governing Law. This Third Supplemental Indenture and the Series D Subordinated Debt Securities shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania as applied to contracts made and performed within the Commonwealth of Pennsylvania, without regard to its principles of conflicts of laws. SECTION 6.04. No Recourse Against Others. No director, officer, employee or stockholder, as such, of the Company shall have any liability for any obligations of the Company under the Series D Subordinated Debt Securities or this Third Supplemental Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Series D Subordinated Debt Security, each Series D Subordinated Debt Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issuance of the Series D Subordinated Debt Securities. SECTION 6.05. Use of Term "Trustee". Unless otherwise clearly required by the context, the term, "Trustee," or any other equivalent term used in this Third Supplemental Indenture shall be held and construed to mean the Trustee under the Indenture for the time being whether the original or a successor Trustee. SECTION 6.06. Confirmation of Original Indenture. As supplemented by the First Supplemental Indenture, the Second Supplemental Indenture and this Third Supplemental Indenture, the Original Indenture, is in all respects ratified and confirmed, and this Third Supplemental Indenture shall be read, taken and construed as a part of the Indenture so that all of the rights, remedies, terms, conditions, covenants and agreements of the Indenture shall apply and remain in full force and effect with respect to this Third Supplemental Indenture and to the Series D Subordinated Debt Securities issued hereunder. SECTION 6.07. Successors. All agreements of the Company in this Third Supplemental Indenture and the Series D Subordinated Debt Securities shall bind its successors and assigns. All agreements of the Trustee in this Third Supplemental Indenture shall bind its successors and assigns. SECTION 6.08. Multiple Original Copies of this Indenture. The parties may sign any number of copies of this Third Supplemental Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. Any signed copy shall be sufficient proof of this Third Supplemental Indenture. SECTION 6.09. Table of Contents; Headings, Etc. The Table of Contents, Cross-Reference Table and headings of the Articles and Sections of this Third Supplemental Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. SECTION 6.10. Benefits of the Indenture. Except as expressly provided in Article 10 of the Original Indenture, nothing in this Third Supplemental Indenture or in the Series D Subordinated Debt Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the Series D Holders and the Special Representative, any benefit or any legal or equitable right, remedy or claim under this Third Supplemental Indenture. SECTION 6.11. Date of Indenture. This Third Supplemental Indenture is dated as of April 1, 1998, but was actually executed and delivered on April 6, 1998. SECTION 6.12. Notices. Any notice or communication shall be in writing and delivered in person or mailed by first-class mail, postage prepaid, addressed as follows: if to the Company: PECO Energy Company 2301 Market Street P.O. Box 8699 Philadelphia, Pennsylvania 19101 Attention: Todd D. Cutler, Esq. Facsimile No.: (215) 841-5743 if to the Trustee: First Union National Bank Corporate Trust Administration 123 S. Broad Street (PA-1249) Philadelphia, Pennsylvania 19109-1199 The Company or the Trustee, by giving notice to the other, may designate additional or different addresses for subsequent notices or communications. The Company shall notify the holder, if any, of Senior Indebtedness of any such additional or different addresses of which the Company receives notice from the Trustee. Any notice or communication given to the Debentureholder other than PECO Energy Capital shall be mailed to the Debentureholder at the Debentureholder's address as it appears on the Register of the Registrar and shall be sufficiently given if mailed within the time prescribed. Failure to mail a notice or communication to a Debentureholder or any defect in it shall not affect its sufficiency with respect to other Debentureholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not received by the addressee. If the Company mails a notice or communication to the Debentureholders, it shall mail a copy to the Trustee and each Registrar, Paying Agent or co-Registrar. SIGNATURES IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this Third Supplemental Indenture on behalf of the respective parties hereto as of the date first above written. PECO ENERGY COMPANY By: /s/ J. Barry Mitchell -------------------------------- Name: J. Barry Mitchell ------------------------------ Title: Vice President - Finance ----------------------------- FIRST UNION NATIONAL BANK, as Trustee By: /s/ George J. Rayzis -------------------------------- Name: George J. Rayzis ------------------------------ Title: Vice President ----------------------------- PECO Energy Capital, L.P. By its General Partner, PECO Energy Capital Corp. By: /s/ J. Barry Mitchell ---------------------------- Name: J. Barry Mitchell -------------------------- Title: President ------------------------- Exhibit A 7.38% Subordinated Deferrable Interest Debentures, Series D due 2028 No. 1 PECO Energy Company, a Pennsylvania corporation (the "Company"), which term includes any successor corporation under the Indenture, as defined herein), for value received, hereby promises to pay to PECO Energy Capital, L.P. or registered assigns, the principal sum of Eighty Million Five Hundred Twenty Thousand Six Hundred Nineteen Dollars ($80,520,619) on April 6, 2028, and to pay interest on said principal sum from April 6, 1998 (the "Issue Date") or from the most recent interest payment date (each such date, an "Interest Payment Date") to which interest has been paid or duly provided for, semiannually in arrears on April 30 and October 31 of each year commencing April 30, 1998 at the rate of 7.38% per annum plus Additional Interest, if any, until the principal hereof shall have become due and payable, and on any overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum. If at any time PECO Energy Capital, L.P. ("PECO Energy Capital") would be required to pay any taxes, duties or other governmental charges (other than withholding taxes) imposed by the United States or any other taxing authority then, in any such case, the Company also will pay as Additional Interest such amounts as shall be required so that the net amounts received and retained by PECO Energy Capital after paying any such taxes, duties or other governmental charges will not be less than the amounts PECO Energy Capital would have received had no such taxes, duties, assessments or other governmental charges been imposed. All capitalized terms used but not otherwise defined herein have the meanings set forth in the Indenture (as defined herein). The amount of interest payable on any Interest Payment Date shall be computed on the basis of a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on the Series D Subordinated Debt Securities is not a Business Day, then payment of interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the person in whose name this Series D Subordinated Debt Security is registered at the close of business on the regular record date for such interest installment, which shall be April 15 and October 15 of each year. Any such interest installment not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on such regular record date, and may be paid to the person in whose name this Series D Subordinated Debt Security is registered at the close of business on a special record date to be fixed by the Trustee for the payment of such defaulted interest, notice whereof shall be given to the registered holders of this series of Debentures not less than ten days prior to such special record date, as more fully provided in the Indenture. The principal of (and premium, if any) and the interest on this Series D Subordinated Debt Security shall be payable at the office or agency of the Company maintained for that purpose in Wilmington, Delaware in any coin or currency of the United States of America which at the time of payment is legal tender for payment of public and private debts; provided however, that payment of interest may be made at the option of the Company by check mailed to the registered holder at such address as shall appear in the Debenture Register. Notwithstanding the foregoing, so long as the holder of this Series D Subordinated Debt Security is PECO Energy Capital, the payment of the principal of (and premium) and interest (including Additional Interest, if any) on this Series D Subordinated Debt Security will be made at such place and to such account as may be designated by PECO Energy Capital. A-1 The indebtedness evidenced by this Series D Subordinated Debt Security is, to the extent provided in the Indenture, subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness, and this Series D Subordinated Debt Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Series D Subordinated Debt Security, by accepting the same (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on its behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and (c) appoints the Trustee its attorney-in-fact for any and all such purposes. Each Holder hereof, by its acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Indebtedness, whether now outstanding or hereafter incurred, and waives reliance by each such Holder upon said provisions. This Series D Subordinated Debt Security is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Series D Subordinated Debt Securities"), specified in the Indenture, limited in aggregate principal amount as specified in the Indenture, issued under and pursuant to an Indenture dated as of July 1, 1994, between the Company and Meridian Trust Company, as Trustee, as supplemented by a First Supplemental Indenture, dated as of December 1, 1995, a Second Supplemental Indenture, dated as of June 1, 1997 and a Third Supplemental Indenture dated as of April 1, 1998 (as supplemented, the "Indenture") executed and delivered between the Company and First Union National Bank, as successor Trustee to which reference is made to the Indenture for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Series D Subordinated Debt Securities. By the terms of the Indenture, Debentures are issuable in series which may vary as to amount, date of maturity, rate of interest and in other respects as provided in the Indenture. A-2 The Series D Subordinated Debt Securities are subject to mandatory redemption prior to maturity at 100% of the principal amount thereof plus accrued interest to the redemption date as follows: (i) in whole upon the dissolution of PECO Energy Capital; and (ii) in whole or in part upon a redemption of the Series D Preferred Securities, but if in part, in an aggregate principal amount equal to the aggregate stated liquidation preference of the Series D Preferred Securities redeemed. In the event of redemption of this Series D Subordinated Debt Security in part only, a new Series D Subordinated Debt Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. In case an Event of Default shall have occurred and be continuing, the principal of all of the Debentures may be declared, and upon such declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Series D Subordinated Debt Security upon compliance by the Company with certain conditions set forth therein. Subject to certain exceptions in the Indenture which require the consent of every Holder, (i) the Indenture or the Series D Subordinated Debt Securities may be amended with the written consent of the Holders of a majority in aggregate principal amount of the Series D Subordinated Debt Securities at the time outstanding, and (ii) certain defaults or noncompliance with certain provisions may be waived by the written consent of the holders of a majority in aggregate principal amount of the Series D Subordinated Debt Securities at the time outstanding. Subject to certain exceptions in the Indenture, without the consent of any Debentureholder, the Company and the Trustee may amend the Indenture or the Debentures to cure any ambiguity, defect or inconsistency, to bind a successor to the obligations of the Indenture, to provide for uncertificated Debentures in addition to certificated Debentures, to comply with any requirements of the Debentures or the Securities and Exchange Commission in connection with the qualification of the Indenture under the TIA, or to make any change that does not adversely affect the rights of any Debentureholder. Amendments bind all Holders and subsequent Holders. A-3 No reference herein to the Indenture and no provision of this Series D Subordinated Debt Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and premium, if any, and interest on this Series D Subordinated Debt Security at the time and place and at the rate and in the money herein prescribed. So long as an Event of Default has not occurred and is continuing, the Company shall have the right at any time during the term of the Series D Subordinated Debt Securities, from time to time to extend the interest payment period of such Series D Subordinated Debt Securities to up to 60 consecutive months (the "Extended Interest Payment Period"), at the end of which period the Company shall pay all interest then accrued and payable (together with interest thereon at the rate specified for the Series D Subordinated Debt Securities to the extent that payment of such interest is enforceable under applicable law); provided that, during such Extended Interest Payment Period the Company shall not declare or pay any dividend on, redeem or purchase any of its capital stock. Prior to the termination of any such Extended Interest Payment Period, the Company may further extend such Extended Interest Payment Period, provided that such Period together with all such further extensions thereof shall not exceed 60 consecutive months. At the termination of any such Extended Interest Payment Period and upon the payment of all accrued and unpaid interest and any additional amounts then due, the Company may select a new Extended Interest Payment period. As provided in the Indenture and subject to certain limitations therein set forth, this Series D Subordinated Debt Security is transferable by the registered holder hereof on the Debenture Register of the Company, upon surrender of this Series D Subordinated Debt Security for registration of transfer at the office or agency of the Registrar accompanied by a written instrument or instruments of transfer in form satisfactory to the Company or the Trustee duly executed by the registered holder hereof or its attorney duly authorized in writing, and thereupon one or more new Series D Subordinated Debt Securities of authorized denominations and for the same aggregate principal amount and series will be issued to the designated transferee or transferees. No service charge will be made for any such transfer, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in relation thereto. A-4 Prior to presentment for registration of transfer of this Series D Subordinated Debt Security, the Company, the Trustee, any paying agent and any Debenture Registrar may deem and treat the registered holder hereof as the absolute owner hereof (whether or not this Series D Subordinated Debt Security shall be overdue and notwithstanding any notice of ownership or writing hereon made by anyone other than the Debenture Registrar) for the purpose of receiving payment of or on account of the principal hereof and premium, if any, and interest due hereon and for all other purposes, and neither the Company nor the Trustee nor any payment agent nor any Debenture Registrar shall be affected by any notice to the contrary. No recourse shall be had for the payment of the principal of or the interest on this Series D Subordinated Debt Security, or for any claim based hereon, or otherwise in respect hereof, or based on or in respect of the Indenture, against any incorporator, stockholder, officer or director, past, present or future, as such, of the Company or of any predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issuance hereof, expressly waived and released. Series D Subordinated Debt Securities issued are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Series D Subordinated Debt Securities are exchangeable for a like aggregate principal amount of Series D Subordinated Debt Securities of a different authorized denomination, as requested by the Holder surrendering the same. This Series D Subordinated Debt Security shall not be valid until an authorized officer of the Trustee manually signs the Trustee's Certificate of Authentication below. A-5 IN WITNESS WHEREOF, the Company has caused this Series D Subordinated Debt Security to be signed manually or by facsimile by its duly authorized officers and a facsimile of its corporate seal to be affixed hereto or imprinted hereon. PECO ENERGY COMPANY (Seal) By: __________________________ Name: ________________________ Title: _______________________ Attest:_______________________ Dated: _______________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. FIRST UNION NATIONAL BANK, as Trustee By: ___________________________________ Name:______________________________ Title:_____________________________ A-6 EX-4.10 3 EXHIBIT 4.10 PAYMENT AND GUARANTEE AGREEMENT THIS PAYMENT AND GUARANTEE AGREEMENT ("Guarantee Agreement"), dated as of April 6, 1998, is executed and delivered by PECO Energy Company, a Pennsylvania corporation (the "Guarantor"), for the benefit of the Holders (as defined below) of the Series D Preferred Securities (as defined below) of PECO Energy Capital, L.P., a Delaware limited partnership ("PECO Energy Capital"), the general partner of which is PECO Energy Capital Corp. (the "General Partner"), a Delaware corporation and a wholly owned subsidiary of the Guarantor. WHEREAS, PECO Energy Capital is issuing on the date hereof $78,105,000 aggregate stated liquidation preference of limited partner interests of a series designated the 7.38% Cumulative Preferred Securities, Series D (the "Series D Preferred Securities"), and the Guarantor desires to enter into this Guarantee Agreement for the benefit of the Holders, as provided herein; WHEREAS, the Guarantor will issue Series D Subordinated Debt Securities (as defined below) in accordance with the Indenture (as defined below) to PECO Energy Capital in an amount equal to the aggregate stated liquidation preference of the Series D Preferred Securities and the capital contribution of the General Partner to PECO Energy Capital (the "G.P. Capital Contribution"); and WHEREAS, the Guarantor desires to irrevocably and unconditionally agree to the extent set forth herein to pay to the Holders the Guarantee Payments (as defined below) and to make certain other undertakings on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the premises and other consideration, receipt of which is hereby acknowledged, the Guarantor, intending to be legally bound hereby, agrees as follows: ARTICLE I --------- As used in this Guarantee Agreement, each term set forth below, unless the context otherwise requires, shall have the following meaning. Each capitalized term used but not otherwise defined herein shall have the meaning assigned to such term in the Amended and Restated Limited Partnership Agreement of PECO Energy Capital dated as of July 25, 1994 (as amended from time to time, the "Limited Partnership Agreement"). "Capital Securities" shall mean the Capital Trust Pass-through Securities issued by the Trust each representing a Series D Preferred Security. "Guarantee Payments" shall mean the following payments, without duplication, to the extent not paid by PECO Energy Capital: (i) any accumulated and unpaid semiannual distributions on the Series D Preferred Securities out of moneys legally available therefor held by PECO Energy Capital, (ii) the Redemption Price (as defined below) payable with respect to any Series D Preferred Securities called for redemption by PECO Energy Capital out of moneys legally available therefor held by PECO Energy Capital, and (iii) upon liquidation of PECO Energy Capital, the lesser of (a) the Liquidation Distribution (as defined below) and (b) the amount of assets of PECO Energy Capital available for distribution to the Holders in liquidation of PECO Energy Capital. "Holders" shall mean the persons or entities in whose name any Series D Preferred Securities are registered on the registration books maintained by PECO Energy Capital; provided, however, that in determining whether the Holders of the requisite percentage of Series D Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor or any entity owned more than 50% by the Guarantor, either directly or indirectly. "Indenture" shall mean the Indenture, dated as of July 1, 1994 (the "Original Indenture"), as supplemented by the First Supplemental Indenture, dated as of December 1, 1995, between the Guarantor and First Union National Bank, as successor trustee, the Second Supplemental Indenture, dated as of June 1, 1997, between the Guarantor and First Union National Bank, as trustee, and the Third Supplemental Indenture, dated as of April 1, 1998, between the Guarantor and First Union National Bank, as trustee, pursuant to which the Guarantor has issued and will issue its Deferrable Interest Subordinated Debentures in series. "Liquidation Distribution" shall mean the aggregate of the stated liquidation preference of $1,000 per Series D Preferred Security and all accumulated and unpaid distributions to the date of payment. "Redemption Price" shall mean the aggregate of $1,000 per Series D Preferred Security and all accumulated and unpaid distributions to the date fixed for redemption. 2 "Special Representative" shall mean any representative of the Holders appointed pursuant to Section 13.02(d) of the Limited Partnership Agreement. "Supplemental Indenture" shall mean the Third Supplemental Indenture, dated as of April 1, 1998, between the Guarantor and First Union National Bank, as trustee, pursuant to which the Guarantor has issued its 7.38% Subordinated Deferrable Interest Debentures, Series D (the "Series D Subordinated Debt Securities") in an amount equal to the aggregate stated liquidation preference of the Series D Preferred Securities and the G.P. Capital Contribution. "Trust" shall mean PECO Energy Capital Trust III, a Delaware business trust. "Trust Agreement" shall mean the Amended and Restated Trust Agreement of PECO Energy Capital Trust III, as amended from time to time, among PECO Energy Capital, L.P., as Grantor, First Union National Bank, as trustee, and the General Partner, for the limited purpose stated therein, dated as of April 6, 1998. "Trustee" shall mean First Union National Bank or a successor trustee under the Trust Agreement. ARTICLE II ---------- SECTION 2.01. The Guarantor hereby irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments, as and when due (except to the extent paid by PECO Energy Capital), to the fullest extent permitted by law, regardless of any defense, right of set-off or counterclaim which the Guarantor may have or assert against PECO Energy Capital, the General Partner, the Trust or the Trustee. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment by the Guarantor to the Holders or by payment of such amounts by PECO Energy Capital to the Holders. Notwithstanding anything to the contrary herein, the Guarantor retains all of its rights under Section 4.01(b) of the Indenture to extend the interest payment period on the Series D Subordinated Debt Securities and the Guarantor shall not be obligated hereunder to pay during an Extension Period any semiannual distributions on the Series D Preferred Securities which are not paid by PECO Energy Capital during such Extension Period. SECTION 2.02. The Guarantor hereby waives notice of acceptance of this Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. 3 SECTION 2.03. Except as otherwise set forth herein, the obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by PECO Energy Capital of any express or implied agreement, covenant, term or condition relating to the Series D Preferred Securities to be performed or observed by PECO Energy Capital; (b) the extension of time for the payment by PECO Energy Capital of all or any portion of the distributions, Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Series D Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Series D Preferred Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders or the Special Representative to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders or the Special Representative pursuant to the terms of the Series D Preferred Securities, or any action on the part of PECO Energy Capital granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, PECO Energy Capital or any of the assets of PECO Energy Capital; (e) any invalidity of, or defect or deficiency in, any of the Series D Preferred Securities; or (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred. There shall be no obligation to the Holders to give notice to, or obtain the consent of, the Guarantor with respect to the occurrence of any of the foregoing. SECTION 2.04. The Guarantor expressly acknowledges that (i) this Guarantee Agreement will be deposited with the General Partner to be held for the benefit of the Holders; (ii) in the event of the appointment of a Special Representative, the Special Representative may enforce this Guarantee Agreement for such purpose; (iii) if no Special Representative has been appointed, the General Partner has the right to enforce this 4 Guarantee Agreement on behalf of the Holders; (iv) the holders of Capital Securities, together with the holders of the Series D Preferred Securities other than the Trust, representing not less than 10% in aggregate stated liquidation preference of the Series D Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available in respect of this Guarantee Agreement including the giving of directions to the General Partner or the Special Representative as the case may be; and (v) if the General Partner or the Special Representative fails to enforce this Guarantee Agreement as above provided, any holder of Capital Securities representing Series D Preferred Securities may institute a legal proceeding directly against the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against PECO Energy Capital or any other person or entity. SECTION 2.05. This is a guarantee of payment and not of collection. The General Partner or Special Representative may enforce this Guarantee Agreement directly against the Guarantor, and the Guarantor will waive any right or remedy to require that any action be brought against PECO Energy Capital or any other person or entity before proceeding against the Guarantor. The Guarantor agrees that this Guarantee Agreement shall not be discharged except by payment of the Guarantee Payments in full (to the extent not paid by PECO Energy Capital) and by complete performance of all obligations of the Guarantor contained in this Guarantee Agreement. SECTION 2.06. The Guarantor will be subrogated to all rights of the Holders against PECO Energy Capital in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement and shall have the right to waive payment by PECO Energy Capital pursuant to Section 2.01; provided, however, that the Guarantor shall not (except to the extent required by mandatory provisions of law) exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of a payment under this Guarantee Agreement, if, at the time of any such payment, any amounts remain due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to pay over such amount to the Holders. SECTION 2.07. The Guarantor acknowledges that its obligations hereunder are independent of the obligations of PECO Energy Capital with respect to the Series D Preferred Securities and that the Guarantor shall be liable as principal and sole debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (f), inclusive, of Section 2.03 hereof. 5 ARTICLE III ----------- SECTION 3.01. So long as any Series D Preferred Securities remain outstanding, neither the Guarantor nor any majority owned subsidiary of the Guarantor shall declare or pay any dividend on, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than dividends by a wholly owned subsidiary) if at such time the Guarantor shall be in default with respect to its payment or other obligations hereunder or there shall have occurred any event that, with the giving of notice or the lapse of time or both, would constitute an Event of Default under the Indenture. The Guarantor shall take all actions necessary to ensure the compliance of its subsidiaries with this Section 3.01. SECTION 3.02. So long as any Series D Preferred Securities are outstanding, the Guarantor agrees to maintain its corporate existence; provided that, the Guarantor may consolidate with or merge with or into, or sell, convey, transfer or lease all or substantially all of its assets (either in one transaction or a series of transactions) to, any person, corporation, partnership, limited liability company, joint venture association, joint stock company, trust or unincorporated association if such entity formed by or surviving such consolidation or merger or to which such sale, conveyance, transfer or lease shall have been made, if other than the Guarantor, (i) is organized and existing under the laws of the United States of America or any state thereof or the District of Columbia, and (ii) shall expressly assume all the obligations of the Guarantor under this Guarantee Agreement. SECTION 3.03. This Guarantee Agreement will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all general liabilities of the Guarantor. ARTICLE IV ---------- This Guarantee Agreement shall terminate and be of no further force and effect upon full payment of the Redemption Price of all Series D Preferred Securities or upon full payment of the amounts payable to the Holders upon liquidation of PECO Energy Capital; provided, however, that this Guarantee Agreement shall continue to be effective or shall be reinstated, as the case may be, if at any time the Holders must restore payments of any sums paid under the Series D Preferred Securities or under this Guarantee Agreement for any reason whatsoever. 6 ARTICLE V --------- SECTION 5.01. All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders. Except as provided in Section 3.02, the Guarantor may not assign its obligations hereunder without the prior approval of the Holders of not less than 66 2/3% of the aggregate stated liquidation preference of all Series D Preferred Securities then outstanding. SECTION 5.02. This Guarantee Agreement may only be amended by a written instrument executed by the Guarantor; provided that, so long as any of the Series D Preferred Securities remain outstanding, any amendment that materially adversely affects the Holders, any termination of this Guarantee Agreement or any waiver of compliance with any covenant hereunder shall be effected only with the prior approval of the holders of Capital Securities together with the holders of Series D Preferred Securities other than the Trust, representing not less than 66 2/3% of the aggregate liquidation preference of all Series D Preferred Securities then outstanding. SECTION 5.03. All notices, requests or other communications required or permitted to be given hereunder to the Guarantor shall be deemed given if in writing and delivered personally or by recognized overnight courier or express mail service or by facsimile transmission (confirmed in writing) or by registered or certified mail (return receipt requested), addressed to the Guarantor at the following address (or at such other address as shall be specified by like notice to the Holders): PECO Energy Company 2301 Market Street P.O. Box 8699 Philadelphia, Pennsylvania 19101 Facsimile No.: (215) 557-9885 Attention: Treasurer All notices, requests or other communications required or permitted to be given hereunder to the Holders shall be deemed given if in writing and delivered by the Guarantor in the same manner as notices sent by PECO Energy Capital to the Holders. SECTION 5.04. This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Series D Preferred Securities. 7 SECTION 5.05. This Guarantee Agreement shall be governed by and construed and interpreted in accordance with the laws of the Commonwealth of Pennsylvania without giving effect to the conflict of law principles thereof. THIS GUARANTEE AGREEMENT is executed as of the day and year first above written. PECO ENERGY COMPANY By: /s/ J. Barry Mitchell ----------------------------------- Name: J. Barry Mitchell Title: Vice President-Finance 8 EX-4.13 4 EXHIBIT 4.13 EXECUTION COPY $400,000,000 TERM LOAN AGREEMENT dated as of November 30, 1998 among PECO ENERGY COMPANY as Borrower THE BANKS NAMED HEREIN as Banks THE FIRST NATIONAL BANK OF CHICAGO as Administrative Agent SALOMON SMITH BARNEY INC. as Syndication Agent MELLON BANK, N.A. as Documentation Agent and CERTAIN BANKS SPECIFIED HEREIN as Co-Agents FIRST CHICAGO CAPITAL MARKETS, INC. As Arranger TABLE OF CONTENTS
Section Page - - ------- ---- ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.01 Certain Defined Terms............................................................... 1 1.02 Computation of Time Periods......................................................... 8 1.03 Accounting Principles............................................................... 8 ARTICLE II AMOUNTS AND TERMS OF THE TERM ADVANCES 2.01 The Term Advances................................................................... 8 2.02 Making the Term Advances............................................................ 9 2.03 Fees................................................................................ 9 2.04 Repayment of Term Advances.......................................................... 10 2.05 Interest on Term Advances........................................................... 10 2.06 Additional Interest on Term Advances................................................ 11 2.07 Interest Rate Determination......................................................... 11 2.08 Conversion of Term Advances......................................................... 12 2.09 Prepayments......................................................................... 12 2.10 Increased Costs..................................................................... 12 2.11 Illegality.......................................................................... 13 2.12 Payments and Computations........................................................... 14 2.13 Taxes............................................................................... 14 2.14 Sharing of Payments, Etc............................................................ 16 ARTICLE III CONDITIONS OF LENDING 3.01 Conditions Precedent to Term Borrowings............................................. 17 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.01 Representations and Warranties of the Borrower...................................... 18 ARTICLE V COVENANTS OF THE BORROWER 5.01 Affirmative Covenants............................................................... 19 5.02 Negative Covenants.................................................................. 22 ARTICLE VI EVENTS OF DEFAULT 6.01 Events of Default................................................................... 23
ARTICLE VII THE AGENTS 7.01 Authorization and Action............................................................ 25 7.02 Agents' Reliance, Etc............................................................... 25 7.03 Agents and Affiliates............................................................... 25 7.04 Lender Credit Decision.............................................................. 25 7.05 Indemnification..................................................................... 26 7.06 Successor Administrative Agent...................................................... 26 7.07 Syndication Agent, Documentation Agent and Co-Agents ............................... 26 ARTICLE VIII MISCELLANEOUS 8.01 Amendments, Etc..................................................................... 26 8.02 Notices, Etc........................................................................ 27 8.03 No Waiver; Remedies................................................................. 27 8.04 Costs and Expenses; Indemnification................................................. 27 8.05 Right of Set-off.................................................................... 28 8.06 Binding Effect...................................................................... 28 8.07 Assignments and Participations...................................................... 28 8.08 Governing Law....................................................................... 31 8.09 Consent to Jurisdiction............................................................. 31 8.10 Execution in Counterparts; Integration.............................................. 31 Schedule I List of Applicable Lending Offices Exhibit A Form of Note Exhibit B Notice of a Borrowing Exhibit C Assignment and Acceptance Exhibit D Form of Opinion of Special Counsel for the Borrower Exhibit E Form of Opinion of Counsel to the Administration Agent Exhibit F Form of Annual and Quarterly Compliance Certificate
ii TERM LOAN AGREEMENT dated as of November 30, 1998 PECO Energy Company, a Pennsylvania corporation (the "Borrower"), the banks listed on the signature pages hereof (the "Banks"), certain Banks specified herein, as co-agents hereunder (in such capacity, the "Co-Agents"), Salomon Smith Barney Inc. ("Salomon Smith Barney"), as syndication agent hereunder (in such capacity, the "Syndication Agent"), The First National Bank of Chicago ("First Chicago"), as administrative agent for the Lenders hereunder (in such capacity, the "Administrative Agent"), and Mellon Bank, N.A. ("Mellon"), as documentation agent for the Lenders hereunder (in such capacity, the "Documentation Agent"), hereby agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, each of the following terms shall have the meaning set forth next to such term below (each such meaning to be equally applicable to both the singular and plural forms of the term defined): "Administrative Agent" means First Chicago in its capacity as administrative agent for the Lenders pursuant to Article VII, and not in its individual capacity as a Lender, and any successor Administrative Agent appointed pursuant to Article VII. "Advance" means a Term Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. "Agents" means the Administrative Agent, the Documentation Agent, the Syndication Agent and the Co-Agents, collectively. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance, and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance. "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in substantially the form of Exhibit C hereto. "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time which rate per annum shall at all times be equal to the higher of: (a) the rate of interest announced by First Chicago, from time to time, as its corporate base rate; and (b) the sum of 1/2 of 1% per annum plus the Federal Funds Rate in effect from time to time. "Base Rate Advance" means a Term Advance that bears interest as provided in Section 2.05(a). "Business Day" means a day of the year on which banks are not required or authorized to close in Philadelphia, Pennsylvania, Chicago, Illinois or New York, New York, and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Closing Date" has the meaning specified in Section 2.01. "Closing Fee Percentage" has the meaning specified in Section 2.03(a). "Co-Agent" means a Bank identified as such on the signature pages to this Agreement, in its capacity as Co-Agent, and not in its individual capacity as a Lender. "Code" means the Internal Revenue Code of 1986, and the regulations promulgated thereunder, in each case as amended, reformed or otherwise modified from time to time. "Commitment" has the meaning specified in Section 2.01. "Consolidated Adjusted Total Capitalization" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) total capitalization as of such date, as determined in accordance with GAAP, (b) the current portion of liabilities which as of such date would be classified in whole or part as long-term debt in accordance with GAAP (it being understood that the noncurrent portion of such liabilities is included in the total capitalization referred to in clause (a)), (c) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (d) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1997). "Consolidated Adjusted Total Debt" on any date shall mean the sum, without duplication, of the following with respect to the Borrower and its consolidated Subsidiaries (exclusive, in each case, of Nonrecourse Transition Bond Debt, to the extent Nonrecourse Transition Bond Debt would otherwise be included in such item): (a) all liabilities which as of such date would be classified in whole or in part as long-term debt in accordance with GAAP (including the current portion thereof), (b) all obligations as lessee which, in accordance with GAAP, are capitalized as liabilities (including the current portion thereof), and (c) all other liabilities which would be classified as short-term debt in accordance with GAAP (including, without limitation, all liabilities of the types classified as "Notes Payable, Bank" on the Borrower's audited balance sheet for December 31, 1997). "Controlled Group" means all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control that, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414(b) or 414(c) of the Code. "Convert", "Conversion" and "Converted" each refers to a conversion of Advances of one Type into Advances of another Type or the selection of a new, or the renewal of the same, Interest Period for Eurodollar Rate Advances pursuant to Section 2.08. "Debt" means (i) indebtedness for borrowed money, (ii) obligations evidenced by bonds, debentures, notes or other similar instrument, (iii) obligations to pay the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of business), (iv) obligations as lessee under leases that shall have been or are required to be, in accordance with GAAP, recorded as capital leases, (v) obligations (contingent or otherwise) under reimbursement or similar agreements with respect to the issuance of letters of credit (other than obligations in respect of documentary letters of credit opened to provide for the payment of goods or services purchased in the ordinary course of business) and (vi) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clauses (i) through (v) above. -2- "Documentation Agent" means Mellon in its capacity as documentation agent pursuant to Article VII, and not in its individual capacity as a Lender. "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eligible Assignee" means (i) a commercial bank organized under the laws of the United States, or any State thereof; (ii) a commercial bank organized under the laws of any other country that is a member of the OECD or has concluded special lending arrangements with the International Monetary Fund associated with its General Arrangements to Borrow, or a political subdivision of any such country, provided that such bank is acting through a branch or agency located in the United States; (iii) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership or other entity) engaged generally in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business; or (iv) the central bank of any country that is a member of the OECD; provided, however, that (A) any such Person described in clause (i), (ii) or (iii) above shall also (x) have outstanding unsecured long-term debt that is rated BBB- or better by S&P and Baa3 or better by Moody's (or an equivalent rating by another nationally recognized credit rating agency of similar standing if either such corporation is no longer in the business of rating unsecured indebtedness of entities engaged in such businesses) and (y) have combined capital and surplus (as established in its most recent report of condition to its primary regulator) of not less than $100,000,000 (or its equivalent in foreign currency), and (B) any Person described in clause (ii), (iii) or (iv) above shall, on the date on which it is to become a Lender hereunder, be entitled to receive payments hereunder without deduction or withholding of any United States Federal income taxes (as contemplated by Section 2.13(e)). "Eligible Successor" means a Person which (i) is a corporation duly incorporated, validly existing and in good standing under the laws of one of the states of the United States or the District of Columbia, (ii) is qualified to do business in Pennsylvania, (iii) as a result of the contemplated acquisition, consolidation or merger, will succeed to all or substantially all of the consolidated business and assets of the Borrower and its Subsidiaries, (iv) upon giving effect to the contemplated acquisition, consolidation or merger, will have all or substantially all of its consolidated business and assets conducted and located in the United States and (v) is acceptable to the Majority Lenders as a credit matter. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder, each as amended and modified from time to time. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. -3- "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Administrative Agent. "Eurodollar Rate" means, for the Interest Period for each Eurodollar Rate Advance made as part of the same Term Borrowing, an interest rate per annum equal to the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England, to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's Eurodollar Rate Advance made as part of such Term Borrowing and for a period equal to such Interest Period. The Eurodollar Rate for the Interest Period for each Eurodollar Rate Advance made as part of the same Term Borrowing shall be determined by the Administrative Agent on the basis of applicable rates furnished to and received by the Administrative Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.07. "Eurodollar Rate Advance" means a Term Advance that bears interest as provided in Section 2.05(c). "Eurodollar Rate Reserve Percentage" of any Lender for the Interest Period for any Eurodollar Rate Advance means the reserve percentage applicable during such Interest Period (or if more than one such percentage shall be so applicable, the daily average of such percentages for those days in such Interest Period during which any such percentage shall be so applicable) under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for such Lender with respect to liabilities or assets consisting of or including Eurocurrency Liabilities having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Exchange Act" means the Securities Exchange Act of 1934, as amended and modified from time to time. "Existing Credit Agreements" means that certain Revolving Credit Agreement, and that certain 364-Day Credit Agreement, each dated as of October 7, 1997, among the Borrower, the banks named therein, certain banks specified therein, as lead managers thereunder, certain banks specified therein, as co-agents thereunder, First Chicago Capital Markets, Mellon and CitiCorp, as syndication agents thereunder, First Chicago Capital Markets and Mellon, as arrangers thereunder, First Chicago, as administrative agent for the lenders thereunder, and Mellon, as documentation agent for the lenders thereunder, as the same may be amended, modified or supplemented from time to time. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. -4- "GAAP" shall have the meaning given that term in Section 1.03. "Interest Period" means, for each Term Advance, the period commencing on the date of such Term Advance or the date of the Conversion of any Term Advance into such a Term Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be 1, 2, 3 or 6 months as the Borrower may select in accordance with Section 2.02 or 2.08; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Term Loan Maturity Date then in effect; (ii) Interest Periods commencing on the same date for Term Advances made as part of the same Term Borrowing shall be of the same duration, and (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, that if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day. "Lenders" means the Banks listed on the signature pages hereof and each Eligible Assignee that shall become a party hereto pursuant to Section 8.07. "Lien" means any lien (statutory or other), mortgage, pledge, security interest or other charge or encumbrance, or any other type of preferential arrangement (including, without limitation, the interest of a vendor or lessor under any conditional sale, capitalized lease or other title retention agreement). "Material Adverse Change" and "Material Adverse Effect" each means, relative to any occurrence, fact or circumstances of whatsoever nature (including, without limitation, any determination in any litigation, arbitration or governmental investigation or proceeding), any materially adverse change in, or materially adverse effect on, the financial condition, operations, assets or business of the Borrower and its consolidated Subsidiaries, taken as a whole. "Majority Lenders" means, at any time prior to the Closing Date, Lenders having at least 66-2/3% of the Commitments, and, at any time on or after the Closing Date, Lenders having at least 66-2/3% of the Term Advances outstanding (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders having such amount of the Commitments or the Term Advances or (ii) determining the total amount of the Commitments or the Term Advances). "Moody's" means Moody's Investors Service, Inc. "Mortgage" means the First and Refunding Mortgage, dated as of May 1, 1923, between The Counties Gas & Electric Company (to which the Borrower is successor) and Fidelity Trust Company, Trustee (to which First Union National Bank is successor), as amended, supplemented or refinanced from time to time, provided, that no effect shall be given to any amendment, supplement or refinancing after the date of this Agreement that would broaden the definition of "excepted encumbrances" as defined in the Mortgage as constituted on the date of this Agreement. -5- "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement or any other arrangement to which the Borrower or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Nonrecourse Transition Bond Debt" means obligations evidenced by "transition bonds" (as defined in 66 Pa. Cons. Stat. Ann. ss. 2812(g) (West Supp. 1997), or any successor provision of similar import), rated AA or higher by S&P (or a comparable rating from a generally recognized successor to S&P) or Aa2 or higher by Moody's (or a comparable rating from a generally recognized successor to Moody's), representing a securitization of "intangible transition property" (as defined in the foregoing statute), as to which obligations neither the Borrower nor any Subsidiary of the Borrower (other than a Special Purpose Subsidiary) has any direct or indirect liability (whether as primary obligor, guarantor, or surety, provider of collateral security, put option, asset repurchase agreement or capital maintenance agreement, debt subordination agreement, or through other right or arrangement of any nature providing direct or indirect assurance of payment or performance of any such obligations in whole or in part), except for liability to repurchase "intangible transition property" conveyed to the securitization vehicle, on terms and conditions customary in receivables securitizations, in the event such "intangible transition property" violates representations and warranties of scope customary in receivables securitizations. "Special Purpose Subsidiary" means a direct or indirect wholly-owned corporate Subsidiary of the Borrower, substantially all of the assets of which are "intangible transition property" and proceeds thereof, formed solely for the purpose of holding such assets and issuing such "transition bonds," and which complies with the requirements customarily imposed on bankruptcy-remote corporations in receivables securitizations. "Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Term Advances made by such Lender. "Notice of Borrowing" has the meaning specified in Section 2.02(a). "OECD" means the Organization for Economic Cooperation and Development. "Order of Registration" has the meaning assigned to that term in Section 3.01(a)(iii). "PBGC" means the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means an employee pension benefit plan that is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code as to which the Borrower or any member of the Controlled Group may have any liability. "PPUC" means the Pennsylvania Public Utility Commission. "Principal Subsidiary" means (i) each Utility Subsidiary and (ii) from and after the date on which the aggregate book value of the assets of the Subsidiaries of the Borrower that are not Utility Subsidiaries exceeds $250,000,000, each such Subsidiary the assets of which exceeded $75,000,000 in book value at any time during the preceding 24-month period. -6- "Reference Banks" means First Chicago, Mellon and Citibank, N.A. "Register" has the meaning specified in Section 8.07(c). "Reportable Event" means a reportable event as defined in Section 4043 of ERISA and regulations issued under such section with respect to a Plan, excluding, however, such events as to which the PBGC by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. "Securities Certificate" has the meaning assigned to that term in Section 3.01(a)(iii). "Single Employer Plan" means a Plan maintained by the Borrower or any member of the Controlled Group for employees of the Borrower or any member of the Controlled Group. "Special Purpose Subsidiary" has the meaning assigned to that term in the definition of "Nonrecourse Transition Bond Debt." "Subsidiary" means, with respect to any Person, any corporation or unincorporated entity of which more than 50% of the outstanding capital stock (or comparable interest) having ordinary voting power (irrespective of whether or not at the time capital stock, or comparable interests, of any other class or classes of such corporation or entity shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person (whether directly or through one or more other Subsidiaries). "Syndication Agent" means Salomon Smith Barney Inc., in its capacity as Syndication Agent, and not in its individual capacity as a Lender. "Term Advance" means an advance by a Lender to the Borrower as part of a Term Borrowing, and refers to a Base Rate Advance or a Eurodollar Rate Advance, each of which shall be a "Type" of Term Advance. "Term Borrowing" means a borrowing consisting of simultaneous Term Advances of the same Type and, if such Borrowing comprises Eurodollar Rate Advances, having Interest Periods of the same duration, made by each of the Lenders pursuant to Section 2.01 or Converted pursuant to Section 2.08. For the avoidance of doubt, it is understood that the Lenders will advance all funds under this Agreement only on the Closing Date, and not thereafter. The use of the term "Term Borrowing" is for convenience and for the sake of conformity with the Existing Credit Agreements, and does not denote or imply that any actual borrowing or funding will occur after the Closing Date or that the outstanding principal amount of Term Borrowings may increase after the Closing Date. "Term Loan Maturity Date" shall mean the date which is the one-year anniversary of the Closing Date. "Termination Date" means December 23, 1998. -7- "Unfunded Liabilities" means, (i) in the case of any Single Employer Plan, the amount (if any) by which the present value of all vested nonforfeitable benefits under such Plan exceeds the fair market value of all Plan assets allocable to such benefits, all determined as of the then most recent evaluation date for such Plan, and (ii) in the case of any Multiemployer Plan, the withdrawal liability that would be incurred by the Controlled Group if all members of the Controlled Group completely withdrew from such Multiemployer Plan. "Utility Subsidiary" means each Subsidiary of the Borrower that is engaged principally in the generation, transmission, or distribution of electricity or gas and is subject to regulation as a public utility by federal or state regulatory authorities. "Year 2000 Problem" shall mean that the computer hardware, software or equipment containing embedded microchips of the Borrower or any of its Subsidiaries which is essential to its business or operations will, as a result of processing dates or time periods occurring after December 31, 1999, malfunction causing a system failure or miscalculations resulting in disruptions of operations, including, among other things, a temporary inability to process transactions, send bills, operate generation stations, or engage in similar normal business activities. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each means "to but excluding". SECTION 1.03. Accounting Principles. As used in this Agreement, "GAAP" shall mean generally accepted accounting principles in the United States, applied on a basis consistent with the principles used in preparing the Borrower's audited consolidated financial statements as of December 31, 1997 and for the fiscal year then ended. In this Agreement, except to the extent, if any, otherwise provided herein, all accounting and financial terms shall have the meanings ascribed to such terms by GAAP, and all computations and determinations as to accounting and financial matters shall be made in accordance with GAAP. In the event that the financial statements generally prepared by the Borrower apply accounting principles other than GAAP, the compliance certificate delivered pursuant to Section 5.01(b)(iv) accompanying such financial statements shall include information in reasonable detail reconciling such financial statements to GAAP to the extent relevant to the calculations set forth in such compliance certificate. ARTICLE II AMOUNTS AND TERMS OF THE TERM ADVANCES SECTION 2.01. The Term Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Term Advances to the Borrower on a single Business Day (the "Closing Date") during the period from the date hereof until (but excluding) the Termination Date in an aggregate amount not to exceed the amount set forth opposite such Lender's name on the signature pages hereof or, if such Lender has entered into any Assignment and Acceptance, set forth for such Lender in the Register maintained by the Administrative Agent pursuant to Section 8.07(c) (such Lender's "Commitment"). Each Term Borrowing shall consist of Term Advances of the same Type made or Converted on the same day by the Lenders ratably according to their respective Commitments. Each Term Borrowing comprising Base Rate Advances shall be in an aggregate amount not less than $5,000,000, and each Term Borrowing comprising Eurodollar Rate Advances shall be in an aggregate amount not less than $10,000,000. All Term Borrowings with respect to which Lenders advance funds to the Borrower shall be made simultaneously on the Closing Date. Immediately after the Term Borrowings are made on the Closing Date the Commitments shall automatically be reduced to zero and no increase in the outstanding Term Borrowings shall occur thereafter The Borrower may not reborrow amounts repaid with respect to the Term Borrowings. -8- SECTION 2.02. Making the Term Advances. (a) All Term Borrowings (other than pursuant to a Conversion) shall be made on notice, given not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the Closing Date (if Term Borrowings comprised of Eurodollar Rate Advances are requested), or on the Closing Date (if the Term Borrowings are comprised only of Base Rate Advances), by the Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof. The notice of the Term Borrowings (the "Notice of Borrowing") shall be sent by telecopier, telex or cable, confirmed immediately in writing, in substantially the form of Exhibit B hereto, specifying therein the requested (i) Closing Date, (ii) Types of Term Advances to be made in connection with the Term Borrowings, (iii) the aggregate amount of each Term Borrowing, and (iv) in the case of a Term Borrowing comprising Eurodollar Rate Advances, the Interest Periods for such Eurodollar Advances. Each Lender shall, before 11:00 A.M. (Chicago time) on the Closing Date make available for the account of its Applicable Lending Office to the Administrative Agent at its address referred to in Section 8.02, in same day funds, such Lender's ratable portion of the Term Borrowings. After the Administrative Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Administrative Agent will make such funds available to the Borrower at the Administrative Agent's aforesaid address. (b) The Notice of Borrowing shall be irrevocable and binding on the Borrower. In the case of any Term Borrowing that the Notice of Borrowing specifies is to comprise Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the Closing Date specified in the Notice of Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Term Advances to be made by such Lender as part of such Term Borrowings when such Term Advances, as a result of such failure, are not made on the Closing Date. (c) Unless the Administrative Agent shall have received notice from a Lender prior to the Closing Date that such Lender will not make available to the Administrative Agent such Lender's ratable portion of the Term Borrowings, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the Closing Date in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on the Closing Date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Term Advances made in connection with the Term Borrowings and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender's Term Advances as part of such Term Borrowings for purposes of this Agreement. (d) The failure of any Lender to make any Term Advance to be made by it on the Closing Date shall not relieve any other Lender of its obligation, if any, hereunder to make any Term Advance on the Closing Date but no Lender shall be responsible for the failure of any other Lender to make any Term Advance to be made by such other Lender on the Closing Date. (e) Notwithstanding anything to the contrary contained herein, no more than sixteen (16) Term Borrowings comprising Eurodollar Rate Advances may be outstanding at any time. SECTION 2.03. Fees. (a) The Borrower agrees to pay on the Closing Date to the Administrative Agent for the account of each Lender a closing fee equal to the Closing Fee Percentage for each Lender times such Lender's Commitment hereunder. The "Closing Fee Percentage" for each Lender shall be the percentage set forth in the table below opposite the amount that such Lender indicated that it was willing to make available to Borrower under this Term Loan Agreement (which may be greater than its final Commitment hereunder) in a commitment letter executed and delivered by such Lender prior to the date hereof. -9- - - -------------------------------------------------------------------------------- Closing Fee Percentage Commitment Letter Amount ---------------------- ------------------------ - - -------------------------------------------------------------------------------- .09% Greater than or equal to $50,000,000 - - -------------------------------------------------------------------------------- .08% Less than $50,000,000, but greater than or equal to $40,000,000 - - -------------------------------------------------------------------------------- .07% Less than $40,000,000 but greater than or equal to $30,000,000 - - -------------------------------------------------------------------------------- .05% Less than $30,000,000 but greater than or equal to $20,000,000 - - -------------------------------------------------------------------------------- 0% Less than $20,000,000 - - -------------------------------------------------------------------------------- Regardless of the amount set forth in a Lender's commitment letter and used to calculate such Lender's closing fee under this Section 2.03, no Lender shall be obligated to make Term Borrowings in an aggregate principal amount in excess of its Commitment hereunder. (b) The Borrower agrees to pay to the Administrative Agent for its own account a closing fee, and an Administrative Agent's administration fee, each payable in such amounts and on such dates as may be agreed to in writing from time to time between the Borrower and the Administrative Agent. SECTION 2.04. Repayment of Term Advances. The Borrower shall repay the principal amount of all Term Advances on or before the Term Loan Maturity Date. SECTION 2.05. Interest on Term Advances. The Borrower shall pay interest on the unpaid principal amount of each Term Advance made by each Lender from the Closing Date until such principal amount shall be paid in full, at the following rates per annum: (a) Base Rate Advances. If such Term Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable quarterly on the last day of each March, June, September and December during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (b) Eurodollar Rate Advances. Subject to Section 2.06, if such Term Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during the Interest Period for such Term Advance to the sum of the Eurodollar Rate for such Interest Period plus 1%, payable on the last day of the Interest Period for such Eurodollar Rate Advance (or, if the Interest Period for such Advance is six months, accrued interest shall be payable on the day that is three months and on the day that is six months from the date such Advance was made) or, if earlier, on the date such Eurodollar Rate Advance shall be Converted or paid in full. -10- SECTION 2.06. Additional Interest on Term Advances. The Borrower shall pay to each Lender, so long as such Lender shall be required under regulations of the Board of Governors of the Federal Reserve System to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency Liabilities, additional interest on the unpaid principal amount of each Eurodollar Rate Advance of such Lender, from the date of such Term Advance until such principal amount is paid in full or Converted, at an interest rate per annum equal at all times to the remainder obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Term Advance from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage of such Lender for such Interest Period, payable on each date on which interest is payable on such Term Advance; provided, that no Lender shall be entitled to demand such additional interest more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such additional interest to the extent that such additional interest relates to the retroactive application of the reserve requirements described above if such demand is made within 90 days after the implementation of such retroactive reserve requirements. Such additional interest shall be determined by such Lender and notified to the Borrower through the Administrative Agent, and such determination shall be conclusive and binding for all purposes, absent manifest error. SECTION 2.07. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Administrative Agent timely information for the purpose of determining each Eurodollar Rate. If any one of the Reference Banks shall not furnish such timely information to the Administrative Agent for the purpose of determining such interest rate, the Administrative Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. (b) The Administrative Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Administrative Agent for purposes of Section 2.05(a) or (b), and the applicable rate, if any, furnished by each Reference Bank for the purpose of determining the applicable interest rate under Section 2.05(b). (c) If fewer than two Reference Banks furnish timely information to the Administrative Agent for determining the Eurodollar Rate for any Eurodollar Rate Advances, (i) the Administrative Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, (ii) each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make, or to Convert Term Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (d) If, with respect to any Eurodollar Rate Advances, the Majority Lenders notify the Administrative Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Majority Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor (unless prepaid), Convert into a Base Rate Advance, and -11- (ii) the obligation of the Lenders to make, or to Convert Term Advances into, Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.08. Conversion of Term Advances. (a) Voluntary. The Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 10:00 A.M. (Chicago time) on the third Business Day prior to the date of any proposed Conversion into Eurodollar Rate Advances and on the date of any proposed Conversion into Base Rate Advances, and subject to the provisions of Sections 2.07 and 2.11, Convert all Term Advances of one Type made in connection with the same Term Borrowing into Advances of another Type or Types or Term Advances of the same Type having the same or a new Interest Period; provided, however, that any Conversion of Eurodollar Rate Advances into Advances of another Type or Advances of the same Type having the same or new Interest Periods shall be made on, and only on, the last day of an Interest Period for such Eurodollar Rate Advances, unless the Borrower shall also reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such Conversion. Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Term Advances to be Converted, and (iii) if such Conversion is into, or with respect to, Eurodollar Rate Advances, the duration of the Interest Period for each such Term Advance. (b) Automatic. If the Borrower shall fail to select the Type of any Term Advance or the duration of any Interest Period for any Term Borrowing comprising Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01 and Section 2.08(a), the Administrative Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. SECTION 2.09. Prepayments. The Borrower may, upon at least two Business Days' notice (or same day notice in the case of any prepayment of Base Rate Advances) to the Administrative Agent stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amounts of the Term Advances made as part of the same Term Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (i) each partial prepayment shall be in an aggregate principal amount not less than $10,000,000 (or $5,000,000 in the case of any prepayment of Base Rate Advances) or, in either case, larger multiples of $1,000,000 and (ii) in the case of any such prepayment of an Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(b) on the date of such prepayment. SECTION 2.10. Increased Costs. (a) If on or after the date of this Agreement, any Lender determines that (i) the introduction of or any change (other than any change by way of imposition or increase of reserve requirements, included in the Eurodollar Rate Reserve Percentage) in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) shall increase the cost to such Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances, then the Borrower shall from time to time, upon demand by such Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender additional amounts (without duplication of any amount payable pursuant to Section 2.13) sufficient to compensate such Lender for such increased cost; provided, that no Lender shall be entitled to demand such compensation more than 90 days following the last day of the Interest Period in respect of which such demand is made; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described in clause (i) or (ii) above if such demand is made within 90 days after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to the amount of such increased cost, submitted to the Borrower and the Administrative Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. -12- (b) If any Lender determines that, after the date of this Agreement, compliance with any law or regulation or any guideline or request from any central bank or other governmental authority (whether or not having the force of law) regarding capital adequacy requirements affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type or the Advances made by such Lender, then, upon demand by such Lender (with a copy of such demand to the Administrative Agent), the Borrower shall immediately pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender or such corporation in the light of such circumstances, to the extent that such Lender determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder or the Advances made by such Lender; provided, that no Lender shall be entitled to demand such compensation more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive such compensation to the extent that such compensation relates to the retroactive application of any law, regulation, guideline or request described above if such demand is made within one year after the implementation of such retroactive law, interpretation, guideline or request. A certificate as to such amounts submitted to the Borrower and the Administrative Agent by such Lender shall be conclusive and binding, for all purposes, absent manifest error. (c) Any Lender claiming compensation pursuant to this Section 2.10 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such compensation that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. SECTION 2.11. Illegality. Notwithstanding any other provision of this Agreement, if any Lender shall notify the Administrative Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or to fund or maintain Eurodollar Rate Advances hereunder, (i) the obligation of such Lender to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended (subject to the following paragraph of this Section 2.11) until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist and (ii) all Eurodollar Rate Advances of such Lender then outstanding shall, on the last day of then applicable Interest Period (or such earlier date as such Lender shall designate upon not less than five Business Days prior written notice to the Administrative Agent), be automatically Converted into Base Rate Advances. If the obligation of any Lender to make, fund or maintain Eurodollar Rate Advances has been suspended pursuant to the preceding paragraph, then, unless and until the Administrative Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist (i) all Advances that would otherwise be made by such Lender as Eurodollar Rate Advances shall instead be made as Base Rate Advances and (ii) to the extent that Eurodollar Rate Advances of such Lender have been Converted into Base Rate Advances pursuant to the preceding paragraph or made instead as Base Rate Advances pursuant to the preceding clause (i), all payments and prepayments of principal that would have otherwise been applied to such Eurodollar Rate Advances of such Lender shall be applied instead to such Base Rate Advances of such Lender. -13- SECTION 2.12. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes not later than 10:00 A.M. (Chicago time) on the day when due in U.S. dollars to the Administrative Agent at its address referred to in Section 8.02 in same day funds. The Administrative Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or facility fees ratably (other than amounts payable pursuant to Section 2.02(c), 2.06, 2.10, 2.13 or 8.04(b)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Administrative Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) The Borrower hereby authorizes each Lender, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to charge from time to time against any or all of the Borrower's accounts with such Lender any amount so due. (c) All computations of interest based on the Base Rate shall be made by the Administrative Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the Federal Funds Rate shall be made by the Administrative Agent, and all computations of interest pursuant to Section 2.06 shall be made by a Lender, on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is payable. Each determination by the Administrative Agent (or, in the case of Section 2.06, by a Lender) of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest, provided, however, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (e) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate. (f) Notwithstanding anything to the contrary contained herein, any amount payable by the Borrower hereunder or under any Note that is not paid when due (whether at stated maturity, by acceleration or otherwise) shall (to the fullest extent permitted by law) bear interest from the date when due until paid in full at a rate per annum equal at all times to the Base Rate plus 2%, payable upon demand. -14- SECTION 2.13. Taxes. (a) Any and all payments by the Borrower hereunder or under the Notes shall be made, in accordance with Section 2.12, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Administrative Agent, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction under the laws of which such Lender or the Administrative Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its income, and franchise taxes imposed on it, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Administrative Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.13) such Lender or the Administrative Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies to the extent arising from the execution, delivery or registration of this Agreement or the Notes (hereinafter referred to as "Other Taxes"). (c) No Lender may claim or demand payment or reimbursement in respect of any Taxes or Other Taxes pursuant to this Section 2.13 if such Taxes or Other Taxes, as the case may be, were imposed solely as the result of a voluntary change in the location of the jurisdiction of such Lender's Applicable Lending Office. (d) The Borrower will indemnify each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.13) paid by such Lender or the Administrative Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date such Lender or the Administrative Agent (as the case may be) makes written demand therefor. (e) Prior to the Closing Date in the case of each Bank, and on the date of the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender, and from time to time thereafter within 30 days from the date of request if requested by the Borrower or the Administrative Agent, each Lender organized under the laws of a jurisdiction outside the United States shall provide the Administrative Agent and the Borrower with the forms prescribed by the Internal Revenue Service of the United States certifying that such Lender is exempt from United States withholding taxes with respect to all payments to be made to such Lender hereunder and under the Notes. If for any reason during the term of this Agreement, any Lender becomes unable to submit the forms referred to above or the information or representations contained therein are no longer accurate in any material respect, such Lender shall notify the Administrative Agent and the Borrower in writing to that effect. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that payments hereunder or under any Note are not subject to United States withholding tax, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate in the case of payments to or for any Lender organized under the laws of a jurisdiction outside the United States and no Lender may claim or demand payment or reimbursement for such withheld taxes pursuant to this Section 2.13. (f) Any Lender claiming any additional amounts payable pursuant to this Section 2.13 shall use its best efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its Applicable Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts which may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. -15- (g) If the Borrower makes any additional payment to any Lender pursuant to this Section 2.13 in respect of any Taxes or Other Taxes, and such Lender determines that it has received (i) a refund of such Taxes or Other Taxes or (ii) a credit against or relief or remission for, or a reduction in the amount of, any tax or other governmental charge attributable solely to any deduction or credit for any Taxes or Other Taxes with respect to which it has received payments under this Section 2.13, such Lender shall, to the extent that it can do so without prejudice to the retention of such refund, credit, relief, remission or reduction, pay to the Borrower such amount as such Lender shall have determined to be attributable to the deduction or withholding of such Taxes or Other Taxes. If, within one year after the payment of any such amount to the Borrower, such Lender determines that it was not entitled to such refund, credit, relief, remission or reduction to the full extent of any payment made pursuant to the first sentence of this Section 2.13(g), the Borrower shall upon notice and demand of such Lender promptly repay the amount of such overpayment. Any determination made by such Lender pursuant to this Section 2.13(g) shall in the absence of bad faith or manifest error be conclusive, and nothing in this Section 2.13(g) shall be construed as requiring any Lender to conduct its business or to arrange or alter in any respect its tax or financial affairs (except as required by Section 2.13(f)) so that it is entitled to receive such a refund, credit or reduction or as allowing any person to inspect any records, including tax returns, of any Lender. (h) Without prejudice to the survival of any other agreement of the Borrower or any Lender hereunder, the agreements and obligations of the Borrower and the Lenders contained in this Section 2.13 shall survive the payment in full of principal and interest hereunder and under the Notes; provided, that no Lender shall be entitled to demand any payment under this Section 2.13 more than one year following the payment to or for the account of such Lender of all other amounts payable hereunder and under any Note held by such Lender and the termination of such Lender's Commitment; provided further, however, that the foregoing proviso shall in no way limit the right of any Lender to demand or receive any payment under this Section 2.13 to the extent that such payment relates to the retroactive application of any Taxes or Other Taxes if such demand is made within one year after the implementation of such Taxes or Other Taxes. SECTION 2.14. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Term Advances made by it (other than pursuant to Section 2.02(c), 2.06, 2.10, 2.13 or 8.04(b)) in excess of its ratable share of payments on account of the Term Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Term Advances made by them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them, provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. -16- ARTICLE III CONDITIONS OF LENDING SECTION 3.01. Conditions Precedent to Term Borrowings. The obligation of each Lender to make its Term Advances on the Closing Date is subject to the satisfaction, prior to or concurrently with, the making of the Term Advances, of each of the following conditions precedent: (a) Documents and Other Agreements. The Administrative Agent shall have received on or before the Closing Date the following, each dated the Closing Date, in form and substance satisfactory to the Administrative Agent and (except for the Notes) with one copy for each Lender: (i) The Notes payable to the order of each of the Lenders, respectively; (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving the transactions contemplated by this Agreement and the Notes, and of all documents evidencing other necessary corporate action with respect to this Agreement and the Notes; (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying (A) the names and true signatures of the officers of the Borrower authorized to sign this Agreement and the Notes and the other documents to be delivered hereunder; (B) that attached thereto are true and correct copies of the Restated Articles of Incorporation and the By-laws of the Borrower, in each case in effect on such date; (C) that attached thereto are true and correct copies of all governmental and regulatory authorizations and approvals required for the due execution, delivery and performance of this Agreement and the Notes, including, without limitation, the Securities Certificate filed with the PPUC by the Borrower (the "Securities Certificate") and the Order of Registration issued by the PPUC registering the Securities Certificate (the "Order of Registration") and (D) that attached thereto is a subsistence certificate from the Secretary of the Commonwealth of Pennsylvania dated as of a recent date; (iv) Copies of the financial statements referred to in Section 4.01(e); (v) A favorable opinion of Ballard Spahr Andrews & Ingersoll, special counsel for the Borrower, substantially in the form of Exhibit D hereto; and (vi) A favorable opinion of Reed Smith Shaw & McClay LLP, counsel for the Documentation Agent, substantially in the form of Exhibit E hereto. (b) Representations and Warranties; Events of Default. (i) The representations and warranties contained in Section 4.01 shall be correct on and as of the Closing Date, before and after giving effect to the Term Borrowings and to the application of the proceeds therefrom, as though made on and as of the Closing Date; (ii) No event shall have occurred and be continuing, or shall result from the Term Borrowings or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both (it being understood for clarification that (A) without limiting the foregoing, it is a condition of this clause (ii) that the Borrower shall be in compliance with Section 5.01(a)(iv), Section 5.02(a) and Section 5.02(c) upon giving effect to Term Borrowings, and (B) the conditions of this clause (ii) shall apply whether or not the respective Commitments of the Lenders have been terminated pursuant to Section 6.01); and -17- (iii) The Administrative Agent shall have received a certificate dated the Closing Date signed by either the chief financial officer, principal accounting officer or treasurer of the Borrower stating that (A) the representations and warranties contained in Section 4.01 are correct on and as of the Closing Date as though made on and as of the Closing Date and (B) no event has occurred and is continuing on the Closing Date that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania. (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not and will not contravene (i) the Borrower's Restated Articles of Incorporation or By-laws, (ii) applicable law or (iii) any contractual or legal restriction binding on or affecting the Borrower or its properties. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and on and after the date of the initial Borrowing hereunder, the action of the PPUC registering the Securities Certificate shall no longer be subject to appeal. (d) This Agreement is, and the Notes when delivered hereunder will be, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, except as the enforceability thereof may be limited by equitable principles or bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally. (e) The consolidated balance sheet of the Borrower and its Subsidiaries as at December 31, 1997, and the related statements of income and retained earnings and of cash flows of the Borrower and its Subsidiaries for the fiscal year then ended, certified by Coopers & Lybrand, and the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at June 30, 1998 and the related unaudited statements of income for the six-month period then ended, copies of which have been furnished to each Lender, fairly present in all material respects (subject, in the case of such balance sheets and statements of income for the period ended June 30, 1998, to year-end adjustments) the consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with GAAP, and since December 31, 1997, there has been no Material Adverse Change. -18- (f) Except as disclosed in the Borrower's Annual, Quarterly or Current Reports, each as filed with the Securities and Exchange Commission and delivered to the Lenders (including reports filed prior to the date of execution and delivery of this Agreement and reports delivered to the Lenders pursuant to Section 5.01(b)), there is no pending or threatened action, investigation or proceeding affecting the Borrower or any of its Subsidiaries before any court, governmental agency or arbitrator that may reasonably be anticipated to have a Material Adverse Effect. There is no pending or threatened action or proceeding against the Borrower or its Subsidiaries that purports to affect the legality, validity, binding effect or enforceability of this Agreement or any Note. (g) No proceeds of any Advance have been or will be used directly or indirectly in connection with the acquisition of in excess of 5% of any class of equity securities that is registered pursuant to Section 12 of the Exchange Act or any transaction subject to the requirements of Section 13 or 14 of the Exchange Act. (h) The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Not more than 25% of the value of the assets of the Borrower and its Principal Subsidiaries is represented by margin stock. (i) The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (j) During the twelve consecutive month period prior to the date of the execution and delivery of this Agreement and prior to the date of any Borrowing under this Agreement, no steps have been taken to terminate any Plan, and no contribution failure by the Borrower or any member of the Controlled Group has occurred with respect to any Plan. No condition exists or event or transaction has occurred with respect to any Plan (including any Multiemployer Plan) which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. (k) The Borrower is reviewing its operations and those of its Subsidiaries with a view to assessing whether its businesses, or the business of any of its Subsidiaries, (i) will be vulnerable to a Year 2000 Problem or (ii) will be vulnerable to the effects of a Year 2000 Problem suffered by the Borrower's or any of its Subsidiaries' major counterparties, in the case of clause (ii), as described in the Borrower's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. The Borrower represents and warrants that it does not believe that any Year 2000 Problem will impair the Borrower's ability to pay principal or interest on the Notes in accordance with their terms. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a)(iv), which shall be applicable only as of the date hereof and at any time that any Advance is outstanding hereunder), the Borrower will, and, in the case of Section 5.01(a), will cause its Principal Subsidiaries to, unless the Majority Lenders shall otherwise consent in writing: -19- (a) Keep Books; Corporate Existence; Maintenance of Properties; Compliance with Laws; Insurance; Taxes. (i) keep proper books of record and account, all in accordance with generally accepted accounting principles; (ii) subject to Section 5.02(b), preserve and keep in full force and effect its existence; (iii) maintain and preserve all of its properties (except such properties the failure of which to maintain or preserve would not have, individually or in the aggregate, a Material Adverse Effect) which are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted; (iv) comply in all material respects with the requirements of all applicable laws, rules, regulations and orders (including those of any governmental authority and including with respect to environmental matters) to the extent the failure to so comply, individually or in the aggregate, would have either a Material Adverse Effect or a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement and the Notes; (v) maintain insurance with responsible and reputable insurance companies or associations, or self-insure, as the case may be, in each case in such amounts and covering such contingencies, casualties and risks as is customarily carried by or self-insured against by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower and its Principal Subsidiaries operate; (vi) at any reasonable time and from time to time, pursuant to prior notice delivered to the Borrower, permit any Lender, or any agents or representatives of any thereof, to examine and, at such Lender's expense, make copies of, and abstracts from the records and books of account of, and visit the properties of, the Borrower and any of its Principal Subsidiaries and to discuss the affairs, finances and accounts of the Borrower and any of its Subsidiaries with any of their respective officers; provided, that any non-public information (which has been identified as such by the Borrower) obtained by any Lender, or any of their respective agents or representatives pursuant to this subsection (vi) shall be treated confidentially by such Person; provided, further, that such Person may disclose such information to any other party to this Agreement, its examiners, affiliates, outside auditors, counsel or other professional advisors in connection with the Agreement or if otherwise required to do so by law or regulatory process; (vii) use the proceeds of the Advances for working capital and general corporate purposes (including, without limitation, the refinancing of its commercial paper, the repayment of outstanding Advances, the repayment of other outstanding Debt and the making of acquisitions) but in no event for any purpose which would be contrary to clause (g) or clause (h) of Section 4.01; (viii) take the actions and commit the resources deemed necessary by the National Electric Reliance Counsel ("NERC"), the Mid-Atlantic Area Counsel, the Nuclear Regulatory Commission and the PUC to mitigate against the Year 2000 Problem; and -20- (ix) at the request of the Administrative Agent, provide the Administrative Agent with any reports submitted by Borrower to the NERC relating to the Year 2000 Problem, within a reasonable time after such request. (b) Reporting Requirements. Furnish to the Lenders: (i) as soon as possible, and in any event within 5 Business Days after the occurrence of each Event of Default or each event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, continuing on the date of such statement, a statement of an authorized officer of the Borrower setting forth details of such Event of Default or event and the action which the Borrower proposes to take with respect thereto; (ii) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, a copy of the Borrower's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission with respect to such quarter, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice or lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iii) as soon as available and in any event within 105 days after the end of each fiscal year of the Borrower, a copy of the Borrower's Annual Report on Form 10-K filed with the Securities and Exchange Commission with respect to such fiscal year, together with a certificate of an authorized officer of the Borrower stating that no Event of Default, or event which, with notice of lapse of time or both, would constitute an Event of Default, has occurred and is continuing or, if any Event of Default or such event has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto; (iv) concurrently with the delivery of the annual and quarterly reports referred to in Sections 5.01(b)(ii) and 5.01(b)(iii), a compliance certificate in substantially the form set forth in Exhibit F, duly completed and signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of the Borrower; (v) except as otherwise provided in subsections (ii) and (iii) above, promptly after the sending or filing thereof, copies of all reports that the Borrower sends to any of its security holders, and copies of all Reports on Form 10-K, 10-Q or 8-K, and registration statements and prospectuses that the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange (except to the extent that any such registration statement or prospectus relates solely to the issuance of securities pursuant to employee or dividend reinvestment plans of the Borrower or such Subsidiary); (vi) promptly upon becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Plan, or the failure to make a required contribution to any Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA, or the taking of any action with respect to a Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Plan, or the occurrence of any event with respect to any Plan, which could result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty; and -21- (vii) such other information respecting the condition, operations, business or prospects, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender, through the Administrative Agent, may from time to time reasonably request. SECTION 5.02. Negative Covenants. So long as any Note or any amount payable by the Borrower hereunder shall remain unpaid or any Lender shall have any Commitment hereunder (except with respect to subsection (a), which shall be applicable only as of the date hereof and at any time any Advance is outstanding hereunder), the Borrower will not, without the written consent of the Majority Lenders: (a) Limitation on Liens. Create, incur, assume or suffer to exist, or permit any of its Principal Subsidiaries to create, incur, assume or suffer to exist, any Lien on its respective property, revenues or assets, whether now owned or hereafter acquired except (i) Liens upon or in any property acquired by the Borrower or any of its Principal Subsidiaries in the ordinary course of business to secure the purchase price of such property or to secure any obligation incurred solely for the purpose of financing the acquisition of such property, (ii) Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition unless permitted by the preceding clause (i)), (iii) Liens granted under the Mortgage and "excepted encumbrances" as defined in the Mortgage, (iv) Liens granted in connection with any financing arrangement for the purchase of nuclear fuel or the financing of pollution control facilities, limited to the fuel or facilities so purchased or acquired, (v) Liens arising in connection with sales or transfers of, or financing secured by, accounts receivable or related contracts, (vi) Liens securing the Borrower's notes collateralized solely by mortgage bonds of the Borrower issued under the terms of the Mortgage, (vii) Liens arising in connection with sale and leaseback transactions, but only to the extent (x) the proceeds received by the Borrower or such Principal Subsidiary from such sale shall immediately be applied to retire mortgage bonds of the Borrower issued under the terms of the Mortgage, or (y) the aggregate purchase price of assets sold pursuant to such sale and leaseback transactions where such proceeds are not so applied shall not exceed $1,000,000,000, (viii) Liens granted by a Special Purpose Subsidiary to secure Nonrecourse Transition Bond Debt of such Special Purpose Subsidiary, and (ix) Liens, other than those described in clauses (i) through (viii) of this subsection granted by the Borrower or any of its Principal Subsidiaries in the ordinary course of business securing Debt of the Borrower and its Principal Subsidiaries in an amount not to exceed $50,000,000 in the aggregate at any one time outstanding. (b) Mergers and Consolidations; Disposition of Assets. Merge with or into or consolidate with or into, or sell, assign, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person or permit any Principal Subsidiary to do so, except that (i) the Borrower or any Principal Subsidiary may merge with or into or consolidate with or transfer assets to any other Principal Subsidiary, (ii) any Principal Subsidiary may merge with or into or consolidate with or transfer assets to the Borrower and (iii) the Borrower may merge with or into or consolidate with or transfer assets to any other Person; provided in each case, immediately thereafter in giving effect thereto, no Event of Default or event that would, with the giving of notice or the passage of time or both constitute an Event of Default shall have occurred and be continuing and (A) in the case of any such merger, consolidation or transfer of assets to which the Borrower is a party, either (x) the Borrower shall be the surviving corporation or (y) the surviving corporation shall be an Eligible Successor and shall have assumed all of the obligations of the Borrower under this Agreement and the Notes pursuant to a written instrument in form and substance satisfactory to the Administrative Agent and (B) subject to clause (A) above, in the case of any such merger to which a Principal Subsidiary is a party, a Principal Subsidiary shall be the surviving corporation. -22- (c) Financial Covenant. Permit Consolidated Adjusted Total Debt to exceed 65% of Consolidated Adjusted Total Capitalization at any time. (d) Continuation of Businesses. (i) Generation Business. (A) Cease to own (through the Borrower or wholly-owned Subsidiaries) the business of generating electricity, or (B) reduce the net installed electric generating capacity (summer rating) of the electricity generation business owned by the Borrower and its wholly-owned Subsidiaries taken as a whole to less than 7821 Megawatts. (ii) Distribution, Transmission and Gas Businesses. Cease to own (directly by the Borrower, and not through Subsidiaries) the business of distributing electricity to end-users, the business of transmitting electricity, or the businesses of transmitting and distributing natural gas, each substantially as conducted by the Borrower as of the date of this Agreement (and the Borrower warrants that as of the date of this Agreement substantially all of such businesses conducted by the Borrower on a consolidated basis, and the assets relating thereto, are operated and owned by the Borrower directly and not through Subsidiaries). ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Term Advance when the same becomes due and payable, or interest thereon or any other amount payable under this Agreement or any of the Notes within three Business Days after the same becomes due and payable; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) pursuant to the terms of this Agreement shall prove to have been incorrect or misleading in any material respect when made; or (c) The Borrower shall fail to perform or observe (i) any term, covenant or agreement contained in Section 5.02, Section 5.01(a)(vii) or Section 5.01(b)(i), or (ii) any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if the failure to perform or observe such other term, covenant or agreement shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Administrative Agent (which notice shall be given by the Administrative Agent at the written request of any Lender); or (d) The Borrower or any Principal Subsidiary shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount in excess of $50,000,000 in the aggregate (but excluding Debt evidenced by the Notes and Nonrecourse Transition Bond Debt) of the Borrower or such Principal Subsidiary (as the case may be) when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof, other than any acceleration of any Debt secured by equipment leases or fuel leases of the Borrower or a Principal Subsidiary as a result of the occurrence of any event requiring a prepayment (whether or not characterized as such) thereunder, which prepayment will not result in a Material Adverse Change; or -23- (e) The Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 60 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property,) shall occur; or the Borrower or any Principal Subsidiary (other than a Special Purpose Subsidiary) shall take any corporate action to authorize or to consent to any of the actions set forth above in this subsection (e); or (f) One or more judgments or orders for the payment of money in an aggregate amount exceeding $50,000,000 (excluding any such judgments or orders which are fully covered by insurance, subject to any customary deductible, and under which the applicable insurance carrier has acknowledged such full coverage in writing) shall be rendered against the Borrower or any Principal Subsidiary and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) (i) any Reportable Event that the Majority Lenders determine in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer a Plan shall have occurred and be continuing 30 days after written notice to such effect shall have been given to the Borrower by the Administrative Agent or (ii) any Plan shall be terminated, or (iii) a Trustee shall be appointed by an appropriate United States District Court to administer any Plan or (iv) the PBGC shall institute proceedings to terminate any Plan or to appoint a trustee to administer any Plan; provided, however that on the date of any event described in clauses (i) through (iv) above the Unfunded Liabilities of such Plan exceed $20,000,000; or (h) any "Event of Default" shall occur under either of the Existing Credit Agreements; then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the respective Commitments of the Lenders to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Majority Lenders, by notice to the Borrower, declare the principal amount outstanding under the Notes, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the principal amount outstanding under the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower or any Principal Subsidiary under the Federal Bankruptcy Code, (A) the Commitments shall automatically be terminated and (B) the principal amount outstanding under the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. -24- ARTICLE VII THE AGENTS SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Administrative Agent to take such action as administrative agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto. Each Lender hereby appoints and authorizes the Administrative Agent to prepare this Agreement and the Notes on behalf of the Lenders. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Administrative Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Lenders, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that the Administrative Agent shall not be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement or applicable law. The Administrative Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 7.02. Agents' Reliance, Etc. Neither the Administrative Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their respective own gross negligence or willful misconduct. Without limitation of the generality of the foregoing: (i) the Administrative Agent may treat the payee of any Note as the holder thereof until the Administrative Agent receives and accepts an Assignment and Acceptance entered into by the Lender which is the payee of such Note, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) the Administrative Agent may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) the Administrative Agent makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) the Administrative Agent shall have no duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) the Administrative Agent shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) the Administrative Agent shall not incur any liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier, telegram, cable or telex) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Agents and Affiliates. With respect to its Commitment, Advances and their respective Note, First Chicago shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not an Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include First Chicago in its individual capacity. First Chicago and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, and generally engage in any kind of business with, the Borrower, any of its subsidiaries and any Person who may do business with or own securities of the Borrower or any such subsidiary, all as if First Chicago was not the Administrative Agent and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent, or any other Lender and based on the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. -25- SECTION 7.05. Indemnification. The Lenders agree to indemnify the Administrative Agent, the Documentation Agent and the Syndication Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Notes then held by each of the Lenders (or if no Notes are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against any such Agent in any way relating to or arising out of this Agreement or any action taken or omitted by any such Agent under this Agreement, provided that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse each such Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees) incurred by such Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that such expenses are reimbursable by the Borrower but for which such Agent is not reimbursed by the Borrower. SECTION 7.06. Successor Administrative Agent. The Administrative Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Majority Lenders. Upon any such resignation or removal, the Majority Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Lenders, and shall have accepted such appointment, within 30 days after the retiring Administrative Agent's giving of notice of resignation or the Majority Lenders' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial bank described in clause (i) or (ii) of the definition of "Eligible Assignee" and having a combined capital and surplus of at least $150,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. Notwithstanding the foregoing, if no Event of Default, and no event that with the giving of notice or the passage of time, or both, would constitute an Event of Default, shall have occurred and be continuing, then no successor Administrative Agent shall be appointed under this Section 7.06 without the prior written consent of the Borrower, which consent shall not be unreasonably withheld or delayed. SECTION 7.07. Syndication Agent, Documentation Agent and Co-Agents. The titles "Syndication Agent," "Documentation Agent," and "Co-Agent," are purely honorific, and the Syndication Agent, Documentation Agent and Co-Agents shall have no duties or responsibilities in such capacities. -26- ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Majority Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders (other than any Lender that is the Borrower or an Affiliate of the Borrower), do any of the following: (a) waive any of the conditions specified in Section 3.01, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder, or (f) amend this Section 8.01; provided, that no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent, in addition to the Lenders required above to take such action, affect the rights or duties of the Administrative Agent under this Agreement or any Note. SECTION 8.02. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telecopier, telegraphic, telex or cable communication) and mailed, telecopied, telegraphed, telexed, cabled or delivered, if to the Borrower, at its address at 2301 Market Street, Philadelphia, Pennsylvania 19101, Attention: Vice President-Finance and Treasurer, S21-1, Telecopy: (215) 841-5743; if to any Bank, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assignment and Acceptance pursuant to which it became a Lender; and if to the Administrative Agent, at its address at One First National Plaza, Mail Suite 0634, 1FPN-10, Chicago, Illinois 60670, Attention: Ms. Gwendolyn Watson, Telecopy: (312) 732-4840 or, as to each party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when deposited in the mails, telecopied, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that notices and communications to the Administrative Agent pursuant to Article II or VII shall not be effective until received by the Administrative Agent. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Administrative Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses; Indemnification. (a) The Borrower agrees to pay on demand all costs and expenses incurred by the Administrative Agent, the Documentation Agent and the Syndication Agent in connection with the preparation, execution, delivery, administration, syndication, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, the reasonable fees, internal charges and out-of-pocket expenses of counsel (including, without limitation, in-house counsel) for such Agents with respect thereto and with respect to advising the such Agents as to their respective rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all costs and expenses, if any (including, without limitation, counsel fees and expenses of outside counsel and of internal counsel), incurred by the Administrative Agent, the Documentation Agent and any Lender in connection with the collection and enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable counsel fees and expenses in connection with the enforcement of rights under this Section 8.04(a). -27- (b) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance is made other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.08 or 2.11 or acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, the Borrower shall, upon demand by any Lender (with a copy of such demand to the Administrative Agent), pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss, cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (c) The Borrower hereby agrees to indemnify and hold each Lender, each Agent, First Chicago Capital Markets, Inc., as Arranger, and each of their respective Affiliates, officers, directors and employees (each, an "Indemnified Person") harmless from and against any and all claims, damages, losses, liabilities, costs or expenses (including reasonable attorney's fees and expenses, whether or not such Indemnified Person is named as a party to any proceeding or is otherwise subjected to judicial or legal process arising from any such proceeding) that any of them may pay or incur arising out of or relating to this Agreement, the Notes or the transactions contemplated thereby, or the use by the Borrower or any of its subsidiaries of the proceeds of any Advance, provided that the Borrower shall not be liable for any portion of such claims, damages, losses, liabilities, costs or expenses resulting from such Indemnified Person's gross negligence or willful misconduct. The Borrower's obligations under this Section 8.04(c) shall survive the repayment of all amounts owing to the Lenders and the Administrative Agent under this Agreement and the Notes and the termination of the Commitments. If and to the extent that the obligations of the Borrower under this Section 8.04(c) are unenforceable for any reason, the Borrower agrees to make the maximum contribution to the payment and satisfaction thereof which is permissible under applicable law. SECTION 8.05. Right of Set-off. Upon (i) the occurrence and during the continuance of any Event of Default and (ii) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement and any Note held by such Lender, whether or not such Lender shall have made any demand under this Agreement or such Note and although such obligations may be unmatured. Each Lender agrees promptly to notify the Borrower after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Lender may have. SECTION 8.06. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Agents and when the Administrative Agent shall have been notified by each Bank that such Bank has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agents and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. -28- SECTION 8.07. Assignments and Participations. (a) Each Lender may, with the prior written consent of the Borrower and the Administrative Agent (neither of which consents shall be unreasonably withheld or delayed), and if demanded by the Borrower pursuant to subsection (g) hereof shall to the extent required by such subsection (g), assign to one or more banks or other entities all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all of the assigning Lender's rights and obligations under this Agreement, (ii) if the assignment occurs prior to the Closing Date, the amount of the Commitment, or if the assignment occurs on or after the Closing Date, the principal amount of the Advances, of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or, if less, the entire amount of such Lender's Commitment, and shall be an integral multiple of $1,000,000 or such Lender's entire Commitment, (iii) each such assignment shall be to an Eligible Assignee, (iv) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Note or Notes subject to such assignment and a processing and recordation fee of $3,500 (which shall be payable by one or more of the parties to the Assignment and Acceptance, and not by the Borrower, and shall not be payable if the assignee is a Bank, any Affiliate of any Bank or the Federal Reserve Bank) and (v) the consent of the Borrower shall not be required after the occurrence and during the continuance of any Event of Default. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). Notwithstanding anything contained in this Section 8.07(a) to the contrary, (A) the consent of the Borrower and the Administrative Agent shall not be required with respect to any assignment by any Lender to an Affiliate of such Lender or to another Lender and (B) any Lender may at any time, without the consent of the Borrower or the Administrative Agent, and without any requirement to have an Assignment and Acceptance executed, assign all or any part of its rights under this Agreement and its Notes to a Federal Reserve Bank, provided that such assignment does not release the transferor Lender from any of its obligations hereunder. (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01(e) and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent or the Documentation Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations which by the terms of this Agreement are required to be performed by it as a Lender. -29- (c) The Administrative Agent shall maintain at its address referred to in Section 8.02 a copy of each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Note or Notes subject to such assignment, the Administrative Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. Within five Business Days after its receipt of such notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for the surrendered Note or Notes: (A) a new Note payable to the order of such Eligible Assignee in an amount equal to the Commitment assumed by such Eligible Assignee (if prior to the Closing Date) or the outstanding Advances purchased by Eligible Assignee (if after the Closing Date); and (B) if such Lender is retaining an interest in its Commitment or outstanding Advances, a new Note payable to the order of the Assignor in an amount equal to the Commitment retained by such Lender (if prior to the Closing Date) or the outstanding Advances retained by such Lender (if after the Closing Date,) all as specified on Schedule 1 hereto. Such Note or Notes shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of Exhibit A hereto. (e) Each Lender may sell participations to one or more banks or other entities (each, a "Participant") in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and the Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) such Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of this Agreement or the Note or Notes held by such Lender, other than any such amendment, modification or waiver with respect to any Advance or Commitment in which such Participant has an interest that forgives principal, interest or fees or reduces the interest rate or fees payable with respect to any such Advance or Commitment, postpones any date fixed for any regularly scheduled payment of principal of, or interest or fees on, any such Advance or Commitment, releases any guarantor of any such Advance or releases any substantial portion of collateral, if any, securing any such Advance. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any confidential information relating to the Borrower received by it from such Lender (subject to customary exceptions regarding regulatory requirements, compliance with legal process and other requirements of law). -30- (g) If (i) any Lender shall make demand for payment under Section 2.10(a), 2.10(b) or 2.13, or (ii) shall deliver any notice to the Administrative Agent pursuant to Section 2.11 resulting in the suspension of certain obligations of the Lenders with respect to Eurodollar Rate Advances, then (in the case of clause (i)) within 60 days after such demand (if, but only if, such payment demanded under Section 2.10(a), 2.10(b) or 2.13 has been made by the Borrower), or (in the case of clause (ii)) within 60 days after such notice (if such suspension is still in effect), the Borrower may demand that such Lender assign in accordance with this Section 8.07 to one or more Eligible Assignees designated by the Borrower and reasonably acceptable to the Administrative Agent all (but not less than all) of such Lender's Commitment and the Advances owing to it within the next succeeding 30 days. If any such Eligible Assignee designated by the Borrower shall fail to consummate such assignment on terms acceptable to such Lender, or if the Borrower shall fail to designate any such Eligible Assignee for all of such Lender's Commitment or Advances, then such Lender may (but shall not be required to) assign such Commitment and Advances to any other Eligible Assignee in accordance with this Section 8.07 during such period. SECTION 8.08. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. SECTION 8.09. Consent to Jurisdiction. THE BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND ANY UNITED STATES DISTRICT COURT SITTING IN THE STATE OF ILLINOIS IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE NOTES AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER JURISDICTION. SECTION 8.10. Execution in Counterparts; Integration. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes all prior and contemporaneous agreements and understandings, oral or written, relating to the subject matter hereof. [Remainder of the page intentionally left blank] -31- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By /s/ J.B. Mitchell ---------------------------------------------- Name: J.B. Mitchell Title: Vice President - Finance and Treasurer /s/ Todd C. Cutler - - ------------------------ Todd D. Cutler Assistant Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By ------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent MELLON BANK, N.A., as Documentation Agent By ------------------------------- Name: Mary Ellen Usher Title: Vice President SALOMON SMITH BARNEY INC., as Syndication Agent By ------------------------------- Name: Robert J. Harrity, Jr. Title: Managing Director This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By ---------------------------------------------- Name: J.B. Mitchell Title: Vice President - Finance and Treasurer - - ------------------------ Todd D. Cutler Assistant Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By /s/ Kenneth J. Bauer ------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent MELLON BANK, N.A., as Documentation Agent By ------------------------------- Name: Mary Ellen Usher Title: Vice President SALOMON SMITH BARNEY INC., as Syndication Agent By ------------------------------- Name: Robert J. Harrity, Jr. Title: Managing Director This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By ---------------------------------------------- Name: J.B. Mitchell Title: Vice President - Finance and Treasurer - - ------------------------ Todd D. Cutler Assistant Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By ------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent MELLON BANK, N.A., as Documentation Agent By /s/ Mary Ellen Usher ------------------------------- Name: Mary Ellen Usher Title: Vice President SALOMON SMITH BARNEY INC., as Syndication Agent By ------------------------------- Name: Robert J. Harrity, Jr. Title: Managing Director This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. [SEAL] PECO ENERGY COMPANY PECO ENERGY COMPANY By ---------------------------------------------- Name: J.B. Mitchell Title: Vice President - Finance and Treasurer - - ------------------------ Todd D. Cutler Assistant Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent By ------------------------------- Name: Kenneth J. Bauer Title: Authorized Agent MELLON BANK, N.A., as Documentation Agent By ------------------------------- Name: Mary Ellen Usher Title: Vice President SALOMON SMITH BARNEY INC., as Syndication Agent By /s/ Steven R. Motorin ------------------------------- Name: Steven R. Motorin Title: Attorney-in-Fact This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. THE BANKS Commitment $47,000,000 THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent and as Bank By /s/ Kenneth J. Bauer ----------------------------- Name: Kenneth J. Bauer Title: Authorized Agent This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $47,000,000 CITIBANK, N.A., as Bank By /s/ Anita J. Brickell ------------------------ Name: Robert J. Harrity, Jr. Title: Attorney-in-Fact ANITA J. BRICKELL Attorney-In-Fact This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $47,000,000 MELLON BANK, N.A., as Documentation Agent and as Bank By /s/ Mary Ellen Usher ----------------------------- Name: Mary Ellen Usher Title: Vice President This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $47,000,000 BANK OF MONTREAL, as Co-Agent and as Bank By /s/ Ian M. Plester ------------------------ Name: Ian M. Plester Title: Director This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $47,000,000 FIRST UNION NATIONAL BANK, as Co-Agent and as Bank By /s/ Michael J. Kolosowsky ------------------------------- Name: Michael J. Kolosowsky Title: Vice President This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $47,000,000 TORONTO DOMINION (TEXAS), INC., as Co-Agent and as Bank By /s/ Alva J. Jones ------------------------- Name: Alva J. Jones Title: Vice President This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $30,000,000 COMERICA BANK, as Bank By /s/ Kimberly S. Kersten --------------------------- Name: Kimberly S. Kersten Title: Vice President This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $30,000,000 PNC BANK, NATIONAL ASSOCIATION, as Bank By /s/ Christopher N. Moravec ------------------------------ Name: Christopher N. Moravec Title: Senior Vice President This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $20,000,000 THE BANK OF NEW YORK, as Bank By /s/ John N. Watt -------------------------- Name: John N. Watt Title: Vice President This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $20,000,000 BANK HAPOALIM B.M., Philadephia Branch, as Bank By /s/ Carl Kopfinger ------------------------------- Name: Carl Kopfinger Title: Vice President By /s/ Amram Lador -------------------------------- Name: Amram (Rami) Lador Title: First Vice President and Branch Manager This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. Commitment $18,000,000 CIBC, INC., as Bank By /s/ Denis O'Meara -------------------------------- Name: Denis O'Meara Title: Executive Director CIBC Oppenheimer Corp., AS AGENT This is a signature page to the Term Loan Agreement, dated as of November 30, 1998 among PECO Energy Company, as Borrower, the Banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent. SCHEDULE I Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, the First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent.
Domestic Eurodollar Name of Bank Lending Office Lending Office - - ------------ -------------- -------------- The First National Bank of Chicago One First National Plaza Same Suite 0634 Chicago, IL 60670 Attn: Lynn Pozsgay Phone: (312) 732-8705 Fax: 312) 732-3055 First Union National Bank One First Union Center Same 301 South College Street Charlotte, NC 28288-0735 Attn: Dana Maloney Phone: (704) 383-0296 Fax: (704) 383-6670 Mellon Bank, N.A. Three Mellon Bank Center Same Room 1203 (Loan Administration) Pittsburgh, PA 15259-0003 Attn: Cathy Capp Phone: (412) 234-1870 Fax: (412) 209-6111 The Toronto-Dominion Bank 909 Fannin Street Same 17th Floor Houston, TX 77010 Attn: Alva J. Jones Manager, Credit Administration Phone: (713) 653-8261 Fax: (713) 951-9921 Bank Hapoalim B.M. Commercial Loan & Documentation Same 1515 Market Street, Suite 200 Philadelphia, PA 19102 Attn: Sheila D. Joe Phone: (215) 665-2228 Fax: (215) 665-2217
Domestic Eurodollar Name of Bank Lending Office Lending Office - - ------------ -------------- -------------- Bank of Montreal 115 South LaSalle Street Same Chicago, IL 60603 Attn: Client Services Phone: (312) 750-3748 Fax: (312) 750-4345 The Bank of New York One Wall Street, 19th Floor Same Energy Industries Division New York, NY 10286 Attn: Theresa A. Foran Phone: (212) 635-7921 Fax: (212) 635-7923 Citibank, N.A. Two Penn's Way Same Second Floor New Castle, DE 19720 4th Floor, Zone 22 New York, New York 10021 Attn: Patrice Williams Phone: (302) 894-6068 Fax: (302) 894-6120 Comerica Bank 500 Woodward Avenue Same Mailcode 3280 Detroit, MI 48226 Attn: David Shirey Phone: (313) 222-3647 Fax: (313) 222-3330 PNC Bank, National Association 249 Fifth Avenue Same Pittsburgh, PA 15222-2707 Attn: Christopher N. Moravec Phone: (412) 762-2540 Fax: (412) 762-2571 CIBC, Inc. 425 Lexington Street Same New York, NY 10017 Attn: Dennis O'Meara Phone: (212) 856-3758 Fax: (212) 856-3991 Two Paces West 2727 Paces Ferry Road Suite 1200 Atlanta, GA 30339 Attn: Patrice Kellaher Phone: (770) 319-4999 Fax: (770) 319-4950
EXHIBIT A FORM OF PROMISSORY NOTE $____________________ Dated: November 30, 1998 FOR VALUE RECEIVED, the undersigned, PECO Energy Company, a Pennsylvania corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _________ (the "Lender") for the account of its Applicable Lending Office (such term and other capitalized terms herein being used as defined in the Term Loan Agreement referred to below) on the Term Loan Maturity Date the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Term Advances made by the Lender to the Borrower pursuant to the Term Loan Agreement outstanding on the Term Loan Maturity Date. The Borrower promises to pay interest on the unpaid principal amount of each Term Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Term Loan Agreement. Both principal and interest are payable in lawful money of the United States of America to The First National Bank of Chicago, as Administrative Agent, at One First National Plaza, Chicago, Illinois 60670, in same day funds. Each Term Advance made by the Lender to the Borrower pursuant to the Term Loan Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Notes referred to in, and is entitled to the benefits of, the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Term Loan Agreement"). The Term Loan Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. THIS PROMISSORY NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. PECO ENERGY COMPANY By ____________________________________ Name: Title: ADVANCES AND PAYMENTS OF PRINCIPAL Amount of Aggregate Principal Unpaid Term Loan Paid or Principal Notation Advances Prepaid Balance Made By - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- EXHIBIT B NOTICE OF BORROWING The First National Bank of Chicago, as Administrative Agent for the Lenders parties to the Term Loan Agreement referred to below One First National Plaza Chicago, Illinois 60670 [Date] Attention: Utilities Department North American Finance Group Ladies and Gentlemen: The undersigned, PECO Energy Company, refers to the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Term Loan Agreement"), and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Term Loan Agreement that the undersigned hereby requests the Term Borrowings under the Term Loan Agreement, and in that connection sets forth below the information relating to such Term Borrowings (the "Proposed Borrowings") as required by Section 2.02(a) of the Term Loan Agreement: (i) The Closing Date is ________ , 1998. (ii) The aggregate amount of the Proposed Borrowings is $ ____________ . (iii) Set forth below is the Type of each Term Borrowing, the principal amount of each Term Borrowing and if any Term Borrowing is comprised of Eurocurrency Advances, the Interest Period applicable thereto: - - -------------------------------------------------------------------------------- Type Principal Amount Interest Period - - -------------------------------------------------------------------------------- The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the Closing Date: (A) the representations and warranties contained in Section 4.01 are correct, before and after giving effect to the Proposed Borrowings and to the application of the proceeds therefrom, as though made on and as of the Closing Date; and (B) no event has occurred and is continuing, or would result from such Proposed Borrowings or from the application of the proceeds therefrom, that constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. Very truly yours, PECO ENERGY COMPANY By_____________________________ Name: Title: -2- EXHIBIT C ASSIGNMENT AND ACCEPTANCE Dated ________ , 19 ___ Reference is made to the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Term Loan Agreement"). Terms defined in the Term Loan Agreement are used herein with the same meaning. ________ (the "Assignor") and __________ (the "Assignee") agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, and the Assignee hereby purchases and assumes from the Assignor, that interest in and to all of the Assignor's rights and obligations under the Term Loan Agreement as of the date hereof which represents the percentage interest specified on Schedule 1 of all outstanding rights and obligations under the Term Loan Agreement, including, without limitation, such interest in the Assignor's Commitment, the Advances owing to the Assignor, and the Note[s] held by the Assignor. After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Advances owing to the Assignee will be as set forth in Section 2 of Schedule 1. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Term Loan Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Term Loan Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Term Loan Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Note[s] referred to in paragraph 1 above and requests that the Administrative Agent exchange such Note[s] for (A) a new Note payable to the order of Assignee in an amount equal to the Commitment assumed by Assignee (if prior to the Closing Date) or the outstanding Advances purchased by Assignee (if after the Closing Date); and (B) if Assignor is retaining an interest in its Commitment or outstanding Advances, a new Note payable to the order of the Assignor in an amount equal to the Commitment retained by Assignor (if prior to the Closing Date) or the outstanding Advances retained by Assignor (if after the Closing Date), all as specified on Schedule 1 hereto. 3. The Assignee (i) confirms that it has received a copy of the Term Loan Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Administrative Agent, the Documentation Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Term Loan Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under the Term Loan Agreement as are delegated to the Administrative Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations which by the terms of the Term Loan Agreement are required to be performed by it as a Lender; (vi) none of the consideration used to make the purchase being made by the Assignee hereunder are "plan assets" as defined under ERISA and the rights and interests of the Assignee in and under the Term Loan Agreement will not be "plan assets" under ERISA [and] (vii) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof [and (viii) attaches the forms prescribed by the Internal Revenue Service of the United States certifying that it is exempt from United States withholding taxes with respect to all payments to be made to the Assignee under the Term Loan Agreement and the Notes].(1) 4. Following the execution of this Assignment and Acceptance by the Assignor and the Assignee, it will be delivered to the Administrative Agent for acceptance and recording by the Administrative Agent. The effective date of this Assignment and Acceptance shall be the date of acceptance thereof by the Administrative Agent, unless otherwise specified on Schedule 1 hereto (the "Effective Date"). 5. Upon such acceptance and recording by the Administrative Agent, as of the Effective Date, (i) the Assignee shall be a party to the Term Loan Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Term Loan Agreement. 6. Upon such acceptance and recording by the Administrative Agent, from and after the Effective Date, the Administrative Agent shall make all payments under the Term Loan Agreement and the Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal , interest and fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Term Loan Agreement and the Notes for periods prior to the Effective Date directly between themselves. 7. THIS ASSIGNMENT AND ACCEPTANCE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF ILLINOIS. - - ----------------- (1) If the Assignee is organized under the laws of a jurisdiction outside the United States. -2- IN WITNESS WHEREOF, the parties hereto have caused this Assignment and Acceptance to be executed by their respective officers thereunto duly authorized, as of the date first above written, such execution being made on Schedule 1 hereto. [NAME OF ASSIGNOR] By ________________________________ Name: Title: [NAME OF ASSIGNEE] By ________________________________ Name: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address] Consented to this_________ day of ___________ , 19 ___ PECO ENERGY COMPANY By ___________________________ Name: Title: Consented to and Accepted this___ day of ____________ , 19 ___ [NAME OF ADMINISTRATIVE AGENT] By ____________________________ Name: Title: -3- Schedule 1 to Assignment and Acceptance Dated ______ , 19 ___ Section 1. Percentage Interest: ____% Section 2. [Assignee's Commitment (include for assignments prior to the Closing Date only)]: $__ Aggregate Outstanding Principal Amount of Advances owing to the Assignee: $__ A Note payable to the order of the Assignee Dated:_________ , 19 __ Principal amount: $__ A Note payable to the order of the Assignor Dated:_________ , 19 __ Principal amount: $__ Section 3. Effective Date(2): ______ , 19 __ - - ---------------- (2) This date should be no earlier than the date of acceptance by the Administrative Agent. EXHIBIT D FORM OF OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL ________ , 19 To each of the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agent, and the Co-Agents party to the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent Re: PECO Energy Company ------------------- Ladies and Gentlemen: This opinion is furnished to you pursuant to Section 3.01(a)(v) of the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Term Loan Agreement"). Unless otherwise specified, terms defined in the Term Loan Agreement are used herein as therein defined. We have acted as special counsel for the Borrower in connection with the preparation, execution and delivery of the Term Loan Agreement. In that capacity we have examined the following: (i) The Term Loan Agreement, and the Notes; (ii) The documents furnished by the Borrower pursuant to Section 3.01 of the Term Loan Agreement; (iii) The Amended and Restated Articles of Incorporation of the Borrower and all amendments thereto (the "Charter"); (iv) The by-laws of the Borrower and all amendments thereto (the "By-laws"); and (v) A certificate of the Secretary of State of the Commonwealth of Pennsylvania, dated , 19 , attesting to the continued subsistence of the Borrower in Pennsylvania. We have also examined the originals, or copies certified to our satisfaction, of such other corporate records of the Borrower, certificates of public officials and of officers of the Borrower, and agreements, instruments and documents, as we have deemed necessary as a basis for the opinions hereinafter expressed. We have assumed the legal capacity and competence of natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to original documents of documents submitted to us as certified, conformed or photostatic copies. We have assumed that the Agents and the Banks have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Term Loan Agreement. When an opinion or confirmation is given to our knowledge or with reference to matters of which we are aware or which are known to us, or with another similar qualification, the relevant knowledge or awareness is limited to the actual knowledge or awareness of the lawyer who is the current primary contact for the Borrower and the individual lawyers in this firm who have participated in the specific transaction to which this opinion relates and without any special or additional investigation undertaken for the purposes of this opinion, except as otherwise noted herein. Based upon the foregoing and subject to the exceptions, limitations and qualifications set forth herein, we are of the following opinion: 1. The Borrower is a corporation duly incorporated and validly subsisting under the laws of the Commonwealth of Pennsylvania. 2. The execution, delivery and performance by the Borrower of the Term Loan Agreement and the Notes are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not contravene (i) the Charter or the By-laws or (ii) any law of the United States or the Commonwealth of Pennsylvania (including, without limitation, any order, rule or regulation of the PPUC) or (iii) to the best of our knowledge, any agreement or instrument to which the Borrower is a party or by which it is bound, and do not result in or require the creation of any lien, security interest or other charge or encumbrance upon or with respect to any of its properties. 3. No authorization, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the Commonwealth of Pennsylvania is required for the due execution, delivery and performance by the Borrower of the Term Loan Agreement or the Notes except for the filing of the Securities Certificate with, and the final approval of, and the Order of Registration issued by, the PPUC, which filing has been duly made and which final approval and Order of Registration have been duly obtained; such Order of Registration is in full force and effect and is final; and the action of the PPUC registering the Securities Certificate is no longer subject to appeal. 4. The Term Loan Agreement and the Notes have been duly executed and delivered by the Borrower. 5. The Term Loan Agreement and the Notes are the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. 6. The Borrower (i) is exempt from the provisions of the Public Utility Holding Company Act of 1935, as amended, other than Section 9(a)(2) thereof, pursuant to Section 3(a)(2) thereof, and (ii) is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. -2- 7. We confirm to you that to our knowledge, after inquiry of each lawyer who is the current primary contact for the Borrower or who has devoted substantive attention to matters on behalf of the Borrower during the preceding twelve months and who is still currently employed by or a member of this firm, except as disclosed in the Borrower's Annual Report on Form 10-K for the year ended December 31, 1997 and the Borrower's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, no litigation or governmental proceeding is pending or threatened in writing against the Borrower (i) with respect to the Term Loan Agreement or the Notes, or (ii) which is likely to have a material adverse effect upon the financial condition, business, properties or prospects of the Borrower and its subsidiaries taken as a whole. We draw to your attention the existence of the following two Pennsylvania statutes in connection with the fact that the Advances bear floating rates of interest: (i) Section 911 of the Pennsylvania "Crime Code," 18 Pa. C.S.A. ss.911, enacted by the Act of December 6, 1972, P.L. 1482. Section 911 of the Crime Code bears a close resemblance to certain of the provisions of the Federal Racketeer Influenced and Corrupt Organizations Act of 1970, 18 U.S.C. ss.ss.1961-1968, commonly known as RICO, and is referred to hereinafter as the "Pennsylvania RICO Act." The Pennsylvania RICO Act provides, among other things, that it is a criminal offense, punishable as a felony, to "use or invest, directly or indirectly ... in the acquisition of any interest in, or the establishment or operation of, any enterprise" any income collected in full or partial satisfaction of a loan made "at a rate of interest exceeding 25% per annum... ." (ii) The Act of December 29, 1982, P.L. 1671, 18 Pa. C.S.A. ss.4806.1 et seq. (superseded volume) (the "Criminal Usury Statute"). The Criminal Usury Statute provides, among other things, that it is a criminal offense, punishable as a felony, to engage in, "charging, taking or receiving any money ... on the loan ... of any money ... at a rate exceeding thirty-six percent per annum... ." The Criminal Usury Statute may have been repealed, but the manner in which the repeal was enacted leaves the matter subject to uncertainty. Both the Pennsylvania RICO Act and the Criminal Usury Statute appear to be intended by the legislature to apply only to racketeering and loan sharking type activities, and not to the type of commercial loan transaction evidenced by the Term Loan Agreement and the Notes. Nevertheless, in view of the plain language of the Pennsylvania courts, we cannot say that the ultimate resolution of this issue is free from doubt. The foregoing opinions are subject to the following exceptions, limitations and qualifications: (a) Our opinion is subject to the effect of applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance, fraudulent transfer or similar laws affecting creditors' rights and remedies generally, general principles of equity, including without limitation, concepts of materiality, reasonableness, good faith and fair dealing (regardless of whether such enforceability is considered in a proceeding in equity or at law); and limitations on enforceability of rights to indemnification by federal or state securities laws or regulations or by public policy. -3- (b) We express no opinion as to the application or requirements of the Pennsylvania Securities Act or federal or state securities, patent, trademark, copyright, antitrust and unfair competition, pension or employee benefit, labor, environmental health and safety or tax laws in respect of the transactions contemplated by or referred to in the Term Loan Agreement. (c) We express no opinion as to the validity or enforceability of any provision of the Term Loan Agreement or the Notes which (i) permits the Lenders to increase the rate of interest in the event of delinquency or default if such increase would be deemed a penalty under applicable law; (ii) purports to be a waiver by Borrower of any right or benefit except to the extent permitted by applicable law; (iii) purports to require that waivers must be in writing to the extent that an oral agreement or implied agreement by trade practice or course of conduct modifying provisions of the Term Loan Agreement or the Notes has been made; or (iv) purports to exculpate any party from its own negligent acts. We express no opinion as to the law of any jurisdiction other than the law of the Commonwealth of Pennsylvania and the federal law of the United States. For purposes of the opinion expressed in Paragraph 5 above, we have assumed, with your permission, that Illinois law is identical to Pennsylvania law in all respects. The foregoing opinion is solely for your benefit in connection with the consummation of the transaction described herein and may not be used or relied upon by you or any other Person without our express written consent for any other purpose other than (i) any Eligible Assignee that may become a Lender under the Term Loan Agreement after the date hereof and (ii) Reed Smith Shaw & McClay LLP, which may rely upon this opinion in rendering their opinion furnished pursuant to Article III of the Term Loan Agreement. The opinions given herein are as of the date hereof, and we assume no obligation to update or supplement this opinion to reflect facts or circumstances which may hereafter come to our attention or any changes in laws which may hereafter occur. Very truly yours, BALLARD SPAHR ANDREWS & INGERSOLL -4- EXHIBIT E FORM OF OPINION OF REED SMITH SHAW & McCLAY LLP ________ , 19 __ To each of the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agent, and the Co-Agents party to the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent Re: PECO Energy Company ------------------- Ladies and Gentlemen: We have acted as counsel to The First National Bank of Chicago, individually and as Administrative Agent, in connection with the preparation, execution and delivery of the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Term Loan Agreement"). We are delivering this opinion pursuant to Section 3.01(a)(vi) of the Term Loan Agreement. Unless otherwise defined herein, terms defined in the Term Loan Agreement are used herein as therein defined. In that connection, we have examined (i) counterparts of the Term Loan Agreement, executed by the Borrower, the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agent, and the Co-Agents, (ii) the Notes, executed by the Borrower, and (iii) the other documents listed on Exhibit A hereto, including the opinion of Ballard Spahr Andrews & Ingersoll, counsel to the Borrower (the "Opinion"), furnished to the Administrative Agent pursuant to Section 3.01(a) of the Term Loan Agreement. In our examination of the documents referred to above, we have assumed the authenticity of all such documents submitted to us as originals, the genuineness of all signatures, the due authority of the parties executing such documents and the conformity to the originals of all such documents submitted to us as copies. We have also assumed that the Banks, the Administrative Agent, the Documentation Agent, the Syndication Agent, the Arrangers, the Co-Agents and the Lead Managers have duly executed and delivered, with all necessary power and authority (corporate and otherwise), the Term Loan Agreement. As to matters of fact, we have relied solely upon the documents we have examined. Based upon the foregoing, we are of the opinion that, while we have not independently considered the matters covered by the Opinion to the extent necessary to enable us to express the conclusions stated therein, each of the Opinion and the other documents listed in Exhibit A hereto are substantially responsive to the corresponding requirements set forth in Section 3.01 of the Term Loan Agreement pursuant to which the same have been delivered. Please note that Richard H. Glanton, Esquire, a partner in this firm, is a director of PECO Energy Company. We have rendered and continue to render legal services to PECO Energy Company. The foregoing opinion is solely for your benefit and may not be relied upon by any other Person other than any Person that may become a lender under the Term Loan Agreement after the date hereof. Very truly yours, KCK:BJB:RKM -2- Other Documents Certificate of the Secretary or Assistant Secretary of the Borrower pursuant to Section 3.01(a)(ii) of the Term Loan Agreement. Certificate of the Secretary or Assistant Secretary of the Borrower pursuant to Section 3.01(a)(iii) of the Term Loan Agreement. Certificate of the Chief Financial Officer, Principal Accounting Officer or Treasurer of the Borrower pursuant to Section 3.01(b)(iii) of the Term Loan Agreement. Opinion of Ballard Spahr Andrews & Ingersoll pursuant to Section 3.01(a)(v) of the Term Loan Agreement. -3- EXHIBIT F FORM OF ANNUAL AND QUARTERLY COMPLIANCE CERTIFICATE ______________________, 19__ Pursuant to the Term Loan Agreement, dated as of November 30, 1998, among PECO Energy Company, as Borrower, the banks named therein, as Banks, certain Banks specified therein, as Co-Agents, Salomon Smith Barney Inc., as Syndication Agent, The First National Bank of Chicago, as Administrative Agent, and Mellon Bank, N.A., as Documentation Agent (as amended, modified or supplemented from time to time, the "Term Loan Agreement"), the undersigned, being ______________________ of the Borrower, hereby certifies on behalf of the Borrower as follows: 1. Delivered herewith are the financial statements prepared pursuant to Section 5.01(b)(ii) and Section 5.01(b)(iii) of the Term Loan Agreement, for the fiscal ________ ended ___________, 19__. All such financial statements comply with the applicable requirements of the Term Loan Agreement. 2. Schedule I hereto sets forth in reasonable detail the information and calculations necessary to establish compliance with the provisions of Section 5.02(c) of the Term Loan Agreement as of the end of the fiscal period referred to in paragraph 1 above. 3. (Check one and only one:) __ No Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists. __ An Event of Default, or event which with notice or lapse of time or both would constitute an Event of Default, has occurred and is continuing or exists, and the document(s) attached hereto as Schedule II specify in detail the nature and period of existence of such Event of Default or such other event as well as any and all actions with respect thereto taken or contemplated to be taken by the Borrower. 4. The undersigned has personally reviewed the Term Loan Agreement, and this certificate was based on an examination made by or under the supervision of the undersigned sufficient to assure that this certificate is accurate. 5. Capitalized terms used in this certificate and not otherwise defined shall have the meanings given in the Term Loan Agreement. PECO ENERGY COMPANY By _______________________________________ Name:_____________________________________ Title:____________________________________ Date:_________________________ EX-10.14 5 EXHIBIT 10.14 AMENDMENT NO. 3 TO THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF PECO ENERGY CAPITAL, L.P. ---------------------------- This Amendment No. 3 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., a Delaware limited partnership (the "Partnership"), dated as of April 6, 1998 (this "Amendment"), is made by and among PECO Energy Capital Corp., a Delaware corporation (the "General Partner"), as general partner of the Partnership, and the Persons who are limited partners of the Partnership. WHEREAS, the General Partner and PECO Energy Company, a Pennsylvania corporation, have heretofore formed a limited partnership pursuant to the Delaware Act by filing a Certificate of Limited Partnership of the Partnership with the Secretary of State of the State of Delaware on May 23, 1994, and by entering into a Limited Partnership Agreement of the Partnership dated as of May 23, 1994 (the "Original Agreement"); WHEREAS, the Original Agreement was amended and restated in its entirety by the Amended and Restated Limited Partnership Agreement of the Partnership, dated as of July 25, 1994, and was further amended by Amendment No. 1, dated as of October 20, 1995 and by Amendment No. 2, dated as of March 1, 1996 (as amended, the "Partnership Agreement"); WHEREAS, the parties hereto desire to amend the Partnership Agreement as described herein; and WHEREAS, this Amendment does not adversely affect the powers, preferences or special rights of any series of Preferred Partner Interests. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree to amend the Partnership Agreement as follows: ARTICLE I - AMENDMENTS ---------------------- 1.1 The first sentence of Section 13.02(a)(i) of the Partnership Agreement is hereby amended and restated as follows: The Preferred Partners shall be entitled to receive, when, as and if declared by the General Partner out of funds held by the Partnership to the extent that the Partnership has cash on hand sufficient to permit such payments and funds legally available therefor, cumulative cash distributions at a rate per annum established by the General Partner, calculated on the basis of a 360-day year consisting of twelve (12) months of thirty (30) days each, and for any shorter period, distributions will be computed on the basis of the actual number of days elapsed in such period, and payable in United States dollars, in arrears, with a payment frequency determined by the General Partner at the time of issuance. 1.2 The first sentence of Section 13.02(b)(ii) of the Partnership Agreement is hereby amended by deleting the word "monthly" contained therein. 1.3 The second sentence of the first paragraph of Section 13.02(d) of the Partnership Agreement is hereby amended and restated as follows: If (i) the Partnership fails to pay distributions in full on any series of Preferred Partner Interests for eighteen (18) consecutive months; (ii) a default under the Indenture occurs and is continuing; or (iii) PECO is in default on any of its payment or other obligations under the Guarantee, then the holders of the Preferred Partner Interests, acting as a single class, will be entitled, by a vote of the majority of the aggregate stated liquidation preference of outstanding Preferred Partner Interests, to appoint and authorize a special representative (the "Special Representative") to enforce the Partnership's creditor rights under the Subordinated Debentures and the Indenture against PECO and enforce the obligations undertaken by PECO under the Guarantee, including, after failure to pay distributions for sixty (60) consecutive months, to declare and pay distributions on such series of Preferred Partner Interests, the General Partner agreeing to execute and deliver such documents as may be necessary, appropriate or convenient for the Special Representative to enforce such rights and obligations. 1.4 The third paragraph of Section 13.02(d) of the Partnership Agreement is hereby amended by (i) deleting the words "monthly distribution periods" contained in the third (3rd) line therein and substituting therefor the word "months", and (ii) deleting the word "monthly" contained in the seventh (7th) line therein. 2 ARTICLE II - MISCELLANEOUS -------------------------- 2.1 Capitalized Terms. Capitalized terms used but not otherwise defined herein shall have the meanings assigned to them in the Partnership Agreement. 2.2 Full Force and Effect. Except to the extent modified hereby, the Partnership Agreement shall remain in full force and effect. 2.3 Successors and Assigns. This Amendment shall be binding upon, and shall enure to the benefit of, the parties hereto and their respective successors and assigns. 2.4 Counterparts. This Amendment may be executed in counterparts, all of which together shall constitute one agreement binding on all parties hereto, notwithstanding that all such parties are not signatories to the original or same counterpart. 2.5 Governing Law. This Amendment shall be interpreted in accordance with the laws of the State of Delaware (without regard to conflict of law principles) with all rights and remedies being governed by such laws. GENERAL PARTNER: PECO ENERGY CAPITAL CORP. By:/s/ J. Barry Mitchell ------------------------------------------- Name: J. Barry Mitchell Title: President PREFERRED PARTNERS: All Preferred Partners now and hereafter admitted as Limited Partners of the Partnership pursuant to the Powers of Attorney now or hereafter executed in favor of, and delivered to, the General Partner. By: PECO ENERGY CAPITAL CORP. By:/s/ J. Barry Mitchell ------------------------------------------- Name: J. Barry Mitchell Title: President 3 EX-10.16 6 EXHIBIT 10.16 ================================================================================ AMENDED AND RESTATED TRUST AGREEMENT OF PECO ENERGY CAPITAL TRUST III PECO ENERGY CAPITAL, L.P., as Grantor and FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee Dated as of April 6, 1998 ================================================================================ TABLE OF CONTENTS Page ---- ARTICLE I DEFINITIONS ARTICLE II CONTINUATION OF TRUST SECTION 2.01. Continuation of Trust ....................................... 4 SECTION 2.02. Trust Account ............................................... 5 SECTION 2.03. Title to Trust Property ..................................... 5 SECTION 2.04. Situs of Trust .............................................. 5 SECTION 2.05. Powers of Trustee Limited ................................... 5 SECTION 2.06. Liability of Holders of Capital Securities .................. 5 ARTICLE III FORM OF CAPITAL SECURITIES, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF CAPITAL SECURITIES SECTION 3.01. Form and Transferability of Capital Securities .............. 6 SECTION 3.02. Issuance of Capital Securities .............................. 7 SECTION 3.03. Registration, Transfer and Exchange of Capital Securities .......................................... 7 SECTION 3.04. Lost or Stolen Capital Securities, Etc. ..................... 8 SECTION 3.05. Cancellation and Destruction of Surrendered Capital Securities .......................................... 8 SECTION 3.06. Surrender of Capital Securities and Withdrawal of Preferred Securities .......................... 9 SECTION 3.07. Redeposit of Preferred Securities ........................... 10 SECTION 3.08. Filing Proofs, Certificates and other Information ................................................. 10 ARTICLE IV DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF CAPITAL SECURITIES SECTION 4.01. Distributions of Semiannual Distributions on Preferred Securities ..................................... 11 SECTION 4.02. Redemptions of Preferred Securities ......................... 11 SECTION 4.03. Distributions in Liquidation of Grantor ..................... 12 SECTION 4.04. Fixing of Record Date for Holders of Capital Securities .................................................. 13 SECTION 4.05. Payment of Distributions .................................... 13 SECTION 4.06. Special Representative and Voting Rights .................... 13 SECTION 4.07. Changes Affecting Preferred Securities and Reclassifications, Recapitalizations, Etc. .................. 14 ARTICLE V THE GUARANTEE SECTION 5.01. The Guarantee ............................................... 15 i Page ---- ARTICLE VI THE TRUSTEE SECTION 6.01. Eligibility ................................................. 15 SECTION 6.02. Obligations of the Trustee .................................. 16 SECTION 6.03. Resignation and Removal of the Trustee; Appointment of Successor Trustee ............................ 18 SECTION 6.04. Corporate Notices and Reports ............................... 19 SECTION 6.05. Status of Trust ............................................. 19 SECTION 6.06. Appointment of Grantor to File on Behalf of Trust ....................................................... 19 SECTION 6.07. Indemnification by the General Partner ...................... 20 SECTION 6.08. Fees, Charges and Expenses .................................. 20 SECTION 6.09. Appointment of Co-Trustee or Separate Trustee ............... 20 ARTICLE VII AMENDMENT AND TERMINATION SECTION 7.01. Supplemental Trust Agreement ................................ 22 SECTION 7.02. Termination ................................................. 22 ARTICLE VIII MERGER, CONSOLIDATION, ETC. OF GRANTOR SECTION 8.01. Limitation on Permitted Merger Consolidation, Etc. of Grantor ............................................. 23 ARTICLE IX MISCELLANEOUS SECTION 9.01. Counterparts ................................................ 23 SECTION 9.02. Exclusive Benefits of Parties ............................... 24 SECTION 9.03. Invalidity of Provisions .................................... 24 SECTION 9.04. Notices ..................................................... 24 SECTION 9.05. Trustee's Agents ............................................ 25 SECTION 9.06. Holders of Capital Securities Are Parties ................... 25 SECTION 9.07. Governing Law ............................................... 25 SECTION 9.08. Headings .................................................... 25 SECTION 9.09. Capital Securities Non-Assessable and Fully Paid ............ 25 SECTION 9.10. No Preemptive Rights ........................................ 25 ii AMENDED AND RESTATED TRUST AGREEMENT AMENDED AND RESTATED TRUST AGREEMENT, dated as of April 6, 1998 (as amended from time to time, this "Trust Agreement") is among PECO ENERGY CAPITAL, L.P., a Delaware limited partnership, as grantor (the "Grantor"), FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as trustee (the "Trustee"), and joined in by PECO ENERGY CAPITAL CORP., a Delaware corporation and the general partner of the Grantor, not as a grantor, trustee or beneficiary but solely for the purposes stated herein (the "General Partner"). W I T N E S S E T H: WHEREAS, the Trustee and the Grantor established the Trust (as defined below) under the Delaware Business Trust Act (12 Del. C. ss. 3801, et seq.) (as amended from time to time, the "Business Trust Act"), pursuant to a Trust Agreement, dated as of March 13, 1998 (the "Original Trust Agreement"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on March 13, 1998; and WHEREAS, the Trustee and the Grantor hereby desire to continue the Trust and to amend and restate in its entirety the Original Trust Agreement; and WHEREAS, the Trust proposes to issue Capital Securities each representing a 7.38% Cumulative Preferred Security, Series D, representing a limited partner interest of the Grantor (the "Preferred Securities"); and WHEREAS, interests in the Trust are to be evidenced by Capital Security certificates executed by the Trustee in accordance with this Trust Agreement, which are to be delivered to the Holders; NOW, THEREFORE, in consideration of the premises contained herein and intending to be legally bound hereby, it is agreed by and among the parties hereto to amend and restate in its entirety the Original Trust Agreement as follows: ARTICLE I DEFINITIONS The following definitions shall apply to the respective terms (in the singular and plural forms of such terms) used in this Trust Agreement and the Capital Securities: "Affiliate" of any specified Person means any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly whether through the ownership of voting securities, by contract or otherwise, and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Business Day" means any day other than a day on which banking institutions in the City of New York or the State of Delaware are closed for business. "Business Trust Act" shall have the meaning set forth in the recitals to this Trust Agreement. "Capital Security" shall mean a Capital Trust Pass-through Security issued hereunder representing an interest in the Trust equal to and representing a Preferred Security and evidenced by a certificate executed by the Trustee pursuant to Article III. "Commission" shall have the meaning set forth in Section 6.05 of this Trust Agreement. "Corporate Office" means the office of the Trustee at which at any particular time its business in respect of matters governed by this Trust Agreement shall be administered, which at the date of this Trust Agreement is located at 1 Rodney Square, 920 King Street, First Floor, Wilmington, Delaware 19801. "DTC" means the Depository Trust Company or any successor thereto. "Exchange" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "Exchange Act" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "Exchange Act Reports" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "General Partner" means PECO Energy Capital Corp., a Delaware corporation, as general partner of the Grantor, and any successor thereto pursuant to the terms of the Partnership Agreement. "Grantor" means PECO Energy Capital, L.P., a Delaware limited partnership, and its successors. "Guarantee" means the Payment and Guarantee Agreement dated as of April 6, 1998, as amended from time to time with respect to the Preferred Securities delivered by PECO Energy to the Grantor. "Holder" means the Person in whose name a certificate representing one or more Capital Securities is registered on the Register maintained by the Registrar for such purposes. "Partnership Agreement" means the Amended and Restated Limited Partnership Agreement of the Grantor dated as of July 25, 1994, as amended from time to time, together with any Action (as defined in the Partnership Agreement) established by the General Partner. "Paying Agent" means the Person from time to time acting as Paying Agent as provided in Section 4.05 of this Trust Agreement. "PECO Energy" means PECO Energy Company, a Pennsylvania corporation. "Person" means any individual, general partnership, limited partnership, corporation, limited liability company, joint venture, trust, business trust, cooperative or association and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits. "Preferred Securities" means the 7.38% Cumulative Preferred Securities, Series D, representing limited partner interests of the Grantor, or any Successor Securities issued to the Trust and held by the Trustee (unless withdrawn under Section 3.06) from time to time under this Trust Agreement for the benefit of the Holders. "Redemption Date" shall have the meaning set forth in Section 4.02 of this Trust Agreement. "Register" shall have the meaning set forth in Section 3.03 of this Trust Agreement. "Registrar" shall mean any bank or trust company appointed to register Capital Security certificates and to register transfers thereof as herein provided. "Special Representative" shall have the meaning set forth in Section 13.02(d) of the Partnership Agreement. "Successor Securities" shall have the meaning set forth in Section 13.02(e) of the Partnership Agreement. "Trust" means the trust governed by this Trust Agreement. "Trust Agreement" shall mean this Amended and Restated Trust Agreement, as the same may be amended, modified or supplemented from time to time. "Trust Estate" means all right, title and interest of the Trust in and to the Preferred Securities (including any Successor Securities), and all distributions and payments with respect thereto, including payments by PECO Energy under the Guarantee. "Trust Estate" shall not include any amounts paid or payable to the Trustee pursuant to this Trust Agreement, including, without limitation, fees, expenses and indemnities. "Trustee" shall mean First Union Trust Company, National Association, a national association, in its capacity as Trustee and not in its individual capacity and any successor as trustee hereunder. "1933 Act Registration Statement" shall have the meaning set forth in Section 6.06 to this Trust Agreement. "1934 Act Registration Statement" shall have the meaning set forth in Section 6.06 to this Trust Agreement. ARTICLE II CONTINUATION OF TRUST SECTION 2.01. Continuation of Trust. (a) The Trust continued hereby shall be known as "PECO Energy Capital Trust III." The Trust exists for the sole purpose of issuing Capital Securities representing the Preferred Securities held by the Trust and performing functions directly related thereto. The Grantor hereby delivers to the Trustee for deposit in the Trust a certificate representing 78,105 Preferred Securities for the benefit of the Holders. Each Holder is intended by the Grantor to be the beneficial owner of the number of Preferred Securities represented by the Capital Securities held by such Holder, not to hold an undivided interest in all of the Preferred Securities. To the fullest extent permitted by law, without the need for any other action of any Person, including the Trustee and any other Holder, each Holder shall be entitled to enforce in the name of the Trust the Trust's rights under the Preferred Securities represented by the Capital Securities held by such Holder and any recovery on such an enforcement action shall belong solely to such Holder who brought the action, not to the Trust, Trustee or any other Holder individually or to Holders as a group. Subject to Section 7.02, this Trust shall be irrevocable. (b) The Trustee hereby acknowledges receipt of the Preferred Securities, registered in the name of the Trust, and its acceptance on behalf of the Trust of the Preferred Securities, and declares that the Trust shall hold the Preferred Securities (including any Successor Securities) for the benefit of the Holders. SECTION 2.02. Trust Account. The Trustee shall open an account entitled "PECO Energy Capital Trust III - Trust Account." All funds received by the Trustee on behalf of the Trust from the Preferred Securities or pursuant to Article V will be deposited in such account by the Trustee until distributed as provided in Article IV. SECTION 2.03. Title to Trust Property. Legal title to all of the Trust Estate shall be vested at all times in the Trust. SECTION 2.04. Situs of Trust. The situs of the Trust shall be in Wilmington, Delaware. The Trust's bank account shall be maintained with a bank in the State of Delaware. The Trustee shall cause to be maintained the books and records of the Trust at the Corporate Office. The Trust Estate shall be held in the State of Delaware. Notwithstanding the foregoing, the Trustee may transfer such of the books and records of the Trust to a co-trustee appointed pursuant to Section 6.09 or to such agents as it may appoint in accordance with the Section 9.05 hereof, as shall be reasonably necessary (and for so long as may be reasonably necessary) to enable such co-trustee or agents to perform the duties and obligations for which such co-trustee or agents may be so employed. SECTION 2.05. Powers of Trustee Limited . The Trustee shall have no power to create, assume or incur indebtedness or other liabilities in the name of the Trust. The Trustee shall have full power to conduct the business of the Trust of holding the Preferred Securities for the Holders and taking the other actions provided by this Trust Agreement. SECTION 2.06. Liability of Holders of Capital Securities. With respect to the Trust, Holders of Capital Securities shall be entitled to the same limitation of personal liability to which stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware are extended. ARTICLE III FORM OF CAPITAL SECURITIES, EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF CAPITAL SECURITIES SECTION 3.01. Form and Transferability of Capital Securities . (a) Except as otherwise required by DTC, Capital Securities shall be evidenced by certificates engraved or printed or lithographed with steel-engraved borders and underlying tint in substantially the form set forth in Exhibit A annexed to this Trust Agreement, with the appropriate insertions, modifications and omissions, as hereinafter provided. (b) Certificates evidencing Capital Securities shall be executed by the Trustee by the manual signature of a duly authorized signatory of the Trustee, provided, however, that such signature may be a facsimile if a Registrar (other than the Trustee) shall have countersigned the Capital Security by manual signature of a duly authorized signatory of the Registrar. No certificate evidencing one or more Capital Securities shall be entitled to any benefit under this Trust Agreement or be valid or obligatory for any purpose unless it shall have been executed as provided in the preceding sentence. The Registrar shall record on the Register each Capital Security certificate executed as provided above and delivered as hereinafter provided. (c) Certificates evidencing Capital Securities shall be in denominations of any whole number of Preferred Securities. All Capital Security certificates shall be dated the date of their execution or countersignature. (d) Certificates evidencing Capital Securities may be endorsed with or have incorporated in the text thereof such legends or recitals or changes not inconsistent with the provisions of this Trust Agreement as may be required by the Trustee or required to comply with any applicable law or regulation or with the rules and regulations of any securities exchange upon which the Capital Securities may be listed or to conform with any usage with respect thereto. (e) Title to any Capital Security certificate that is properly endorsed or accompanied by a properly executed instrument of transfer or endorsement shall be transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until the transfer shall be registered on the Register as provided in Section 3.03, the Trust, the Trustee, the Registrar and the Grantor may, notwithstanding any notice to the contrary, treat the Holder thereof at such time as the absolute owner thereof for the purpose of determining the Person entitled to distributions or to any notice provided for in this Trust Agreement and for all other purposes. SECTION 3.02. Issuance of Capital Securities . Upon receipt by the Trustee on behalf of the Trust of a certificate or certificates for the Preferred Securities, subject to the terms and conditions of this Trust Agreement, the Trustee, on behalf of the Trust, shall execute and deliver to DTC one or more certificates evidencing the Capital Securities in the name of DTC's nominee, who shall thereupon be the initial Holder of Capital Securities. SECTION 3.03. Registration, Transfer and Exchange of Capital Securities . The Trustee shall cause a Register (the "Register") to be kept at the office of the Registrar in which, subject to such reasonable regulations as the Trustee and the Registrar may prescribe, the Trustee shall provide for the registration of Capital Security certificates and of transfers and exchanges of Capital Security certificates as herein provided. The Grantor hereby appoints First Union Trust Company, National Association as the Registrar. The Registrar shall also act as transfer agent. The Grantor may remove the Registrar and, upon removal or resignation of the Registrar, appoint a successor Registrar. Subject to the terms and conditions of this Trust Agreement, the Registrar shall register the transfers on the Register from time to time of Capital Security certificates upon any surrender thereof by the Holder in person or by a duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, together with evidence of the payment of any transfer taxes as may be required by law. Upon such surrender, the Trustee shall execute a new Capital Security certificate representing the same number of Preferred Securities in accordance with Section 3.01(b) and deliver the same to or upon the order of the Person entitled thereto. At the option of a Holder, Capital Security certificates may be exchanged for other Capital Security certificates representing the same number of Preferred Securities. Upon surrender of a Capital Security certificate at the office of the Registrar or such other office as the Trustee may designate for the purpose of effecting an exchange of Capital Security certificates, subject to the terms and conditions of this Trust Agreement, the Trustee shall execute and deliver a new Capital Security certificate representing the same number of Preferred Securities as the Capital Security certificate surrendered. As a condition precedent to the registration of the transfer or exchange of any Capital Security certificate, the Registrar may require (i) production of proof satisfactory to it as to the identity and genuineness of any signature; and (ii) compliance with such regulations, if any, as the Trustee or the Registrar may establish not inconsistent with the provisions of this Trust Agreement. No service charge shall be made to a Holder of Capital Securities for any registration of transfer or exchange of Capital Security certificates, but the Trustee or the Registrar shall require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Capital Security certificates. Neither the Trustee nor the Registrar shall be required (a) to register the transfer of or exchange any Capital Security certificate for a period beginning at the opening of business ten days preceding any selection of Capital Securities to be redeemed and ending at the close of business on the day of the mailing a notice of redemption of Capital Securities or (b) to register the transfer of or exchange of Capital Securities called or being called for redemption in whole or in part, except as provided in Section 4.02. SECTION 3.04. Lost or Stolen Capital Securities, Etc. In case any Capital Security certificate shall be mutilated or destroyed or lost or stolen and in the absence of notice to the Trustee that such Capital Security has been acquired by a protected purchaser (as such term is used in Section 8-405(a)(1) of the Delaware Uniform Commercial Code), the Trustee shall execute and deliver a Capital Security certificate of like form and tenor in exchange and substitution for such mutilated Capital Security certificate or in lieu of and in substitution for such destroyed, lost or stolen Capital Security certificate, provided, however, that the Holder thereof provides the Trustee with (i) evidence satisfactory to the Trustee of such destruction, loss or theft of such Capital Security certificate, of the authenticity thereof and of his ownership thereof, (ii) reasonable indemnification satisfactory to the Trustee and (iii) payment of any expense (including fees, charges and expenses of the Trustee) in connection with such execution and delivery. Any duplicate Capital Security certificate issued pursuant to this Section 3.04 shall constitute complete and indefeasible evidence of beneficial ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Capital Security certificate shall be found at any time. SECTION 3.05. Cancellation and Destruction of Surrendered Capital Securities. All Capital Security certificates surrendered to the Trustee shall be cancelled by the Trustee. Except as prohibited by applicable law or regulation, at any time after six years from the date of surrender of any Capital Security certificate, the Trustee may destroy such cancelled Capital Security certificates. SECTION 3.06. Surrender of Capital Securities and Withdrawal of Preferred Securities . Any Person who is the beneficial owner (an "Owner") of the Capital Securities represented by the global certificate held by DTC or a successor clearing agency (the "Clearing Agency") or, if a participant in the Clearing Agency is not the Owner, then as reflected in the records of a Person maintaining an account with such Clearing Agency (directly or indirectly), in accordance with the rules of such Clearing Agency, may withdraw all, but not less than all, of the Preferred Securities represented by such Capital Securities by providing a written notice and an agreement to be bound by the terms of the Partnership Agreement to the Trustee at the Corporate Office or at such other office as the Trustee may designate for such withdrawals, all in form satisfactory to the Trustee, in its sole discretion. Within a reasonable period after such request has been properly made, (i) the Trustee shall instruct DTC to reduce the number of Capital Securities represented by the global certificate held by DTC by an amount equal to the number of Capital Securities to be so withdrawn by the Owner, (ii) the Grantor shall issue to the Owner a certificate, in form substantially similar to that certificate attached hereto as Exhibit A to the Partnership Agreement, representing the number of Preferred Securities so withdrawn and (iii) the Trustee, on behalf of the Trust, shall reduce the number of Preferred Securities represented by the global certificate held by the Trustee by a like amount; provided, that the Grantor shall not issue any fractional number of Preferred Securities. If an Owner of Capital Securities withdraws Preferred Securities in accordance with this Section 3.06, such Owner of Capital Securities shall cease to be an Owner. The Preferred Securities will only be issued by the Grantor in certificated form. An Owner who wishes to withdraw Preferred Securities in accordance with this Section 3.06 will be required to provide the Grantor with a completed Form W-8 or such other documents or information as are requested by the Grantor for tax reporting purposes and thereafter shall be admitted to the Grantor as a preferred partner of the Grantor upon such Owner's receipt of a certificate evidencing such Preferred Securities registered in such Owner's name. The Trustee shall deliver the Preferred Securities represented by the Capital Securities surrendered to the Owner in accordance with this Section 3.06 at the Corporate Office, except that, at the request, risk and expense of the Owner and for the account of the Owner thereof, such delivery may be made at such other place as may be designated by such Owner. Notwithstanding anything in this Section 3.06 to the contrary, if the Preferred Securities represented by Capital Securities have been called for redemption in accordance with the Partnership Agreement, no Owner of such Capital Securities may withdraw any or all of the Preferred Securities represented by such Capital Securities. SECTION 3.07. Redeposit of Preferred Securities. Subject to the terms and conditions of this Trust Agreement, any holder of Preferred Securities may redeposit withdrawn Preferred Securities under this Trust Agreement by delivery to the Trustee of a certificate or certificates for the Preferred Securities to be deposited, properly endorsed or accompanied, if required by the Trustee, by a properly executed instrument of transfer or endorsement in form satisfactory to the Trustee and in compliance with the terms of the Partnership Agreement, together with all such certifications as may be required by the Trustee in its sole discretion and in accordance with the provisions of this Trust Agreement. Within a reasonable period after such deposit is properly made, the Trustee shall instruct DTC to increase the number of Capital Securities represented by the global certificate held by DTC by an amount equal to the Preferred Securities to be deposited. The Capital Securities will not be issued in certificated form. The Trustee will only accept the deposit of such Preferred Securities upon payment by such holder of Preferred Securities to the Trustee of all taxes and other governmental charges and any fees payable in connection with such deposit and the transfer of the deposited Preferred Securities. If required by the Trustee, Preferred Securities presented for deposit at any time shall also be accompanied by an agreement or assignment, or other instrument satisfactory to the Trustee, that will provide for the prompt transfer to the Trustee or its nominee of any distribution or other right that any Person in whose name the Preferred Securities are registered may thereafter receive upon or in respect of such deposited Preferred Securities, or in lieu thereof such agreement of indemnity or other agreement as shall be satisfactory to the Trustee. SECTION 3.08. Filing Proofs, Certificates and Other Information. Any Person presenting Preferred Securities for redeposit in accordance with Section 3.07 may be required from time to time to file such proof of residence or other information, to execute such Preferred Security certificates and to make such representations and warranties as the Trustee may reasonably deem necessary or proper. The Trustee may withhold or delay the delivery of any Capital Security or Capital Securities, the transfer, redemption or exchange of any Capital Security or Capital Securities or the making of any distribution until such proof or other information is filed, such certificates are executed or such representations and warranties are made. ARTICLE IV DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF CAPITAL SECURITIES SECTION 4.01. Distributions of Semiannual Distributions on Preferred Securities. Whenever the Trustee shall receive any cash distribution representing a semiannual distribution on the Preferred Securities (whether or not distributed by the Grantor on the regular semiannual distribution date therefor) or payment under the Guarantee in respect thereof pursuant to Article V of this Agreement, the Trustee acting directly or through any Paying Agent shall distribute to Holders of Capital Securities on the record date fixed pursuant to Section 4.04, such amounts in proportion to the respective numbers of Preferred Securities represented by the Capital Securities held by such Holders. SECTION 4.02. Redemptions of Preferred Securities. Whenever the Grantor shall elect or is required to redeem Preferred Securities in accordance with the Partnership Agreement, it shall (unless otherwise agreed in writing with the Trustee) give the Trustee not less than 40 days' prior notice thereof. The Trustee shall, as directed by the Grantor, mail, or cause to be mailed, first-class postage prepaid, notice of the redemption of Preferred Securities and the proposed simultaneous redemption of the Capital Securities to be redeemed in connection herewith, not less than 30 and not more than 60 days prior to the date fixed for redemption (the "Redemption Date") of the Capital Securities. Such notice shall be mailed to the Holders of the Capital Securities to be redeemed, at the addresses of such Holders as the same appear on the records of the Registrar. No defect in the notice of redemption or in the mailing or delivery thereof or publication of its contents shall affect the validity of the redemption proceedings. The Grantor shall provide the Trustee with such notice, and each such notice shall state: the Redemption Date; the redemption price at which the Capital Securities and the Preferred Securities are to be redeemed; that all outstanding Capital Securities are to be redeemed or, in the case of a redemption of fewer than all outstanding Capital Securities in connection with a partial redemption of Preferred Securities, the number of such Capital Securities to be so redeemed; the place or places where Capital Securities to be redeemed are to be surrendered for redemption; and specifying the CUSIP number assigned to the Capital Securities. In case fewer than all the outstanding Capital Securities are to be redeemed, the Capital Securities to be redeemed shall be selected by lot or pro rata (as nearly as may be practicable without creating fractional shares) or by any other equitable method determined by the Trustee. The Grantor agrees that if a partial redemption of the Preferred Securities would result in a delisting of the Capital Securities from any national exchange on which the Capital Securities are then listed, the Grantor will only redeem the Preferred Securities in whole. On the date of any such redemption of Preferred Securities, provided that the Grantor (or PECO Energy pursuant to the Guarantee) shall then have deposited with the Trust the aggregate amount payable upon redemption of the Preferred Securities to be redeemed, the Trustee, on behalf of the Trust, shall redeem (using the funds so deposited with it) Capital Securities representing the same number of Preferred Securities redeemed by the Grantor. Notice having been mailed by the Trustee as aforesaid, from and after the Redemption Date (unless the Grantor shall have failed to redeem the Preferred Securities to be redeemed by it as set forth in the Grantor's notice provided for in this Section 4.02 and PECO Energy shall have failed to pay the redemption price of the Preferred Securities under the Guarantee), the Capital Securities called for redemption shall be deemed no longer to be outstanding and all rights of the Holders of Capital Securities (except the right to receive the redemption price in cash upon surrender of Capital Securities) shall cease and terminate. Upon surrender in accordance with said notice of the Capital Securities endorsed or assigned for transfer, if the Trustee shall so require, the Holders of such Capital Securities shall receive for each such Capital Security an amount equal to the redemption price for each Preferred Security, in addition to accrued and unpaid distributions thereon to the date fixed for redemption. If fewer than all of the Capital Securities of any Holder are called for redemption, the Registrar will deliver to the Holder of such Capital Securities upon surrender of the certificate evidencing such Capital Securities a new certificate evidencing the number of Capital Securities not called for redemption. SECTION 4.03. Distributions in Liquidation of Grantor. Upon and to the extent of receipt by the Trust of any distribution from the Grantor upon the liquidation of the Grantor or any payment under the Guarantee in respect thereof pursuant to Article V of this Trust Agreement, after satisfaction of creditors of the Trust as required by applicable law, the Trustee shall distribute to the Holders of Capital Securities on the record date fixed pursuant to Section 4.04, such amounts in proportion to the respective number of Preferred Securities which were represented by the Capital Securities held by such Holders. SECTION 4.04. Fixing of Record Date for Holders of Capital Securities. Whenever any distribution (other than upon any redemption) shall become payable, or whenever the Trustee shall receive notice of any meeting at which holders of Preferred Securities are entitled to vote or of which holders of Preferred Securities are entitled to notice, the Trustee shall in each such instance fix a record date (which shall be the same date as the record date fixed by the General Partner with respect to the Preferred Securities, of which the General Partner shall promptly inform the Trustee) for the determination of the Holders of Capital Securities who shall be entitled (i) to receive such distribution, and (ii) to receive notice of, and to give instructions for the exercise of voting rights at, any such meeting. SECTION 4.05. Payment of Distributions. The Grantor shall appoint one or more Paying Agents for the purpose of paying semiannual distributions on, the redemption price of, and distributions in liquidation on, the Capital Securities. The Grantor hereby appoints First Union Trust Company, National Association to act as Paying Agent and designates the Wilmington office of the Paying Agent as the place of payment of the redemption price of and of distributions in liquidation on the Capital Securities. The aforesaid appointment and designation shall remain in effect until changed by the Grantor. Payments of semiannual distributions on the Capital Securities shall be payable by wire transfer into the accounts of or check mailed to the addresses of the Holders thereof on the record date therefor. Payments of the redemption price of Capital Securities and distributions in liquidation shall be made upon surrender of such Capital Securities at the office of the Paying Agent. The Grantor shall pay semiannual distributions on, the redemption price of, and distributions in liquidation on, the Preferred Securities directly to the Paying Agent for distribution to the Holders in accordance with the terms of this Trust Agreement. SECTION 4.06. Special Representative and Voting Rights. (a) If the holders of the Preferred Partner Interests (as defined in the Partnership Agreement), acting as a single class, are entitled to appoint and authorize a Special Representative pursuant to Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Capital Securities of such right, request direction of each Holder of a Capital Security as to the appointment of a Special Representative and vote the Preferred Securities represented by such Capital Security in accordance with such direction. If the General Partner fails to convene a general meeting of the Partnership as required in Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Capital Securities and, if so directed by the Holders of Capital Securities representing Preferred Securities constituting at least 10% of the aggregate stated liquidation preference of the outstanding Preferred Partner Interests (as defined in the Partnership Agreement) shall convene such meeting. (b) Upon receipt of notice of any meeting at which the Holders of Preferred Securities are entitled to vote, the Trustee shall, as soon as practicable thereafter, mail to the Holders of Capital Securities a notice, which shall be provided by the General Partner and which shall contain (i) such information as is contained in such notice of meeting, (ii) a statement that the Holders of Capital Securities at the close of business on a specified record date fixed pursuant to Section 4.04 will be entitled, subject to any applicable provision of law or of the Partnership Agreement, to instruct the Trustee as to the exercise of the voting rights pertaining to the amount of Preferred Securities represented by their respective Capital Securities, and (iii) a brief statement as to the manner in which such instructions may be given. Upon the written request of a Holder of a Capital Security on such record date, the Trustee shall vote or cause to be voted the number of Preferred Securities represented by the Capital Securities evidenced by such Capital Security in accordance with the instructions set forth in such request. The Grantor hereby agrees to take all reasonable action that may be deemed necessary by the Trustee in order to enable the Trustee to vote such Preferred Securities or cause such Preferred Securities to be voted. In the absence of specific instructions from the Holder of a Capital Security, the Trustee will abstain from voting to the extent of the Preferred Securities represented by such Capital Security. SECTION 4.07. Changes Affecting Preferred Securities and Reclassifications, Recapitalizations, Etc. Upon any consolidation, amalgamation, merger, replacement or conveyance, transfer or lease by the Partnership of its properties and assets as an entirety in accordance with Section 13.02(e) of the Partnership Agreement, the Trustee shall, upon the instructions of the Grantor, treat any Successor Securities or other property (including cash) that shall be received by the Trustee in exchange for or upon conversion of or in respect of the Preferred Securities as part of the Trust Estate, and Capital Securities then outstanding shall thenceforth represent the proportionate interests of Holders thereof in the new deposited property so received in exchange for or upon conversion or in respect of such Preferred Securities. ARTICLE V THE GUARANTEE SECTION 5.01. The Guarantee . In connection with the issuance of the Preferred Securities, PECO Energy has delivered to the General Partner the Guarantee for the benefit of the holders of the Preferred Securities. If the General Partner or the Grantor receives any payment under the Guarantee, the General Partner or the Grantor, as the case may be, will immediately transfer such payment to the Trustee. All rights to enforce the Guarantee shall remain in the General Partner, except to the extent set forth in Section 2.04 of the Guarantee. ARTICLE VI THE TRUSTEE SECTION 6.01. Eligibility. This Trust Agreement shall at all times have a Trustee which is a bank that has its principal place of business in the State of Delaware and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of conditions at least annually, pursuant to law or to the requirements of Federal, State, Territorial or District of Columbia supervising or examining authority, then for the purposes of this Section 6.01, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of conditions so published. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.01, the Trustee shall resign immediately in the manner and with the effect specified in Section 6.03. The Trustee shall make available for inspection by Holders of Capital Securities at the Corporate Office and at such other places as it may from time to time deem advisable during normal business hours any reports and communications received from the Grantor, the General Partner or PECO Energy by the Trustee as the holder of Preferred Securities. Promptly upon request from time to time by the Grantor, the Trustee shall cause the Registrar to furnish to it a list, at the sole expense of the General Partner, as of a recent date, of the names, addresses and holdings of all Persons in whose names Capital Securities are registered on the Register. SECTION 6.02. Obligations of the Trustee . The Trustee does not assume any obligation nor shall it be subject to any liability under this Trust Agreement or any Capital Security to Holders of Capital Securities other than that it agrees to use good faith in the performance of such duties as are specifically assigned to the Trustee in this Trust Agreement. The Trustee shall not be under any obligation to appear in, prosecute or defend any action, suit or other proceeding with respect to Preferred Securities or Capital Securities that in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense and liability be furnished as often as may be required. The Grantor may instruct the Trustee to dissolve the Trust and distribute the Trust Estate on a pro rata basis to the Holders if the Trust, at any time, is subject to federal income tax with respect to interest received on its allocable share of interest on the Deferrable Interest Subordinated Debentures, Series D issued by PECO Energy Company received by the Grantor, the Trust is subject to more than a de minimis amount of other taxes, duties or other governmental charges or if an Investment Company Act Event shall occur and be continuing. "Investment Company Event" means that the Grantor shall have received an opinion of counsel (which may be regular counsel to PECO Energy or an affiliate but not an employee thereof) experienced in such matters to the effect that a change in law or regulation or a change in official interpretation of law or regulation by any legislative body, court, governmental agency or regulatory authority has occurred (a "Change in 1940 Act Law") to the effect that the Trust is or will be considered an "Investment Company" which is required to be registered under the Investment Company Act of 1940, which Change in 1940 Act Law becomes effective on or after the date of the issuance of the Capital Securities. In the event that the Trustee is uncertain as to application or interpretation of any provision of this Trust Agreement or must choose between alternative courses of action, the Trustee may seek the instructions of the Grantor (or the Special Representative if one has been appointed) by written notice requesting instructions. The Trustee shall take and be protected in taking such action as has been directed by the Grantor (or the Special Representative if one has been approved); provided that, if the Trustee does not receive instructions within ten days or such shorter time as is set forth in the Trustee notice, the Trustee shall be under no duty to take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the interest of the Holders. The Trustee shall not be liable to any Holder or any other party having an interest hereunder for any action or any failure to act by it in reliance upon the advice of or information from legal counsel, accountants, any Holder of a Capital Security or any other Person believed by it in good faith to be competent to give such advice or information. The Trustee may rely and shall be protected from any and all liability in acting upon any written notice, request, direction or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee, its parent, Affiliates or subsidiaries may own, buy, sell or deal in any class of securities of the Grantor, the General Partner or PECO Energy and its Affiliates and in Capital Securities or become pecuniarily interested in any transaction in which the Grantor, the General Partner or PECO Energy or its Affiliates may be interested or contract with or lend money to or otherwise act as fully or as freely as if it were not the Trustee hereunder. The Trustee may also act as transfer agent or registrar of any of the securities of the Grantor, the General Partner or PECO Energy and its Affiliates or act in any other capacity for PECO Energy or its Affiliates. The Trustee (and its officers, directors, employees and agents) makes no representation nor shall it have any liability for or responsibility with respect to the issuance of Capital Securities or as to the validity of the registration statement pursuant to which the Capital Securities are registered under the Securities Act, the Preferred Securities, the Guarantee or the Capital Securities (except for its counter-signatures thereon) or any instruments referred to therein or herein, or as to the correctness of any statement made therein or herein; provided, however, that the Trustee is responsible for its representations in this Trust Agreement. The Trustee assumes no responsibility for the correctness of the description that appears in the Capital Securities, which can be taken as a statement of the Grantor summarizing certain provisions of this Trust Agreement. Notwithstanding any other provision herein or in the Capital Securities, the Trustee makes no warranties or representations as to the validity, genuineness or sufficiency of any Preferred Securities or the Guarantee or of the Capital Securities, as to the validity or sufficiency of this Trust Agreement, as to the value of the Capital Securities or as to any right, title or interest of the Holders of Capital Securities, except that the Trustee hereby represents and warrants as follows: (i) the Trustee has been duly organized and is validly existing and in good standing under federal law, with full power, authority and legal right under such laws to execute, deliver and carry out the terms of this Trust Agreement; (ii) this Trust Agreement has been duly authorized, executed and delivered by the Trustee; and (iii) this Section 6.02 of the Trust Agreement constitutes a valid and binding obligation of the Trustee enforceable against the Trustee in accordance with its terms subject to equitable principles and laws affecting the enforcement of creditors' rights generally. SECTION 6.03. Resignation and Removal of the Trustee; Appointment of Successor Trustee. The Trustee may at any time resign as Trustee hereunder by notice of its election to do so delivered to the Grantor and the General Partner, such resignation to take effect upon the appointment of a successor trustee and its acceptance of such appointment as hereinafter provided. The Trustee may at any time be removed by the Grantor, provided that an Event of Default has not occurred and is then continuing under the Indenture dated as of July 1, 1994 between PECO Energy and First Union National Bank, as successor trustee, as supplemented from time to time, or the Guarantee, by notice of such removal delivered to the Trustee, such removal to take effect upon the appointment of a successor trustee and its acceptance of such appointment as hereinafter provided. In case at any time the Trustee acting hereunder shall resign or be removed, the Grantor shall, within 45 days after the delivery of the notice of resignation or removal, as the case may be, appoint a successor trustee, which shall be a bank or trust company, or an Affiliate of a bank or trust company, having its principal office in the State of Delaware and having a combined capital and surplus of at least $50,000,000. If a successor Trustee shall not have been appointed in 45 days, the resigning Trustee may petition a court of competent jurisdiction to appoint a successor trustee, and the expenses of such proceeding shall be borne by the General Partner. Every successor trustee shall execute and deliver to its predecessor and to the Grantor and the General Partner an instrument in writing accepting its appointment hereunder, and thereupon such successor trustee, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor and for all purposes shall be the Trustee under this Trust Agreement, and such predecessor, upon payment of all sums due it and on the written request of the Grantor, shall promptly execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder, shall duly assign, transfer and deliver all rights, title and interest in the Preferred Securities and any moneys or property held hereunder to such successor and shall deliver to such successor a list of the Holders of all outstanding Capital Securities. Any successor Trustee shall promptly mail notice of its appointment to the Holders of Capital Securities. Any Person into or with which the Trustee may be merged, consolidated or converted, or any Person succeeding to the corporate trust business of the Trustee, shall be the successor of such Trustee without the execution or filing of any document or any further act, provided such Person shall be eligible under the provisions of the immediately preceding paragraph. SECTION 6.04. Corporate Notices and Reports. The General Partner agrees that it will give timely notice to the Trustee and any Paying Agent of any record date, which record date shall become the record date with respect to the Capital Securities pursuant to Section 4.04 hereof, for the Preferred Securities and that it will deliver to the Trustee, and the Trustee will, promptly after receipt thereof, transmit to the Holders of Capital Securities, in each case at the address recorded on the Register, copies of all notices and reports (including financial statements) required by law, by the rules of any national securities exchange upon which the Capital Securities are listed or by the Partnership Agreement to be furnished to holders of Preferred Securities. Such transmission will be at the expense of the General Partner and the General Partner will provide the Trustee with such number of copies of such documents as the Trustee may reasonably request. In addition, the Trustee will transmit to the Holders of Capital Securities at the Grantor's expense such other documents as may be requested by the Grantor. SECTION 6.05. Status of Trust. It is intended that the Trust shall not be an "investment company" under the Investment Company Act of 1940, as amended. While it is expressly understood and agreed that the Trustee is acting only in a ministerial capacity hereunder, the Securities and Exchange Commission (the "Commission") has determined that as of the date hereof, the Trust is an issuer under the Federal securities laws and is thus required to sign any registration statement filed or to be filed in connection with the Capital Securities. SECTION 6.06. Appointment of Grantor to File on Behalf of Trust. The Grantor and the Trustee hereby authorize and direct the Grantor, if the Grantor deems it necessary, appropriate or convenient to do, as the sponsor of the Trust (and any of the following are hereby confirmed if such action has been taken) (i) to file with the Commission and execute, in each case on behalf of the Trust, (a) the Registration Statement on Form S-3 (the "1933 Act Registration Statement"), including any pre-effective or post-effective amendments to such 1933 Act Registration Statement (including the prospectus and the exhibits contained therein), relating to the registration under the Securities Act of 1933, as amended, of the Capital Securities of the Trust and certain other securities; (b) a Registration Statement on Form 8-A (the "1934 Act Registration Statement"), including all pre-effective and post-effective amendments thereto relating to the registration of the Capital Securities under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) any reports or other papers or documents required to be filed by, or desirable to be filed with, the Commission, under the Exchange Act ("Exchange Act Reports"); (ii) to file with the New York Stock Exchange or Philadelphia Stock Exchange (each, an "Exchange") and execute on behalf of the Trust one or more listing applications and all other applications, statements, certificates, agreements and other instruments as shall be necessary or desirable to cause the Capital Securities to be listed on any of the Exchanges; and (iii) to file and execute on behalf of the Trust such applications, reports, surety bonds, irrevocable consents, appointments of attorney for service of process and other papers and documents as shall be necessary or desirable to register the Capital Securities under the securities or "Blue Sky" laws of such jurisdictions as the Grantor, on behalf of the Trust, may deem necessary or desirable. SECTION 6.07. Indemnification by the General Partner. To the fullest extent permitted by law, the General Partner agrees to indemnify and defend the Trustee, the Registrar and any Paying Agent and their directors, officers, employees and agents against, and hold each of them harmless from, any liability, costs and expenses (including reasonable attorneys' fees) that may arise out of or in connection with its acting as the Trustee or the Registrar or Paying Agent, respectively, under this Trust Agreement and the Capital Securities, except for any liability arising out of gross negligence, bad faith or willful misconduct on the part of any such Person or Persons. SECTION 6.08. Fees, Charges and Expenses. No fees, charges or expenses of the Trustee or any Trustee's agent hereunder or of any Registrar shall be payable by any Person other than the General Partner; provided that, if the Trustee incurs fees, charges or expenses for which it is not otherwise liable under this Trust Agreement due to any action taken at the election of a Holder of Capital Securities or other Person, such Holder or other Person will be liable for such fees, charges and expenses. SECTION 6.09. Appointment of Co-Trustee or Separate Trustee. (a) Notwithstanding any other provisions of this Trust Agreement, at any time, for the purpose of meeting any legal requirements of any jurisdiction in which any property of the Trust must at the time be located, the Trustee shall have the power and may execute and deliver all instruments to appoint one or more Persons to act as co-trustee or co-trustees, or separate trustee or separate trustees, of all or any part of the Trust, and to vest in such Person or Persons, in such capacity and for the benefit of the Holders, such title to the Trust, or any part thereof, and, subject to the other provisions of this Section 6.09, such powers, duties, obligations, rights and trusts as the Trustee may consider necessary or desirable. No co-trustee or separate trustee hereunder shall be required to meet the terms of eligibility as successor trustee under Section 6.03 and no notice to the Holders of the appointment of any co-trustee or separate trustee shall be required. (b) Every separate trustee and co-trustee shall, to the extent permitted by law, be appointed and act subject to the following provisions and conditions: (i) all rights, powers, duties and obligations conferred or imposed upon and exercised or performed by the Trustee and such separate trustee or co-trustee jointly (it being understood that such separate trustee or co-trustee is not authorized to act separately without the Trustee joining in such act), except to the extent that under any laws of any jurisdiction in which any particular act or acts are to be performed, the Trustee shall be incompetent or unqualified to perform such act or acts, in which event, such rights, powers, duties and obligations (including the holding of title to the Trust or any portion thereof in any such jurisdiction) shall be exercised and performed singly by such separate trustee or co-trustee, but solely at the direction of the Trustee; (ii) no Trustee hereunder shall be personally liable by reason of any act or omission of any other trustee hereunder; and (iii) the Trustee may at any time accept the resignation of or remove any separate trustee or co-trustee. (c) Any notice, request or other writing given to the Trustee shall be deemed to have been given to each of the then separate trustees and co-trustees, as effectively as if given to each of them. Every instrument appointing any separate trustee or co-trustee shall refer to this Trust Agreement. Each separate trustee and co-trustee, upon its acceptance of the trusts conferred, shall be vested with the estates or property specified in its instrument of appointment, either jointly with the Trustee or separately, as may be provided therein, subject to all the provisions of this Trust Agreement, specifically including every provision of this Trust Agreement relating to the conduct of, affecting the liability of, or affording protection to, the Trustee. Every such instrument shall be filed with the Trustee and a copy thereof given to the Grantor. (d) Any separate trustee or co-trustee may at any time constitute the Trustee as its agent or attorney-in-fact with full power and authority, to the extent not prohibited by law, to do any lawful act under or in respect to this Trust Agreement on its behalf and in its name. If any separate trustee or co-trustee shall die, become incapable of acting, resign or be removed, all of its estates, properties, rights, remedies and trusts shall vest in and be exercised by the Trustee, to the extent permitted by law, without the appointment of a new or successor trustee. ARTICLE VII AMENDMENT AND TERMINATION SECTION 7.01. Supplemental Trust Agreement. The Grantor or the General Partner, and the Trustee may, at any time and from time to time, without the consent of the Holders, enter into one or more agreements supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another partnership, corporation or other entity to the Grantor or the General Partner and the assumption by any such successor of the covenants of the Grantor or the General Partner herein contained; or (b) to add to the covenants of the Grantor or the General Partner for the benefit of the Holders, or to surrender any right or power herein conferred upon the Grantor or the General Partner; or (c) (i) to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make any other provisions with respect to matters or questions arising under this Trust Agreement, provided that any such action taken under subsection (c)(ii) hereof shall not materially adversely affect the interests of the Holders; or (d) to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental hereto must be in writing and approved by Holders of 66-2/3% of the then outstanding Capital Securities. SECTION 7.02. Termination. The Trust Agreement shall terminate on the date that all outstanding Capital Securities have been redeemed or there has been a final distribution in respect of the Preferred Securities in connection with any liquidation, dissolution or winding up of the Grantor and such distribution has been made to the Holders of the Capital Securities. Except as provided in Section 6.07 and Section 6.08, upon termination of this Trust Agreement and the Trust in accordance with the foregoing, the respective obligations and responsibilities of the Trustee, the Grantor and the General Partner created hereby shall terminate. ARTICLE VIII MERGER, CONSOLIDATION, ETC. OF GRANTOR SECTION 8.01. Limitation on Permitted Merger Consolidation, Etc. of Grantor. The Grantor agrees that it will not consolidate, amalgamate, merge with or into, or be replaced by, or convey, transfer or lease its properties and assets substantially in their entirety to any corporation or other entity without the consent of the Holders of 66-2/3% of the Capital Securities unless permitted by Section 13.02(e) of the Partnership Agreement and (i) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities to be delisted by any national securities exchange or other organization on which the Capital Securities are then listed, (ii) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Capital Securities to be downgraded by any "nationally recognized statistical rating organization," as that term is defined by the Commission for purposes of Rule 436(g)(2) under the Securities Act of 1933, as amended, and (iii) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, PECO Energy has received an opinion of counsel (which may be regular counsel to PECO Energy or an Affiliate, but not an employee thereof) experienced in such matters to the effect that Holders of outstanding Capital Securities will not recognize any gain or loss for Federal income tax purposes as a result of the merger, consolidation, amalgamation, replacement, conveyance, transfer or lease. ARTICLE IX MISCELLANEOUS SECTION 9.01. Counterparts. This Trust Agreement may be executed by the Grantor, the Trustee and the General Partner in separate counterparts, each of which counterparts, when so executed and delivered shall be deemed an original, but all such counterparts taken together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Trust Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Trust Agreement. Copies of this Trust Agreement shall be filed with the Trustee and any Trustee's agents appointed pursuant to Section 9.05 and shall be open to inspection during business hours at the Corporate Office and the respective offices of such Trustee's agents, if any, by any Holder of a Capital Security. SECTION 9.02. Exclusive Benefits of Parties . This Trust Agreement is for the exclusive benefit of the parties hereto and the Holders of the Capital Securities and the Preferred Securities, and their respective successors hereunder, and shall not be deemed to give any legal or equitable right, remedy or claim to any other Person whatsoever. SECTION 9.03. Invalidity of Provisions. In case any one or more of the provisions contained in this Trust Agreement or in the Capital Securities should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. SECTION 9.04. Notices. Any notices to be given to the Grantor or the General Partner hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or telex or telecopier confirmed by letter, addressed to the General Partner at 1013 Centre Road, Suite 350F, Wilmington, Delaware 19805, Attention: President, or at any other place to which the General Partner may have transferred its principal executive office. Any notices to be given to the Trustee hereunder or under the Capital Securities shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or telex or telecopier confirmed by letter, addressed to the Trustee at the Corporate Office. Any notices given to any Holder of a Capital Security hereunder or under the Capital Securities shall be in writing and shall be deemed to have been duly given if personally delivered or sent by mail, or by telegram or telex or telecopier confirmed by letter, addressed to such Holder at the address of such Holder as it appears on the books of the Trustee or, if such Holder shall have timely filed with the Trustee a written request that notices intended for such Holder be mailed to some other address, at the address designated in such request. Delivery of a notice sent by mail, or by telegram or telex or telecopier shall be deemed to be effected at the time when a duly addressed letter containing the same (or a duly addressed letter confirming an earlier notice in the case of a telegram or telex or telecopier message) is deposited, postage prepaid, in a post office letter box. The Trustee may, however, act upon any telegram or telex or telecopier message received by it from or on behalf of the other parties hereof or from any Holder of a Capital Security, notwithstanding that such telegram or telex or telecopier message shall not subsequently be confirmed by letter as aforesaid. SECTION 9.05. Trustee's Agents. The Trustee may from time to time appoint agents to act in any respect for the Trustee for the purposes of this Trust Agreement. The Trustee shall have no liability for the acts or omissions of agents selected by it with due care. The Trustee will notify the General Partner prior to any such action. SECTION 9.06. Holders of Capital Securities Are Parties . Notwithstanding that Holders of Capital Securities have not executed and delivered this Trust Agreement or any counterpart thereof, the Holders of Capital Securities from time to time shall be bound by all of the terms and conditions hereof and of the Capital Securities by acceptance of delivery of Capital Securities. SECTION 9.07. Governing Law . This Trust Agreement and the Capital Securities and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, and construed in accordance with, the law of the State of Delaware without giving effect to principles of conflict of laws. SECTION 9.08. Headings . The headings of articles and sections of this Trust Agreement and in the form of the Capital Security set forth in Exhibit A hereto have been inserted for convenience only and are not to be regarded as part of this Trust Agreement or to have any bearing upon the meaning or interpretation of any provision contained herein or in the Capital Securities. SECTION 9.09. Capital Securities Non-Assessable and Fully Paid . The Holders of the Capital Securities shall not be personally liable for obligations of the Trust, the interests in the Trust represented by the Capital Securities shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever, and the Capital Securities upon delivery thereof by the Trustee pursuant to this Trust Agreement are and shall be deemed fully paid. SECTION 9.10. No Preemptive Rights . No Holder shall be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional interest in the Trust, whether now or hereafter authorized and whether issued for cash or other consideration or by way of distribution. IN WITNESS WHEREOF, the Grantor and the Trustee and the General Partner have duly executed this Trust Agreement as of the day and year first above set forth. PECO ENERGY CAPITAL, L.P. By: PECO ENERGY CAPITAL CORP., its general partner By: /s/ J. Barry Mitchell --------------------------- Name: J. Barry Mitchell Title: President FIRST UNION TRUST COMPANY, NATIONAL ASSOCIATION, as trustee By: /s/ Doris J. Kruck --------------------------- Name: Doris J. Kruck Title: Vice President The General Partner joins in this Trust Agreement solely for the purposes of obligating itself under Sections 4.04, 4.06, 6.01, 6.04, 6.07 and 6.08 of this Trust Agreement and not as grantor, trustee or beneficiary. PECO ENERGY CAPITAL CORP. By: /s/ J. Barry Mitchell --------------------------- Name: J. Barry Mitchell Title: President EXHIBIT A CAPITAL TRUST PASS-THROUGH SECURITIES OF PECO ENERGY CAPITAL TRUST III, a Delaware Business Trust, each Representing a 7.38% Cumulative Preferred Security, Series D of PECO Energy Capital, L.P. (a Delaware limited partnership) No. 1 78,105 Capital Securities First Union Trust Company, National Association, not in its individual capacity, but solely as Trustee (the "Trustee") on behalf of the above-named Trust, hereby certifies that Cede & Co. is the registered owner of 78,105 Capital Trust Pass-through Securities ("Capital Securities"), each representing a 7.38% Cumulative Preferred Security, Series D (the "Preferred Securities") of PECO Energy Capital, L.P., a Delaware limited partnership (the "Grantor"), deposited in trust by the Grantor with the Trustee pursuant to an Amended and Restated Trust Agreement of PECO Energy Capital Trust III dated as of April 6, 1998 (as amended or supplemented from time to time, the "Trust Agreement") among the Grantor, the Trustee and PECO Energy Capital Corp., the general partner of the Grantor (the "General Partner"). Subject to the terms of the Trust Agreement, the registered Holder hereof is entitled to a full interest in the same number of Preferred Securities held by the Trustee under the Trust Agreement, as are represented by the Capital Securities, including the distribution, voting, liquidation and other rights of the Preferred Securities specified in the Amended and Restated Limited Partnership Agreement of the Grantor, as amended, a copy of which is on file at the Corporate Office. 1. The Trust Agreement. The Capital Securities are issued upon the terms and conditions set forth in the Trust Agreement. The Trust Agreement (a copy of which is on file at the Corporate Office of the Trustee) sets forth the rights of Holders of Capital Securities and the rights and duties of the Trustee, the Grantor and the General Partner. The statements made herein are summaries of certain provisions of the Trust Agreement and are subject to the detailed provisions thereof, to which reference is hereby made. In the event of any conflict or discrepancy between the provisions hereof and the provisions of the Trust Agreement, the provisions of the Trust Agreement will govern. Unless otherwise expressly herein provided, all defined terms used herein shall have the meanings ascribed thereto in the Trust Agreement. 2. Enforcement of Rights; Withdrawal of Preferred Securities. To the fullest extent permitted by law, without the need for any other action of any Person, including the Trustee and any other Holder, each Holder shall be entitled to enforce in the name of the Trust the Trust's rights under the Preferred Securities represented by the Capital Securities held by such Holder and any recovery on such enforcement action shall belong solely to such Holder who brought the action, not to the Trust, Trustee or any other Holder individually or to Holders as a group. Any beneficial owner of Capital Securities may withdraw all, but not less than all, of the Preferred Securities represented by such Capital Securities by providing a written notice and an agreement to be bound by the terms of the Partnership Agreement to the Trustee at the Corporate Office, with evidence of beneficial ownership in form satisfactory to the Trustee; provided, however, that the Grantor shall not issue any fractional number of Preferred Securities. A-1 3. Distributions of Semiannual Distributions on Preferred Securities. Whenever and to the extent the Trustee shall receive any cash distribution representing a semiannual distribution on the Preferred Securities (whether or not distributed by the Grantor on the regular semiannual distribution date therefor) or payment by PECO Energy Company ("PECO Energy") under the Payment and Guarantee Agreement dated as of April 6, 1998 (the "Guarantee") in respect thereof, the Trustee acting directly or through any Paying Agent shall distribute to Holders of Capital Securities on the record date therefor, such amounts in proportion to the respective numbers of Preferred Securities represented by the Capital Securities held by such Holders. 4. Redemptions of Preferred Securities. Whenever the Grantor shall elect or is required to redeem Preferred Securities in accordance with the Partnership Agreement, it shall (unless otherwise agreed in writing with the Trustee) give the Trustee not less than 40 days' prior notice thereof. The Trustee shall, as directed by the Grantor, mail, with first-class postage prepaid, notice of the redemption of Preferred Securities and the proposed simultaneous redemption of the Capital Securities to be redeemed, not less than 30 and not more than 60 days prior to the date fixed for redemption of such Preferred Securities and Capital Securities. Such notice shall be mailed to the Holders of the Capital Securities, at the addresses of such Holders as the same appear on the records of the Trustee. No defect in the notice of redemption or in the mailing or delivery thereof or publication of its contents shall affect the validity of the redemption proceedings. In case fewer than all the outstanding Capital Securities are to be redeemed, the Capital Securities to be redeemed shall be selected by lot or pro rata (as nearly as may be practicable without creating fractional shares) or by any other equitable method determined by the Grantor. On the date of any such redemption of Preferred Securities, provided that the Grantor (or PECO Energy pursuant to the Guarantee) shall then have deposited with the Trust the aggregate amount payable upon redemption of the Preferred Securities to be redeemed, the Trustee, on behalf of the Trust, shall redeem (using the funds so deposited with it) Capital Securities representing the same number of Preferred Securities to be redeemed by the Grantor. A-2 5. Distributions in Liquidation. Upon receipt by the Trustee of any distribution from the Grantor upon the liquidation of the Grantor or any payment under the Guarantee in respect thereof, after satisfaction of creditors of the Trust required by applicable law, the Trustee shall distribute to Holders of Capital Securities on the record date therefor, such amounts in proportion to the respective number of Preferred Securities which were represented by the Capital Securities held by such Holders. 6. Fixing of Record Date for Holders of Capital Securities. Whenever any distribution (other than upon any redemption) shall become payable, or whenever the Trustee shall receive notice of any meeting at which holders of Preferred Securities are entitled to vote or of which holders of Preferred Securities are entitled to notice, the Trustee shall in each such instance fix a record date (which shall be the same date as the record date fixed by the General Partner with respect to the Preferred Securities) for the determination of the Holders of Capital Securities who shall be entitled (i) to receive such distribution or (ii) to receive notice of, and to give instructions for the exercise of voting rights at, any such meeting. 7. Payment of Distributions. Payments of semiannual distributions on the Capital Securities shall be payable by wire transfer into the accounts of or check mailed to the addresses of the Holders thereof on the record date therefor. Payments of the redemption price of Capital Securities and distributions in liquidation shall be made against surrender of such Capital Securities at the office of First Union Trust Company, National Association, as the Paying Agent. 8. Special Representative; Voting Rights. (a) If the holders of the Preferred Partner Interests (as defined in the Partnership Agreement), acting as a single class, are entitled to appoint and authorize a Special Representative pursuant to Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Capital Securities of such right, request direction of each Holder of a Capital Security and vote the Preferred Securities represented by such Capital Security in accordance with such direction. If the General Partner fails to convene a general meeting of the Partnership as required in Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Capital Securities and, if so directed by the Holders of Capital Securities representing Preferred Securities constituting at least 10% of the aggregate stated liquidation preference of the outstanding Preferred Partner Interests (as defined in the Partnership Agreement), shall convene such meeting. A-3 (b) Upon receipt of notice of any meeting at which the holders of Preferred Securities are entitled to vote, the Trustee shall, as soon as practicable thereafter, mail to the Holders of Capital Securities a notice, which shall be provided by the Grantor and which shall contain (i) such information as is contained in such notice of meeting, (ii) a statement that the Holders of Capital Securities at the close of business on a specified record date therefor will be entitled, subject to any applicable provision of law or of the Partnership Agreement, to instruct the Trustee as to the exercise of the voting rights pertaining to the amount of Preferred Securities represented by their respective Capital Securities, and (iii) a brief statement as to the manner in which such instructions may be given. Upon the written request of a Holder of a Capital Security on such record date, the Trustee shall vote or cause to be voted the number of Preferred Securities represented by the Capital Securities in accordance with the instructions set forth in such request. In the absence of specific instructions from the Holder of a Capital Security, the Trustee will abstain from voting to the extent of the Preferred Securities represented by such Capital Security. 9. Changes Affecting Preferred Securities and Reclassifications, Recapitalizations, Etc. Upon any consolidation, amalgamation, merger, replacement or conveyance, transfer or lease by the Grantor of its properties and assets substantially in their entirety in accordance with Section 13.02(e) of the Partnership Agreement, the Trustee shall, upon the instructions of the Grantor, treat any Successor Securities or other property that shall be received by the Trustee in exchange for or upon conversion of or in respect of the Preferred Securities as part of the Trust Estate, and Capital Securities then outstanding shall thenceforth represent the proportionate interests of Holders thereof in the new deposited property so received in exchange for or upon conversion or in respect of such Preferred Securities. 10. Transfer and Exchange of Capital Securities. Subject to the terms and conditions of the Trust Agreement, the Trustee shall register the transfer on its books from time to time of Capital Security certificates upon any surrender thereof by the Holder in person or by a duly authorized attorney, properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, together with evidence of the payment of any transfer taxes as may be required by law. Upon such surrender, the Trustee shall execute a new Capital Security representing the same aggregate number of the Capital Securities surrendered in accordance with the Trust Agreement and deliver the same to or upon the order of the Person entitled thereto. A-4 Upon surrender of a Capital Security at the Corporate Office or such other office as the Trustee may designate for the purpose of effecting an exchange of Capital Security certificates, subject to the terms and conditions of the Trust Agreement, the Trustee shall execute and deliver a new Capital Security certificate representing the same number of Preferred Securities as the Capital Security certificate surrendered. As a condition precedent to the registration of a transfer or exchange of any Capital Security certificate, the Registrar, may require (i) the production of proof satisfactory to it as to the identity and genuineness of any signature; and (ii) compliance with such regulations, if any, as the Trustee or the Registrar may establish not inconsistent with the provisions of the Trust Agreement. Neither the Trustee nor the Registrar shall be required (a) to register the transfer or exchange of any Capital Security certificate for a period beginning at the opening of business ten days next preceding any selection of Capital Securities to be redeemed and ending at the close of business on the day of the mailing of a notice of redemption of Capital Securities or (b) to transfer or exchange Capital Securities called or being called for redemption in whole or in part. 11. Title to Capital Securities. It is a condition of the Capital Securities, and every successive Holder hereof by accepting or holding the same consents and agrees, that title to this Capital Security certificate, when properly endorsed or accompanied by a properly executed instrument of transfer or endorsement, is transferable by delivery with the same effect as in the case of a negotiable instrument; provided, however, that until the transfer of this Capital Security certificate shall be registered on the books of the Trustee, the Trustee may, notwithstanding any notice to the contrary, treat the Holder hereof at such time as the absolute owner hereof for the purpose of determining the Person entitled to distributions or to any notice provided for in the Trust Agreement and for all other purposes. 12. Reports, Inspection of Transfer Books. The Trustee shall make available for inspection by Holders of Capital Securities at the Corporate Office and at such other places as it may from time to time deem advisable during normal business hours any reports and communications received by the Trustee as the record holder of Preferred Securities. The Registrar shall keep books at the Corporate Office for the registration of transfer of Capital Securities, which books at all reasonable times will be open for inspection by the Holders of Capital Securities as and to the extent provided by applicable law. A-5 13. Supplemental Trust Agreement. The Grantor or the General Partner may, and the Trustee shall, at any time and from time to time, without the consent of the Holders, enter into one or more agreements supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another partnership, corporation or other entity to the Grantor or the General Partner and the assumption by any such successor of the covenants of the Grantor or the General Partner herein contained; (b) to add to the covenants of the Grantor or the General Partner for the benefit of the Holders, or to surrender any right or power herein conferred upon the Grantor or the General Partner; (c)(i) to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein or (ii) to make any other provisions with respect to matters or questions arising under this Trust Agreement, provided that any such action taken under subsection (ii) hereof shall not materially adversely affect the interests of the Holders; or (d) to cure any ambiguity or correct any mistake. Any other amendment or agreement supplemental hereto must be in writing and approved by Holders of 66-2/3% of the then outstanding Capital Securities. 14. Governing Law. The Trust Agreement and this Capital Security and all rights thereunder and hereunder and provisions thereof and hereof shall be governed by, and construed in accordance with, the law of the State of Delaware without giving effect to principles of conflict of laws. 15. Capital Security Non-Assessable and Fully Paid. Holders of Capital Securities shall not be personally liable for obligations of the Trust, the interest in the Trust represented by the Capital Securities shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever and the Capital Securities upon delivery thereof by the Trustee pursuant to the Trust Agreement are and shall be deemed fully paid. 16. Liability of Holders of Capital Securities. Holders of Capital Securities shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. 17. No Preemptive Rights. No Holder shall be entitled as a matter of right to subscribe for or purchase, or have any preemptive right with respect to, any part of any new or additional interest in the Trust, whether now or hereafter authorized and whether issued for cash or other consideration or by way of distribution. A-6 This Capital Security certificate shall not be entitled to any benefits under the Trust Agreement or be valid or obligatory for any purpose unless this Capital Security certificate shall have been executed manually or, if a Registrar for the Capital Securities (other than the Trustee) shall have been appointed, by facsimile signature of a duly authorized signatory of the Trustee and, if executed by facsimile signature of the Trustee, shall have been countersigned manually by such Registrar by the signature of a duly authorized signatory. THE TRUSTEE IS NOT RESPONSIBLE FOR THE VALIDITY OF ANY PREFERRED SECURITIES. THE TRUSTEE ASSUMES NO RESPONSIBILITY FOR THE CORRECTNESS OF THE FOREGOING DESCRIPTION WHICH CAN BE TAKEN AS A STATEMENT OF THE GRANTOR SUMMARIZING CERTAIN PROVISIONS OF THE TRUST AGREEMENT. THE TRUSTEE MAKES NO WARRANTIES OR REPRESENTATIONS AS TO THE VALIDITY, GENUINENESS OR SUFFICIENCY OF PREFERRED SECURITIES OR OF CAPITAL SECURITIES; AS TO THE VALIDITY OR SUFFICIENCY OF THE TRUST AGREEMENT; AS TO THE VALUE OF CAPITAL SECURITIES OR AS TO ANY RIGHT, TITLE OR INTEREST OF THE HOLDERS OF CAPITAL SECURITIES IN AND TO CAPITAL SECURITIES. Dated: April 6, 1998 First Union Trust Company, National Association, not in its individual capacity, but solely as Trustee on behalf of the Trust, By:________________________________ Name: Title: A-7 [FORM OF ASSIGNMENT] FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto ____________________ the within Capital Security Certificate and all rights and interests represented by the Capital Securities evidenced thereby, and hereby irrevocably constitutes and appoints ____________________ attorney, to transfer the same on the books of the within-named Trustee, with full power of substitution in the premises. Dated:_________________ Signature:__________________________________ NOTE: The signature to this assignment must correspond with the name as written upon the face of the Capital Security in every particular, without alteration or enlargement or any change whatever. Signature Guarantee: _______________________ EX-12.1 7 EXHIBIT 12.1 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES ($000) 12 Months Ended 12/31/1998 - - ------------------------------------------------------------------- NET INCOME $ 532,378 ADD BACK: INCOME TAXES: OPERATING INCOME 348,497 NON-OPERATING INCOME (28,843) - - ------------------------------------------------------------------- NET TAXES $ 319,654 - - ------------------------------------------------------------------- FIXED CHARGES: INTEREST APPLICABLE TO DEBT $ 317,243 ANNUAL RENTALS ESTIMATE $ 8,973 - - ------------------------------------------------------------------- TOTAL FIXED CHARGES $ 326,216 - - ------------------------------------------------------------------- ADJUSTED EARNINGS INCLUDING AFUDC $1,178,248 - - ------------------------------------------------------------------- RATIO OF EARNINGS TO FIXED CHARGES 3.61 =================================================================== AFUDC 3,522 =================================================================== ADJUSTED EARNINGS EXCLUDING AFUDC $1,174,726 - - ------------------------------------------------------------------- RATIO OF EARNINGS EXCLUDING AFUDC TO FIXED CHARGES 3.60 =================================================================== EX-12.2 8 EXHIBIT 12.2 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDEND REQUIREMENTS ($000) 12 Months Ended 12/31/1998 -------------- NET INCOME ................................................ $ 532,378 ADD BACK: INCOME TAXES: OPERATING INCOME ....................................... 348,497 NON-OPERATING INCOME ................................... (28,843) ---------- NET TAXES .............................................. $ 319,654 ========== FIXED CHARGES: TOTAL INTEREST ......................................... $ 317,243 ANNUAL RENTALS ESTIMATE ................................ 8,973 ---------- TOTAL FIXED CHARGES .................................... $ 326,216 ========== EARNINGS REQUIRED FOR PREFERRED DIVIDENDS: DIVIDENDS ON PREFERRED STOCK ........................... $ 13,109 ADJUSTMENT TO PREFERRED DIVIDENDS* ..................... $ 7,871 ========== $ 20,980 ========== FIXED CHARGES AND PREFERRED DIVIDENDS .................. $ 347,196 ========== EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES ......... $1,199,228 ========== RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND EARNINGS REQUIRED FOR PREFERRED DIVIDENDS .............. 3.45 =========== - - ------------ * ADDITIONAL CHARGE EQUIVALENT TO EARNINGS REQUIRED TO ADJUST DIVIDENDS ON PREFERRED STOCK TO A PRE-TAX BASIS EX-13 9 EXHIBIT 13 Management's Discussion and Analysis of Financial Condition and Results of Operations General The Electricity Generation Customer Choice and Competition Act (Competition Act), enacted in December 1996, provided for the restructuring of the electric utility industry in Pennsylvania, including the institution of retail competition for generation supply beginning in 1999. Pursuant to the Competition Act, in April 1997, the Company filed with the Pennsylvania Public Utility Commission (PUC) a restructuring plan in which it identified $7.5 billion of retail electric generation-related stranded costs. At December 31, 1997, the Company determined that its electric generation business no longer met the criteria of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." In connection with the discontinuance of SFAS No. 71, the Company performed a market value analysis of its generation assets and wrote-off $1.8 billion (net of income taxes) of unrecoverable electric plant costs and regulatory assets. See Note 4 of Notes to Consolidated Financial Statements. In May 1998, the PUC entered an Opinion and Order (Final Restructuring Order) approving a joint petition and settlement of the Company's restructuring case. Under the Final Restructuring Order, the Company has received approval to recover stranded costs of $5.26 billion over 12 years beginning January 1, 1999 with a return of 10.75%. The Final Restructuring Order provides for the phase-in of customer choice of electric generation suppliers (EGS) for all customers: One-third of the peak load of each customer class on January 1, 1999; one-third on January 2, 1999; and the remainder on January 2, 2000. The Final Restructuring Order calls for an across the board retail electric rate reduction of 8% in 1999. This rate reduction will decrease to 6% in 2000. See Note 3 of Notes to Consolidated Financial Statements. Based on the estimated annual sales of the Company in the Final Restructuring Order, the rate reductions are expected to reduce the Company's revenues from retail electric sales by $270 million in 1999 and $200 million in 2000. The Company believes that its revenues from retail electric sales will be further reduced by competition for electric generation services within its traditional service territory. The Company is actively participating in the competitive electric generation supply market throughout Pennsylvania. In addition, the Company anticipates lower depreciation and amortization expense in 1999 as a result of the amortization schedule for the Company's stranded cost recovery. In light of the expected impact on future revenues of the Final Restructuring Order and competition for electric generation services, the Company is continuing its cost management efforts through a Cost Competitiveness Review (CCR). The goal of CCR is to achieve significant cost savings while maintaining high levels of service quality, reliability, safety and overall performance. The cost-control targets of CCR include reducing annual operating and maintenance expense by at least $150 million by 2001. The expense reductions will be realized, in part, through the elimination of approximately 1,200 employee positions. As part of the CCR, in April 1998, the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance benefit program to accompany targeted workforce reductions. In the fourth quarter of 1998, the Company incurred an after-tax charge to earnings of $74 million to recognize costs related to the CCR workforce reduction. Discussion of Operating Results Earnings The Company recorded basic earnings per average common share of $2.24 in 1998 as compared with a loss of $6.80 per share in 1997 and earnings per share of $2.24 in 1996. Earnings per share in 1998 reflect higher revenues net of fuel of $0.14 per share primarily attributable to sales to other utilities and interchange sales; lower operating and maintenance expenses of $0.10 per share and lower fuel expenses of $0.22 per share as a result of the full return to service of Salem Nuclear Generating Station (Salem); and lower operating and maintenance expenses of $0.21 per share. In addition, earnings include the effects of a lower effective income tax rate of $0.34 per share. These increases were partially offset by higher depreciation and amortization expense of $0.17 per share; a charge of $0.33 per share related to the CCR workforce reduction program initiated in 1998; and an extraordinary charge of $0.09 per share for premiums paid in connection with the redemption of higher cost long-term debt. The loss in 1997 of $6.80 per common share was primarily due to an extraordinary charge of $8.24 per share reflecting the effects of the PUC Restructuring Order and deregulation of the Company's electric generation operations. 1997 earnings were also reduced by several one-time charges totaling $0.56 per share for changes in employee benefits, write-offs of information systems development charges reflecting clarification of accounting guidelines and additional reserves, including those for environmental site remediation; by $0.30 per share for higher depreciation expense resulting from a full year's increase in depreciation and amortization of assets associated with Limerick Generating Station (Limerick) and other assets; by $0.12 per share for income tax adjustments; by $0.09 per share for losses from new non-utility ventures; and by $0.05 per share for increased depreciation expense due to plant additions. These decreases were partially offset by a one-time $0.18 per share credit relating to the settlement of litigation arising from the outage of Salem; $0.08 per share for operational efficiencies; and higher revenues net of fuel of $0.06 per share primarily due to increased sales to other utilities. Significant Operating Items
Revenue and Expense Items as a Percentage of Total Operating Revenues Percentage Dollar Changes - - ------------------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1998-1997 1997-1996 - - ------------------------------------------------------------------------------------------------------------------------ 92% 90% 90% Electric 15% 8% 8% 10% 10% Gas (11%) 5% ------ ----- ----- ------- ------ 100% 100% 100% Total Operating Revenues 13% 8% ====== ===== ===== ======= ====== 34% 28% 23% Fuel and Energy Interchange 36% 33% 24% 31% 30% Operating and Maintenance (a) (12%) 12% 12% 12% 11% Depreciation and Amortization 11% 19% 5% 7% 7% Taxes Other Than Income (10%) 4% ------ ----- ----- ------- ------ 75% 78% 71% Total Operating Expenses 9% 19% ====== ===== ===== ======= ====== 25% 22% 29% Operating Income 28% (19%) ====== ===== ===== ======= ====== (7%) (9%) (10%) Interest Expense (10%) (2%) ------ ----- ----- ------- ------ (9%) (8%) (9%) Total Other Income and Deductions (15%) 4% ------ ----- ----- ------- ------ 16% 14% 20% Income Before Taxes and Extraordinary Item 35% (27%) ------ ----- ----- ------- ------ 6% 6% 8% Income Taxes 9% (14%) ------ ----- ----- ------- ------ 10% 8% 12% Income Before Extraordinary Item 58% (35%) ====== ===== ===== ======= ======
(a) Includes Early Retirement and Separation Programs Expense in 1998. Operating Revenues Total operating revenues increased in 1998 by $593 million to $5,210 million. This represented a $644 million increase in electric revenues and a $51 million decrease in gas revenues compared to 1997. Electric revenues increased as a result of additional sales to other utilities and interchange sales, in addition to higher wholesale prices. The decrease in gas revenues was primarily attributable to lower sales to house heating, small commercial and residential customers as a result of milder weather conditions in 1998, partially offset by higher purchased gas clause revenues charged in 1998 compared to 1997. Total operating revenues increased in 1997 by $334 million to $4,618 million. This represented a $312 million increase in electric revenues and a $22 million increase in gas revenues over 1996. The increase in electric revenues was primarily due to increased sales to other utilities. The increase in gas revenues was primarily due to higher revenues from sales to commercial, house heating and residential customers resulting from higher purchased gas clause revenues charged in 1997 compared to 1996, partially offset by lower sales resulting from milder weather conditions in 1997. This increase was partially offset by reduced sales to interruptible customers switching to transportation service. Increases/(decreases) in electric sales and revenues by class of customer for 1998 compared to 1997 and 1997 compared to 1996 are set forth as follows:
1998 - 1997 1997 - 1996 ----------------------------------------------------------------------- Electric Electric Electric Electric Sales Revenues Sales Revenues ----------------------------------------------------------------------- (Millions of kWh) (Millions of $) (Millions of kWh) (Millions of $) ----------------- --------------- ----------------- --------------- Residential 356 $ 30 (48) $ (1) House Heating (140) (10) (217) (12) Small Commercial and Industrial 203 5 194 30 Large Commercial and Industrial 644 (11) (174) (21) Other (38) 2 (61) 8 Unbilled 61 (18) 397 45 ----------------- --------------- ----------------- --------------- Service Territory 1,086 (2) 91 49 Interchange Sales 1,556 152 992 33 Sales to Other Utilities 8,365 494 8,650 230 ----------------- --------------- ----------------- --------------- Total 11,007 $ 644 9,733 $ 312 ================= =============== ================= ===============
Fuel and Energy Interchange Expense Fuel and energy interchange expense increased in 1998 by $462 million to $1,752 million. The increase was primarily due to increased energy purchases associated with increased sales to other utilities and interchange sales partially offset by reduced replacement power expense related to Salem. Increases in purchases of non-utility generation also contributed to increased fuel expense in 1998. Fuel and energy interchange expense as a percentage of operating revenues, increased from 28% to 34% principally as a result of energy purchases associated with increased sales to other utilities and interchange sales. Fuel and energy interchange expense increased in 1997 by $318 million to $1,290 million. The increase was primarily due to purchases associated with increased sales to other utilities and a one-time billing credit in 1996 from a non-utility generator. Fuel and energy interchange expense as a percentage of operating revenues increased from 23% to 28% principally due to purchases associated with increased sales to other utilities. Operating and Maintenance Expense Operating and maintenance expense, inclusive of expenses associated with early retirement and separation programs, decreased in 1998 by $178 million to $1,253 million. The decrease in 1998 was primarily attributable to the full return to service of Salem which resulted in lower restart expenses, a credit to pension and benefits expense related to the performance of pension plan investments and lower property insurance and workers compensation insurance. These decreases were partially offset by the charge associated with the CCR workforce reduction program and increased power marketing expenses. Operating and maintenance expense increased in 1997 by $157 million to $1,431 million primarily due to several one-time charges totaling $187 million, including charges for changes in employee benefits, write-offs of information systems development charges reflecting clarification of accounting guidelines and additional reserves, including reserves for environmental site remediation. These increases were partially offset by lower operating costs at Company-operated nuclear generating stations and lower administrative and general expenses resulting from the Company's ongoing cost-control efforts. Depreciation and Amortization Expense Depreciation and amortization expense increased in 1998 by $62 million to $643 million. The increase was primarily due to the amortization of Deferred Generation Costs Recoverable in Current Rates during 1998, preceding the Company's transition to market-based pricing of electric generation in 1999. Included in this amortization were charges that were included in operating and maintenance expense and interest expense in 1997. Depreciation and amortization expense increased in 1997 by $92 million to $581 million. The increase was primarily due to increased depreciation of assets associated with Limerick which became effective October 1, 1996. Depreciation and amortization expense also increased due to additions to plant in service. Interest Charges Interest charges consist of interest expense, distributions on Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) and Allowance for Funds Used During Construction (AFUDC). Interest charges decreased in 1998 by $22 million to $358 million. The decrease was primarily due to the Company's program to reduce and/or refinance higher cost, long-term debt, lower variable interest rates and the discontinuance of amortization of the loss on reacquired debt related to electric generation operations as of December 31, 1997. These decreases were partially offset by lower AFUDC and capitalized interest resulting from fewer projects in the construction base in 1998 and the replacement of $62 million of preferred stock with COMRPS in the third quarter of 1997. Interest charges decreased in 1997 by $9 million to $380 million. The decrease was primarily due to the Company's program to reduce and/or refinance higher-cost, long-term debt. This decrease was partially offset by the replacement of $62 million of preferred stock with COMRPS in the third quarter of 1997. Other Income and Deductions Excluding Interest Charges Other income and deductions excluding interest charges decreased in 1998 by $77 million to a deduction of $73 million. The decrease was primarily due to the settlement of litigation arising from the shutdown of Salem recognized in 1997 and losses from the Company's non-utility ventures, which are accounted for under the equity method, partially offset by interest income on a gross receipts tax refund. Other income and deductions excluding interest charges increased in 1997 by $6 million to $4 million. The increase was primarily due to the settlement of litigation arising from the shutdown of Salem, partially offset by losses from the Company's non-utility ventures. Also offsetting the increase was the write-off of one of the Company's telecommunications investments as a result of the auctioning of personal communications systems "C-block" licenses by the Federal Communication Commission. Income Taxes Income taxes increased in 1998 by $27 million to $320 million. The Company's effective income tax rate decreased, however, from 46.5% to 37.5% in 1998 primarily as a result of full normalization of deferred taxes associated with deregulated generation plant. Income taxes decreased in 1997 by $47 million to $293 million. The Company's effective income tax rate increased, however, from 39.7% to 46.5% in 1997 primarily attributable to reduced tax depreciation benefits from plant and regulatory assets which were not fully normalized for ratemaking purposes. Preferred Stock Dividends Preferred stock dividends decreased in 1998 by $4 million to $13 million and decreased in 1997 by $1 million to $17 million. The decreases were primarily a result of the replacement of $62 million of preferred stock with COMRPS in the third quarter of 1997. Discussion of Liquidity and Capital Resources The Company's capital resources are primarily provided by internally generated cash flows from utility operations and, to the extent necessary, external financing. Such capital resources are used to fund the Company's capital requirements, including investments in new and existing ventures, to repay maturing debt and to make preferred and common stock dividend payments. Cash flows from operations were $1,433 million in 1998 as compared to $1,038 million in 1997 and $1,172 million in 1996. The increase in 1998 was principally attributable to improved operating results and changes in working capital. Cash flows used in investing activities were $462 million in 1998 as compared to $573 million in 1997 and $663 million in 1996. Expenditures under the Company's construction program decreased to $415 million in 1998. Net funds invested in diversified activities in 1998 were $47 million, consisting of $17 million for telecommunications ventures, $21 million for nuclear plant decommissioning trust funds and $9 million for other deposits and ventures. In 1997 and 1996, funds used in similar activities were $83 million and $114 million, respectively. Cash flows used in financing activities were $956 million in 1998 as compared to $461 million in 1997 and $501 million in 1996. The increase in 1998 was primarily attributable to increased retirement of long-term debt partially offset by lower dividends on common stock. During 1998, in anticipation of competition, which is expected to reduce cash flows, the Company reduced its dividend payment requirements by reducing its common stock dividend to $1 per share. The decrease in 1997 was primarily due to fewer retirements of higher-cost debt. The Company's capital expenditures are currently estimated to be $440 million in 1999. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. Capital expenditures do not include investments in joint ventures including investments related to the Company's strategy to expand its generation portfolio. See"Outlook-Expansion of Generation Portfolio." The Company may use internally generated funds or external financing or a combination of both to finance any acquisition. The Company meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under bank credit facilities. The Company has a $900 million unsecured revolving credit facility with a group of banks which consists of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support its $600 million commercial paper program. There was no debt outstanding under this credit facility at December 31, 1998. The Company had $525 million of short-term debt, consisting of $125 million of commercial paper, and a $400 million term loan, outstanding at December 31, 1998. At December 31, 1998, the Company's embedded cost of debt was 6.65% with 29% of the Company's long-term debt having floating rates. At December 31, 1998, the Company's capital structure consisted of 44.2% common equity; 8.4% preferred stock and COMRPS (which comprised 5.1% of the Company's total capitalization structure); and 47.4% long-term debt. In the Final Restructuring Order, the PUC authorized the Company to securitize up to $4 billion of its allowed $5.26 billion stranded cost recovery through the issuance of transition bonds (Transition Bonds). The proceeds of any securitization are required to be used by the Company principally to reduce its stranded costs and related capitalization. The Company currently proposes to securitize its allowed stranded asset recovery, up to the maximum amount authorized by the PUC, through the issuance of Transition Bonds by a special purpose subsidiary (SPS). The Transition Bonds will be obligations of the SPS secured by intangible transition property (ITP). ITP represents the irrevocable right of the Company or its assignee, to collect non-bypassable charges from customers to recover stranded costs. The Transition Bonds will be included in the consolidated capitalization of the Company. Because the Transition Bonds will be obligations of the SPS, payable from the ITP owned by the SPS, the Company does not expect the issuance of Transition Bonds to adversely affect the ratings on the Company's securities which remain outstanding after issuance of Transition Bonds. In anticipation of the issuance of Transition Bonds, the Company's Board of Directors authorized the repurchase of up to 25 million shares of the Company's common stock from time to time through open market, privately negotiated and/or other types of transactions. The Company has entered into forward purchase agreements to be settled from time to time, at the Company's election on either a physical, net share or net cash basis. The amount at which these agreements can be settled is dependent principally upon the market price of the Company's common stock as compared to the forward purchase price per share and the number of shares to be settled. If these agreements had been settled on a net share basis at December 31, 1998, based on the closing price of the Company's common stock on that date, the Company would have received approximately 4.6 million shares of the Company's common stock. The Company has entered into treasury forwards and forward starting interest rate swaps to manage interest rate exposure associated with the anticipated issuance of Transition Bonds. The fair value of ($4.7 million) was based on the present value difference between the contracted rate (i.e., hedged rate) and the market rates at December 31, 1998. The aggregate change in fair value of the Transition Bond derivative instruments that would have resulted from a hypothetical 50 basis point decrease in the spot yield at December 31, 1998 is estimated to be $128 million. If the derivative instruments had been terminated at December 31, 1998, this estimated fair value represents the amount to be paid by the Company to the counterparties. The aggregate change in fair value of the Transition Bond derivative instruments that would have resulted from a hypothetical 50 basis point increase in the spot yield at December 31, 1998 is estimated to be $113 million. If the derivativeinstruments had been terminated at December 31,1998, this estimated fair value represents the amount to be paid by the counterparties to the Company. Outlook The Company is entering a period of financial uncertainty as a result of the deregulation of its electric generation operations. Under the terms of the Final Restructuring Order, revenues from regulated rates will decrease. In addition, the Company will sell an increasing portion of its energy at market-based rates. The Company believes that the deregulation of its electric generation operations and other regulatory initiatives designed to encourage competition will increase the Company's risk profile by changing and increasing the number of factors upon which the Company's financial results are dependent. This may result in more volatility in the Company's future results of operations. The Company believes that it has significant advantages that will strengthen its position in the increasingly competitive electric generation environment. These advantages include the ability to produce electricity at a low variable-cost and the demonstrated ability to market power in the competitive wholesale markets. The Company's future financial condition and results of operations are substantially dependent upon the effects of the Final Restructuring Order and retail and wholesale competition for generation services. Additional factors that affect the Company's financial condition and results of operations include operation of nuclear generating facilities, Year 2000 issues, new accounting pronouncements, inflation, weather, compliance with environmental regulations and the profitability of the Company's investments in new ventures. Final Restructuring Order The Final Restructuring Order contains a number of provisions which the Company expects will significantly impact its future results of operations and financial condition, including mandated rate reductions, extended rate caps, provisions designed to enhance competition for generation services, the amortization of the Company's stranded cost recovery and the securitization of stranded cost recovery. The Final Restructuring Order mandates retail electric rate reductions of 8% in 1999 and 6% in 2000 from rates in existence on December 31, 1996. Based on the estimated annual sales of the Company in the Final Restructuring Order, these rate reductions will reduce the Company's revenue from retail electric sales by $270 million and $200 million in 1999 and 2000, respectively. The Company's revenue from retail electric sales will be further reduced to the extent that customers purchase generation service from alternate EGS. The Final Restructuring Order caps the Company's retail transmission and distribution rates at their current levels through June 30, 2005. The Final Restructuring Order also established rate caps for generation services, consisting of the charge for stranded cost recovery and a charge for energy and capacity, through 2010. The rate caps will limit the Company's ability to pass cost increases through to customers. The Final Restructuring Order contains a number of provisions which are designed to encourage competition for generation services. The Final Restructuring Order establishes an above-market shopping credit for generation services, equivalent to the Company's energy and capacity charge, in order to provide an economic incentive for customers to choose an alternate EGS. If market prices of retail generation services remain below the shopping credits for generation established by the Final Restructuring Order, this economic incentive to choose an alternate EGS will continue. If, on the other hand, market prices of retail generation services exceed the shopping credits for generation, customers will have an economic incentive to purchase generation services from the Company as the provider of last resort (PLR) at below market rates. Additionally, if on January 1, 2001 and January 1, 2003, less than 35% and 50%, respectively, of the Company's residential and commercial customers are obtaining generation service from alternate EGS, the non-shopping customers will be randomly assigned to EGS, including those affiliated with the Company, to meet these thresholds. Further, on January 1, 2001, 20% of all the Company's residential customers, whether or not such customers are obtaining generation service from an alternate EGS, will be assigned to a PLR other than the Company. Such alternate supplier will be selected by a PUC-approved bidding process. The right to provide this competitive default service will be rebid annually, and if the number of residential customers served by this service falls below 17%, further random selection of customers will be assigned to achieve the 20% level. The Company's recovery of stranded costs is based on the level of transition charges established in the Final Restructuring Order and the projected annual retail sales in the Company's service territory. Recovery of transition charges for stranded costs will be included in operating revenue and are expected to be $552 million in 1999, increasing to $932 million by 2010, the final year of stranded cost recovery. Amortization of the Company's stranded cost recovery, which is a regulatory asset, will be included in depreciation and amortization, beginning in 1999 at a level of ($14) million and increasing by 2010 to $879 million. The Company is allowed a 10.75% return on the unamortized balance. As a result of this amortization schedule, the Company expects its earnings to be disproportionately benefited by the recovery of stranded assets in the early years of the transition period declining over the life of the recovery as the balance of the unamortized regulatory asset is reduced. Under the Final Restructuring Order, the Company may securitize up to $4 billion of its $5.26 billion of stranded cost recovery through the issuance of Transition Bonds. The rate reductions and rate caps of the Final Restructuring Order anticipate the benefits of securitization and no adjustment in the Company's base rates will be made upon the issuance of Transition Bonds. As a result of the 10.75% allowed return on the unamortized balance of stranded cost recovery and expected costs of securitization substantially below this allowed return, the Company anticipates that successful securitization, resulting in a reduction of its common equity, will improve the Company's future financial results. Competition The Company competes in both the retail electric generation market in Pennsylvania and the wholesale electric generation market nationally. Competition for electric generation services is expected to create new uncertainties in the utility industry. These uncertainties include future prices of generation services in both the wholesale and retail markets; potential changes in the Company's customer profiles, both at the retail level where change is expected to be ongoing as a result of customer choice, and between the retail and wholesale markets; and supply and demand volatility. Retail competition for generation supply commenced in January 1999, with two-thirds of Pennsylvania electric utility consumers having the right to choose their suppliers of generation service. The Company is actively competing for a share of the generation supply market in its traditional service territory through PECO Energy Distribution as the PLR for customers who do not or cannot choose an alternate EGS and throughout Pennsylvania through Exelon Energy, the Company's new competitive supplier. Generation services provided by PECO Energy Distribution are at the energy and capacity charge mandated by the Final Restructuring Order. Generation services offered by Exelon Energy are at competitive market prices. Customers who continue to take generation service from PECO Energy Distribution may choose an alternate generation supplier at any time. As of January 12, 1999, approximately 12% of the Company's residential and small commercial customers and approximately 50% of its large commercial and industrial customers had selected an alternate EGS. As of that date, Exelon Energy is providing generation service to approximately 135,000 business and residential customers throughout Pennsylvania. Because the energy and capacity charge (shopping credit) established by the PUC in the Restructuring Order remains above current retail market prices for generation services, including those offered by Exelon Energy, the Company's retail revenues will be reduced to the extent customers choose an alternate EGS, including Exelon Energy. To the extent that the Company cannot replace lost retail sales through PECO Energy Distribution with retail sales by Exelon Energy, the Company will be required to sell a larger portion of its energy and capacity in the wholesale market. Since prices in the wholesale market are currently lower on average than those charged in the competitive retail market, this will adversely affect the Company's revenues and profit margins. The Company is a low variable-cost electricity producer, which puts it in a favorable position to take advantage of opportunities in the electric retail and wholesale generation markets. The Company's competitive position and its future financial condition and results of operations are dependent on the Company's ability to successfully operate its low variable-cost power plants and market its power effectively in competitive wholesale markets. The Company competes in the wholesale market by selling the energy and capacity from the Company's installed capacity not utilized in the retail market and buying and selling energy from third parties. The Company enters into both long-term and short-term commitments to buy and sell power. Currently, the Company's long-term commitments, together with the energy the Company expects to market from the Company's installed capacity, make the Company a net power seller. This long position, however, exposes the Company to the risk of declining revenues in periods of low wholesale demand for generation services. See Note 5 of Notes to Consolidated Financial Statements. There is an initiative in the Pennsylvania legislature to deregulate the gas industry, which has the support of the governor. The Company cannot predict whether the Pennsylvania legislature will enact legislation that deregulates the gas industry or whether the governor will ultimately sign into law any such legislation. The Company cannot predict the ultimate effect of gas industry deregulation on its future financial condition or results of operations. Regulation and Operation of Nuclear Generating Facilities The Company's financial condition and results of operations are in part dependent on the continued successful operation of its nuclear generating facilities. The Company's nuclear generating facilities represent 44% of its installed generating capacity. Because of the Company's reliance on its nuclear generating units, any changes in regulations by the Nuclear Regulatory Commission (NRC) requiring additional investments or resulting in increased operating costs of nuclear generating units could adversely affect the Company. During 1998, Company-operated nuclear plants operated at an 86% weighted-average capacity factor and Company-owned nuclear plants operated at an 83% weighted-average capacity factor. Company-owned nuclear plants produced 39% of the Company's electricity. Nuclear generation is currently the most cost-effective way for the Company to meet customer needs and commitments for sales to other utilities. See "Expansion of Generation Portfolio". New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," to establish accounting and reporting standards for derivatives. The new standard requires recognizing all derivatives as either assets or liabilities on the balance sheet at their fair value and specifies the accounting for changes in fair value depending upon the intended use of the derivative. The new standard is effective for fiscal years beginning after June 15, 1999. The Company expects to adopt SFAS No. 133 in the first quarter of2000. The Company is in the process of evaluating the impact of SFAS No. 133 on its financial statements. In November 1998, the FASB's Emerging Issues Task Force issued EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF 98-10 outlines attributes that may be indicative of an energy trading operation and gives further guidance on the accounting for contracts entered into by an energy trading operation. This accounting guidance requires mark-to-market accounting for contracts considered to be a trading activity. EITF 98-10 is applicable for fiscal years beginning after December 15, 1998 with any impact recorded as a cumulative effect adjustment through retained earnings at the date of adoption. At December 31, 1998, the Company has evaluated its wholesale marketing operation and related contracts under the guidance provided in EITF 98-10. For those contracts entered into in the over-the-counter market and considered to be a trading activity, the Company believes the impact to be immaterial. However, with respect to the long-term commitments considered to be trading activities, the Company is continuing to evaluate these commitments and the impact of adopting EITF 98-10. Other Factors Annual and quarterly operating results can be significantly affected by weather. Since the Company's peak demand is in the summer months, temperature variations in summer months are generally more significant than variations during winter months. Inflation affects the Company through increased operating costs and increased capital costs for utility plant. As a result of the rate caps imposed under the Final Restructuring Order and expected price pressures due to competition, the Company may have a limited opportunity to pass the costs of inflation through to customers. The Company's operations have in the past and may in the future require substantial capital expenditures in order to comply with environmental laws. Additionally, under federal and state environmental laws, the Company is generally liable for the costs of remediating environmental contamination of property now or formerly owned by the Company and of property contaminated by hazardous substances generated by the Company. The Company owns or leases a number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination by substances which are considered hazardous under environmental laws. The Company is currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future. The Company has identified 28 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean-up of three sites. Eight other sites are currently under some degree of active study and/or remediation. As of December 31, 1998 and 1997, the Company had accrued $60 and $63 million, respectively, for environmental investigation and remediation costs, including $33 and $35 million, respectively, for MGP investigation and remediation that currently can be reasonably estimated. The Company expects to expend $3 million for environmental remediation activities in 1999. The Company cannot predict whether it will incur other significant liabilities for any additional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable from third parties. For a discussion of other contingencies, see Note 5 of Notes to Consolidated Financial Statements. Year 2000 Readiness Disclosure Due to the severity of the potential impact of the Year 2000 Issue (Y2K Issue) on the electric utility industry, the Company has adopted a comprehensive schedule to achieve Y2K readiness by the time specified by the NRC. The Company has dedicated extensive resources to its Y2K Project (Project) and believes the project is progressing on schedule. The Project is addressing the issue resulting from computer programs using two digits rather than four to define the applicable year and other programming techniques that constrain date calculations or assign special meanings to certain dates. Any of the Company's computer systems that have date-sensitive software or microprocessors may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, a temporary inability to process transactions, send bills, operate generating stations, or engage in similar normal business activities. The Company has determined that it will be required to modify, convert or replace significant portions of its software and a subset of its system hardware and embedded technology so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with these modifications, conversions and replacements the effect of the Y2K Issue on the Company can be mitigated. If such modifications, conversions and replacements are not made, or are not completed in a timely manner, the Y2K Issue could have a material impact on the operations and financial condition of the Company. The costs associated with this potential impact are not presently quantifiable. The Company is utilizing both internal and external resources to reprogram, or replace and test software and computer systems for the Project. The Project is scheduled for completion by July 1, 1999, except for a small number of modifications, conversions or replacements that are impacted by vendor dates and/or are being incorporated into scheduled plant outages between July and October 1999. The Project is divided into four major sections - Information Technology Systems (IT Systems), Embedded Technology (devices used to control, monitor or assist the operation of equipment, machinery or plant), Supply Chain (third-party suppliers and customers), and Contingency Planning. The general phases common to all sections are: (1) inventorying Y2K items; (2) assigning priorities to identified items; (3) assessing the Y2K readiness of items determined to be material to the Company; (4) converting material items that are determined not to be Y2K ready; (5) testing material items; and (6) designing and implementing contingency plans for each critical Company process. Material items are those believed by the Company to have a risk involving the safety of individuals, may cause damage to property or the environment, or affect revenues. The IT Systems section includes both the conversion of applications software that is not Y2K ready and the replacement of software when available from the supplier. The Company estimates that the software conversion phase was approximately 66% complete at January 27, 1999, and the remaining conversions are expected to be completed by the scheduled end date. The Company has been experiencing slippage in delivery dates of vendor supplied products which may have a minor impact on the July 1, 1999 target completion date. Contingency planning for IT Systems is scheduled to be completed by July 1, 1999 with an interim date of March 31, 1999 that addresses PUC contingency planning requirements. The Project has identified 380 critical systems of which 238 are IT Systems. The current readiness status of IT Systems is set forth below: Number of Systems Progress Status ----------------------------------------------------------- 79 Systems Y2K Ready 65 Systems In Testing 87 Systems In Active Code Modification, Or Package Upgrading 7 Systems Not Started The Embedded Technology section consists of hardware and systems software other than IT Systems. The Company estimates that the Embedded Technology section was approximately 75% complete at January 27, 1999. The remaining conversions are on schedule to be tested and ready by July 1, 1999, except for a small number of systems which will be extended into the fall of 1999 because their final tests will occur during a planned generating plant outage. Contingency planning for Embedded Technology is scheduled to be completed by July 1, 1999 with an interim date of March 31, 1999 that addresses PUC contingency planning requirements. The Project has identified 142 critical Embedded Technology systems. The current readiness status of those systems is set forth below: Number of Systems Progress Status ----------------------------------------------------------- 31 Systems Y2K Ready 29 Systems In Final Quality Review 76 Systems In Progress 6 Systems Not Started The Supply Chain section includes the process of identifying and prioritizing critical suppliers and communicating with them about their plans and progress in addressing the Y2K Issue. The Company initiated formal communications with all of its critical suppliers to determine the extent to which the Company may be vulnerable to their Y2K issues. The process of evaluating these critical suppliers has commenced and is scheduled to be completed by March 31, 1999. The Company, like other companies, is interconnected with many businesses, including electric utilities, natural gas pipelines and municipalities. The Company is working with businesses where interconnections exist to determine and monitor their Y2K readiness efforts. In addition, the Company is currently developing contingency plans to address how to respond to events which may disrupt normal operations. These plans address Y2K risk scenarios that cross departmental, business unit and industry lines as well as specific risks from various internal and external sources, including supplier readiness. Emergency plans already exist that cover various aspects of the Company's business. These plans are being reviewed and updated, as needed, to address the Y2K Issue. The Company is also participating in industry contingency planning efforts. The estimated total cost of the Project is $75 million, the majority of which will be incurred during testing. This estimate includes the Company's share of Y2K costs for jointly owned facilities. The total amount expended on the Project through December 31, 1998 was $21 million. The Company expects to fund the Project from operating cash flows. The Company's failure to become Y2K ready could result in an interruption in or a failure of certain normal business activities or operations. In addition, there can be no assurance that the systems of other companies on which the Company's systems rely or with which they communicate will be converted in a timely manner, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, will not have a material adverse effect on the Company. Such failures could materially and adversely affect the Company's results of operations, liquidity and financial condition. The Company is currently developing contingency plans to address how to respond to events that may disrupt normal operations, including activities with PJM Interconnection, LLC. The costs of the Project and the date on which the Company plans to complete the Y2K modifications are based on estimates, that were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third-party modification plans and other factors, such as regulatory requirements that impact key systems. There can be no assurance that these estimates will be achieved. Actual results could differ materially from the projections. Specific factors that might cause a material change include, but are not limited to, the availability and cost of trained personnel, the ability to locate and correct all relevant computer programs and microprocessors. The Project is expected to significantly reduce the Company's level of uncertainty about the Y2K Issue. The Company believes that the completion of the Project, as scheduled, minimizes the possibility of significant interruptions of normal operations. Expansion of Generation Portfolio The Company established specific goals to increase its generation capacity from 9 gigawatts to 25 gigawatts by 2003. The Company is targeting a balanced portfolio of nuclear, hydro and clean burning fossil capacity through the acquisition of plants and long-term supply agreements. In order to meet this strategic objective the Company may require significant capital resources. In October 1998, the Company through AmerGen Energy Company, LLC, a 50% owned joint venture with British Energy, Inc., entered into a definitive asset purchase agreement with GPU, Inc. (GPU) to acquire GPU's 786 megawatt Three Mile Island Unit No. 1 Nuclear Generating Facility for approximately $23 million in cash, $77 million for nuclear fuel payable over five years and certain contingent payments based upon future wholesale market prices. The Company currently expects the acquisition, which is subject to various regulatory approvals, to close by mid-year 1999. Corporate Restructuring In 1999, the Company's common shareholders will vote on a management proposal for the formation of a holding company. The holding company will be formed through the exchange of PECO Energy common stock for common stock of the holding company. As a result, the Company will become a wholly owned subsidiary of the holding company. The formation of the holding company will not affect the Company's other securities. Management has proposed the formation of the holding company to facilitate the disaggregation of the Company's transmission and distribution, generation and unregulated businesses and corporate central services in order to create increased financial, management and organizational flexibility. Forward-Looking Statements Except for the historical information contained herein, certain of the matters discussed in this Report are forward-looking statements which are subject to risks and uncertainties. The factors that could cause actual results to differ materially include those discussed herein as well as those listed in Note 5 of Notes to Consolidated Financial Statements and other factors discussed in the Company's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Report. The Company undertakes no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this Report. Report of Independent Accountants To the Shareholders and Board of Directors of PECO Energy Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, cash flows and changes in common shareholders' equity and preferred stock present fairly, in all material respects, the financial position of PECO Energy Company and Subsidiary Companies at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 5, 1999 24 PECO Energy Company and Subsidiary Companies Consolidated Statements of Income
For the Years Ended December 31, 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------------- Thousands of Dollars --------------------------------------------------------- Operating Revenues Electric $ 4,810,840 $ 4,166,669 $ 3,854,836 Gas 399,642 451,232 428,814 ----------- ----------- ----------- Total Operating Revenues 5,210,482 4,617,901 4,283,650 ----------- ----------- ----------- Operating Expenses Fuel and Energy Interchange 1,751,819 1,290,164 972,380 Operating and Maintenance 1,128,792 1,431,420 1,274,222 Early Retirement and Separation Programs 124,200 -- -- Depreciation and Amortization 642,842 580,595 489,001 Taxes Other Than Income 279,515 310,091 299,546 ----------- ----------- ----------- Total Operating Expenses 3,927,168 3,612,270 3,035,149 ----------- ----------- ----------- Operating Income 1,283,314 1,005,631 1,248,501 ----------- ----------- ----------- Other Income and Deductions Interest Expense (330,842) (372,857) (382,443) Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company (30,694) (28,990) (26,723) Allowance for Funds Used During Construction 3,522 21,771 19,947 Settlement of Salem Litigation -- 69,800 -- Other, net (73,268) (66,028) (1,976) ----------- ----------- ----------- Total Other Income and Deductions (431,282) (376,304) (391,195) ----------- ----------- ----------- Income Before Income Taxes and Extraordinary Item 852,032 629,327 857,306 Income Taxes 319,654 292,769 340,101 ----------- ----------- ----------- Income Before Extraordinary Item 532,378 336,558 517,205 Extraordinary Item (net of income taxes of $13,757 and $1,290,961 for 1998 and 1997, respectively) (19,654) (1,833,664) -- ----------- ----------- ----------- Net Income (Loss) 512,724 (1,497,106) 517,205 Preferred Stock Dividends 13,109 16,804 18,036 ----------- ----------- ----------- Earnings (Loss) Applicable to Common Stock $ 499,615 $(1,513,910) $ 499,169 =========== =========== =========== Average Shares of Common Stock Outstanding (Thousands) 223,219 222,543 222,490 =========== =========== =========== Basic Earnings per Average Common Share Before Extraordinary Item (Dollars) $ 2.33 $ 1.44 $ 2.24 Extraordinary Item (Dollars) $ (0.09) $ (8.24) $ -- ----------- ----------- ----------- Basic Earnings per Average Common Share (Dollars) $ 2.24 $ (6.80) $ 2.24 =========== =========== =========== Diluted Earnings per Average Common Share Before Extraordinary Item (Dollars) $ 2.32 $ 1.44 $ 2.24 Extraordinary Item (Dollars) $ (0.09) $ (8.24) $ -- ----------- ----------- ----------- Diluted Earnings per Average Common Share (Dollars) $ 2.23 $ (6.80) $ 2.24 =========== =========== =========== Dividends per Common Share (Dollars) $ 1.00 $ 1.80 $ 1.755 =========== =========== ===========
See Notes to Consolidated Financial Statements. PECO Energy Company and Subsidiary Companies 25 Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998 1997 1996 - - ----------------------------------------------------------------------------------------------------------------------- Thousands of Dollars ------------------------------------------------------- Cash Flows from Operating Activities Net Income (Loss) $ 512,724 $(1,497,106) $ 517,205 Extraordinary Item (net of income taxes) (19,654) (1,833,664) -- ----------- ----------- ----------- Income Before Extraordinary Item 532,378 336,558 517,205 Adjustments to reconcile Net Income to Net Cash provided by Operating Activities: Depreciation and Amortization 704,718 664,294 566,412 Deferred Income Taxes (115,640) (17,228) 166,770 Amortization of Investment Tax Credits (18,066) (18,201) (15,979) Early Retirement and Separation Charge 125,000 -- -- Salem Litigation Settlement -- 69,800 -- Deferred Energy Costs 5,818 (5,652) (66,151) Amortization of Leased Property 59,923 39,100 31,400 Changes in Working Capital: Accounts Receivable 15,590 (289,610) 53,681 Inventories 14,192 28,628 (2,729) Accounts Payable 8,971 93,881 (86,765) Other Current Assets and Liabilities 54,263 58,539 (25,040) Other Deferred Credits - Other 49,948 78,846 (4,609) Other Items affecting Operations (4,190) (804) 38,050 ----------- ----------- ----------- Net Cash Flows from Operating Activities 1,432,905 1,038,151 1,172,245 ----------- ----------- ----------- Cash Flows from Investing Activities Investment in Plant (415,331) (490,200) (548,854) Increase in Other Investments (46,742) (83,261) (114,126) ----------- ----------- ----------- Net Cash Flows from Investing Activities (462,073) (573,461) (662,980) ----------- ----------- ----------- Cash Flows from Financing Activities Change in Short-Term Debt 123,500 114,000 287,500 Proceeds from Exercise of Stock Options 50,700 117 11,301 Retirement of Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership (80,794) (61,895) -- Issuance of Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership 78,105 50,000 -- Issuance of Long-Term Debt 13,486 161,813 43,700 Retirement of Long-Term Debt (841,755) (283,303) (427,463) Loss on Reacquired Debt 6,753 22,752 24,724 Dividends on Preferred and Common Stock (236,307) (417,383) (411,569) Capital Lease Payments (59,923) (39,100) (31,400) Other Items Affecting Financing (9,918) (7,522) 2,575 ----------- ----------- ----------- Net Cash Flows from Financing Activities (956,153) (460,521) (500,632) ----------- ----------- ----------- Increase in Cash and Cash Equivalents 14,679 4,169 8,633 Cash and Cash Equivalents at beginning of period 33,404 29,235 20,602 ----------- ----------- ----------- Cash and Cash Equivalents at end of period $ 48,083 $ 33,404 $ 29,235 =========== =========== ===========
See Notes to Consolidated Financial Statements. 26 PECO Energy Company and Subsidiary Companies Consolidated Balance Sheets
At December 31, 1998 1997 - - ------------------------------------------------------------------------------------------------- Thousands of Dollars --------------------------------- Assets Utility Plant Electric-Transmission & Distribution $ 3,833,780 $ 3,617,666 Electric-Generation 1,713,430 1,434,895 Gas 1,131,999 1,071,819 Common 407,320 302,672 ----------- ----------- 7,086,529 6,427,052 Less Accumulated Provision for Depreciation 2,891,321 2,690,824 ----------- ----------- 4,195,208 3,736,228 Nuclear Fuel, net 141,907 147,359 Construction Work in Progress 272,590 611,204 Leased Property, net 154,308 175,933 ----------- ----------- Net Utility Plant 4,764,013 4,670,724 ----------- ----------- Current Assets Cash and Temporary Cash Investments 48,083 33,404 Accounts Receivable, net Customers 97,527 173,350 Other 213,229 139,996 Inventories, at average cost Fossil Fuel 79,488 84,858 Materials and Supplies 82,068 90,890 Deferred Energy Costs-Gas 29,847 35,665 Deferred Generation Costs Recoverable in Current Rates -- 424,497 Other 19,013 20,115 ----------- ----------- Total Current Assets 569,255 1,002,775 ----------- ----------- Deferred Debits and Other Assets Competitive Transition Charge 5,274,624 5,274,624 Recoverable Deferred Income Taxes 614,445 590,267 Deferred Non-Pension Postretirement Benefits Costs 90,915 97,409 Investments 550,904 515,835 Loss on Reacquired Debt 77,165 83,918 Other 107,042 121,016 ----------- ----------- Total Deferred Debits and Other Assets 6,715,095 6,683,069 ----------- ----------- Total Assets $12,048,363 $12,356,568 =========== ===========
See Notes to Consolidated Financial Statements. PECO Energy Company and Subsdiary Companies 27 Consolidated Balance Sheets (Continued)
At December 31, 1998 1997 - - ---------------------------------------------------------------------------------------------------- Thousands of Dollars ----------------------------------- Capitalization and Liabilities Capitalization Common Shareholders' Equity Common Stock $ 3,589,031 $ 3,517,731 Other Paid-In Capital 1,236 1,239 Retained Earnings (Accumulated Deficit) (532,925) (792,239) ------------ ------------ 3,057,342 2,726,731 Preferred and Preference Stock Without Mandatory Redemption 137,472 137,472 With Mandatory Redemption 92,700 92,700 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company 349,355 352,085 Long-Term Debt 2,919,592 3,853,141 ------------ ------------ Total Capitalization 6,556,461 7,162,129 ------------ ------------ Current Liabilities Notes Payable 525,000 401,500 Long-Term Debt Due Within One Year 361,523 247,087 Capital Lease Obligations Due Within One Year 69,011 55,808 Accounts Payable 316,292 323,816 Taxes Accrued 170,495 66,397 Interest Accrued 61,515 77,911 Deferred Income Taxes 14,168 185,696 Other 217,416 260,457 ------------ ------------ Total Current Liabilities 1,735,420 1,618,672 ------------ ------------ Deferred Credits and Other Liabilities Capital Lease Obligations 85,297 120,125 Deferred Income Taxes 2,376,792 2,297,042 Unamortized Investment Tax Credits 299,999 318,065 Pension Obligation 219,274 211,596 Non-Pension Postretirement Benefits Obligation 421,083 324,850 Other 354,037 304,089 ------------ ------------ Total Deferred Credits and Other Liabilities 3,756,482 3,575,767 ------------ ------------ Commitments and Contingencies (Note 5) Total Capitalization and Liabilities $ 12,048,363 $ 12,356,568 ============ ============
See Notes to Consolidated Financial Statements. 28 PECO Energy Company and Subsidiary Companies Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock
Retained Other Earnings Common Stock Paid-In (Accumulated Preferred Stock All Amounts in Thousands Shares Amount Capital Deficit) Shares Amount - - ----------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1996 222,172 $ 3,506,313 $ 1,326 $ 1,023,708 2,921 $ 292,067 Net Income 517,205 Cash Dividends Declared Preferred Stock (at specified annual rates) (21,042) Common Stock ($1.755 per share) (390,527) Expenses of Capital Stock Activity (275) Capital Stock Activity Long-Term Incentive Plan Issuances 370 11,301 (2,028) --------- ------------ --------- ------------ -------- ---------- Balance at December 31, 1996 222,542 3,517,614 1,326 1,127,041 2,921 292,067 Net Loss (1,497,106) Cash Dividends Declared Preferred Stock (at specified annual rates) (16,804) Common Stock ($1.80 per share) (400,578) Expenses of Capital Activity 97 Stock Repurchase Forward Contract (4,889) Capital Stock Activity Long-Term Incentive Plan Issuances 5 117 Preferred Stock Redemptions (87) (619) (61,895) --------- ------------ --------- ------------ -------- ---------- Balance at December 31, 1997 222,547 $ 3,517,731 $ 1,239 $ (792,239) 2,302 $ 230,172 Net Income 512,724 Cash Dividends Declared Preferred Stock (at specified annual rates) (13,109) Common Stock ($1.00 per share) (223,198) Expenses of Capital Stock Activity 2,731 Stock Repurchase Forward Contract (7,677) Capital Stock Activity Long-Term Incentive Plan Issuances 2,137 71,300 (3) (12,157) --------- ------------ --------- ------------ -------- ---------- Balance at December 31, 1998 224,684 $ 3,589,031 $ 1,236 $ (532,925) 2,302 $ 230,172 ========= ============ ========= ============= ======== ==========
See Notes to Consolidated Financial Statements. Notes to Consolidated Financial Statements 29 Notes to Consolidated Financial Statements 1. Significant Accounting Policies General The consolidated financial statements of PECO Energy Company (the Company) include the accounts of its utility subsidiary companies, all of which are wholly owned. Accounting policies for all of the Company's operations are in accordance with generally accepted accounting principles (GAAP). Accounting policies for regulated operations are also in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Pennsylvania Public Utility Commission (PUC) and the Federal Energy Regulatory Commission (FERC). The Company has unconsolidated non-utility subsidiaries which are not material. The unconsolidated subsidiaries are accounted for under the equity method. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used by the Company in accounting for unbilled revenue, the allowance for uncollectible accounts, purchased gas adjustment clause, depreciation and amortization, taxes, reserves for contingencies, employee benefits, certain fair value and recoverability determinations, and nuclear outage costs, among others. Accounting for the Effects of Regulation The Company accounts for all of its electric transmission and distribution and gas operations in accordance with Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," requiring the Company to record the financial statement effects of the rate regulation to which such operations are currently subject. If a separable portion of the Company's business no longer meets the provisions of SFAS No. 71, the Company is required to eliminate the financial statement effects of regulation for that portion. Effective December 31, 1997, the Company determined that the electric generation portion of its business no longer met the criteria of SFAS No. 71 and, accordingly, implemented SFAS No. 101, "Regulated Enterprises - Accounting for the Discontinuation of FASB Statement No. 71," for that portion of its business. Revenues Electric and gas revenues are recorded as service is rendered or energy is delivered to customers. At the end of each month, the Company accrues an estimate for the unbilled amount of energy delivered or services provided to customers. Purchased Gas and Energy Cost Adjustment Clauses The Company's gas rates are subject to a fuel adjustment clause designed to recover or refund the difference between the actual cost of purchased gas and the amount included in base rates. Differences between the amounts billed to customers and the actual costs recoverable are deferred and recovered or refunded in future periods by means of prospective quarterly adjustments to rates. Prior to December 31, 1996, the Company's retail electric rates were subject to an Energy Cost Adjustment (ECA) clause designed to recover or refund the difference between the actual cost of fuel, energy interchange or purchased power and the amount of such costs included in base rates. Effective December 31, 1996, the PUC approved the roll-in of electric energy costs into the base rates charged to the Company's retail electric customers and such rates are no longer subject to the ECA. Nuclear Fuel The cost of nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed. The Company's nuclear fuel at Peach Bottom Atomic Power Station (Peach Bottom) and Salem Generating Station (Salem) is accounted for as a capital lease. Nuclear fuel at Limerick Generating Station (Limerick) is owned. Nuclear Outage Costs Incremental nuclear maintenance and refueling outage costs are accrued over the unit operating cycle. For each unit, an accrual for incremental nuclear maintenance and refueling outage expense is estimated based upon the latest planned outage schedule and estimated costs for the outage. Differences between the accrued and actual expense for the outage are recorded when such differences are known. Depreciation, Amortization and Decommissioning Depreciation is provided over the estimated service lives of plant on the straight-line method. Annual depreciation provisions for financial reporting purposes, expressed as a percentage of average depreciable utility plant in service, were approximately 2.8% in 1998, 3.3% in 1997 and 2.9% in 1996. See note 3 for information concerning the change in 1996 to depreciation and amortization. The Company's current estimate of the costs for decommissioning its ownership share of its nuclear generating stations is currently included in regulated rates and is charged to operations over the expected service life of the related plant. The amounts recovered from customers are deposited in trust accounts and invested for funding of future costs. These amounts, and realized investment earnings thereon, are credited to accumulated depreciation. The Company believes that the amounts being recovered from customers through electric rates will be sufficient to fully fund the unrecorded portion of its decommissioning obligation. Allowance for Funds Used During Construction (AFUDC) AFUDC is the cost, during the period of construction, of debt and equity funds used to finance construction projects for regulated operations. AFUDC is recorded as a charge to Construction Work in Progress and as a credit to AFUDC included in Other Income and Deductions. The rates used for capitalizing AFUDC, which averaged 8.63% in 1998, 8.88% in 1997 and 9.38% in 1996, are computed under a method prescribed by regulatory authorities. AFUDC is not included in regular taxable income and the depreciation of capitalized AFUDC is not tax deductible. 30 PECO Energy Company and Subsidiary Companies Effective January 1, 1998, the Company ceased accruing AFUDC for electric generation-related construction projects and began using SFAS No. 34, "Capitalizing Interest Costs," to calculate the costs during construction of debt funds used to finance its electric generation-related construction projects. The Company recorded capitalized interest of $7 million in 1998. Gains and Losses on Reacquired Debt Prior to December 31, 1997, gains and losses on reacquired debt were deferred and amortized to interest expense over the period approved for ratemaking purposes. Effective January 1, 1998, gains and losses on reacquired debt associated with the electric generation portion of the Company's operations are expensed as incurred. Gains and losses on reacquired debt associated with the Company's regulated operations continue to be deferred and amortized to interest expense over the period approved for ratemaking purposes based on management's assessment of the likelihood of recovery. Income Taxes Deferred Federal and state income taxes are provided on all significant timing differences between book bases and tax bases of assets and liabilities, transactions that reflect taxable income in a year different than book income and tax carry forwards. Investment tax credits previously used for income tax purposes have been deferred on the Consolidated Balance Sheet and are recognized in book income over the life of the related property. The Company and its subsidiaries file a Consolidated Federal income tax return. Income taxes are allocated to each of the Company's subsidiaries within the consolidated group based on the separate return method. Derivative Financial Instruments Hedge accounting is applied only if the derivative reduces the risk of the underlying hedged item and is designated at inception as a hedge, with respect to the hedged item. If a derivative instrument ceased to meet the criteria for deferral, any gains or losses would be currently recognized in income. The Company does not hold or issue derivative financial instruments for trading purposes. Utility Plant Effective December 31, 1997, electric generation plant is valued at the lower of original cost or market pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"(SFAS No. 121). All other utility plant continues to be valued at original cost. Capitalized Software Costs Software projects which exceed $5 million are capitalized. At December 31, 1998 and 1997, capitalized software costs totaled $84 and $86 million (net of $37 and $29 million accumulated amortization), respectively. Such capitalized amounts are amortized ratably over the expected lives of the projects when they become operational, not to exceed ten years. New Accounting Pronouncements In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 supersedes SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS No. 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the Company's financial condition or results of operations (see note 2). In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," (SFAS No. 132) which revises and standardizes employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans. The adoption of SFAS No. 132 did not affect the Company's financial condition or results of operations (see note 6). In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS No. 133) to establish accounting and reporting standards for derivatives. The new standard requires recognizing all derivatives as either assets or liabilities on the balance sheet at their fair value and specifies the accounting for changes in fair value depending upon the intended use of the derivative. The new standard will be effective for fiscal years beginning after June 15, 1999. The Company expects to adopt SFAS No. 133 in the first quarter of 2000. The Company is in the process of evaluating the impact of SFAS No. 133 on its financial statements. In November 1998, the FASB's Emerging Issues Task Force issued EITF 98-10. "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF 98-10 outlines attributes that may be indicative of an energy trading operation and gives further guidance on the accounting for contracts entered into by an energy trading operation. This accounting guidance requires mark-to-market accounting for contracts considered to be a trading activity. EITF 98-10 is applicable for fiscal years beginning after December 15, 1998 with any impact recorded as a cumulative effect adjustment through retained earnings at the date of adoption. At December 31, 1998, the Company has evaluated its wholesale marketing operation and related contracts under the guidance provided in EITF 98-10. For those contracts entered into in the over-the-counter market and considered to be a trading activity, the Company believes the impact to be immaterial. However, due to the duration, complexity, and uncertainties surrounding the long-term commitments considered to be trading activities, the Company is continuing to evaluate these commitments and the impact of adopting EITF 98-10. Reclassifications Certain prior-year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income or common shareholders' equity. 2. Nature of Operations and Information about Products and Services The Company is primarily a vertically integrated public utility that provides retail electric and natural gas service to the public in its traditional service territory and retail electric generation service throughout Pennsylvania in conjunction with Pennsylvania's Customer Choice Program. The Company also engages in the wholesale marketing of electricity on a national basis. The Company participates in joint ventures which provide services such as telecommunications in the Philadelphia metropolitan area. Revenues and expenses associated with these activities, the Customer Choice Program, joint ventures and other projects are reflected in Other Income and Deductions in the Company's Consolidated Statements of Income.
For the Years Ended December 31, 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------------------------- Thousands of Dollars ------------------------------------------------------- Operating Revenues from Electric Operations Residential $ 1,377,237 $ 1,357,449 $ 1,370,158 Small commercial and industrial 783,682 778,743 748,561 Large commercial and industrial 1,066,868 1,077,374 1,098,307 Other 149,424 147,523 140,133 Unbilled 1,409 19,130 (25,950) ----------- ----------- ----------- Service territory 3,378,620 3,380,219 3,331,209 Interchange sales 210,965 58,614 25,991 Sales to other utilities 1,221,255 727,836 497,636 ----------- ----------- ----------- Total operating revenues $ 4,810,840 $ 4,166,669 $ 3,854,836 =========== =========== =========== Operating Revenues from Gas Operations Residential $ 15,968 $ 16,852 $ 15,716 House heating 236,430 265,299 249,507 Commercial and industrial 124,548 144,801 132,822 Other 2,037 3,228 11,462 Unbilled (2,960) (969) (4,250) ----------- ----------- ----------- Subtotal 376,023 429,211 405,257 Other revenues (including gas transported for customers) 23,619 22,021 23,557 ----------- ----------- ----------- Total operating revenues $ 399,642 $ 451,232 $ 428,814 =========== =========== ===========
3. Rate Matters Final Restructuring Order On May 14, 1998, the PUC issued a final order (Final Restructuring Order) approving a Joint Petition for Settlement (Global Settlement) filed by the Company and numerous parties to the Company's restructuring proceeding mandated by the Electricity Generation Competition and Customer Choice Act (Competition Act). The Competition Act provides for the restructuring of the electric utility industry in Pennsylvania, including the deregulation of generation operations and the institution of retail competition for generation supply beginning in 1999. The Final Restructuring Order provided for the recovery of $5.26 billion of stranded costs through transition charges to distribution customers over a 12 year period beginning in 1999 with a 10.75% return on the balance and supercedes all prior orders regarding recovery of generation-related regulatory assets and liabilities. During the 12 year stranded cost recovery period, the Company will amortize the recoverable stranded costs in accordance with the rate schedules determined in the Final Restructuring Order. 31 The Final Restructuring Order provided for the phase-in of customer choice of electric generation supplier (EGS) for all customers: one-third of the peak load of each customer class on January 1, 1999; one-third on January 2, 1999; and the remainder on January 2, 2000. The Final Restructuring Order also established market share thresholds to ensure that a minimum number of residential and commercial customers choose an EGS. If less than 35% and 50% of residential and commercial customers have chosen an EGS by January 1, 2001 and January 1, 2003, respectively, the number of customers sufficient to meet the necessary threshold levels shall be randomly selected and assigned to an EGS through a PUC-determined process. Beginning January 1, 1999, electric rates will be unbundled into transmission and distribution components, a Competitive Transition Charge (CTC) for recovery of stranded costs and an energy and capacity charge. Eligible customers who choose an alternative EGS will not be charged the energy and capacity charge or the transmission charge and instead will purchase their electric energy supply and transmission at market-based rates from their EGS. The Company will in turn be reimbursed by the EGS, via the PJM Interconnection, LLC, for the cost of the transmission service at a rate approximately equivalent to the unbundled transmission rate. Also, beginning January 1, 1999, the Company will unbundle its retail electric rates for metering, meter reading and billing and collection services to provide credits to those customers who elect to have an alternative supplier perform these services. In accordance with the Competition Act and the Final Restructuring Order, the Company's retail electric rates are capped at the year-end 1996 levels (system-wide average of 9.96 cents/kilowatt hour (kWh)) through June 2005. The Final Restructuring Order requires the Company to reduce its retail electric rates by 8% from the 1996 system-wide average rate on January 1, 1999. The rate decrease will become 6% from January 1, 2000 until January 1, 2001, when the system-wide average rate cap will revert to 9.96 cents/kWh. The transmission and distribution rate component will remain capped at a system-wide average rate of 2.98 cents/kWh through June 30, 2005. Additionally, generation rate caps, defined as the sum of the applicable transition charge and energy and capacity charge, will remain in effect through 2010. 32 PECO Energy Company and Subsidiary Companies The Final Restructuring Order requires that on January 1, 2001, 20% of all of the Company's residential customers, determined by random selection and without regard to whether such customers are obtaining generation service from an alternate EGS, shall be assigned to a provider of last resort default supplier other than the Company through a PUC-approved bidding process. The Final Restructuring Order authorizes the issuance of up to $4 billion of transition bonds (Transition Bonds). In preparation for the issuance of Transition Bonds, the Company formed a special purpose subsidiary (SPS). The proceeds of the Transition Bonds are required to be used principally to reduce recoverable stranded costs and related capitalization. The Transition Bonds will be obligations of the SPS, secured by intangible transition property (ITP). ITP represents the irrevocable right of the Company or its assignee, to collect non-bypassable charges from customers to recover stranded costs. The Company filed complaints in federal and state courts relating to the restructuring orders issued by the PUC in December 1997, January 1998 and February 1998. In addition, numerous other parties filed appeals and cross appeals of these orders. In accordance with the terms of the Final Restructuring Order, all appeals and cross-appeals filed by the signatories to the Global Settlement have been placed in a pending but inactive status. Such appeals and cross appeals will be permanently withdrawn at such time that the Final Restructuring Order is no longer subject to administrative or judicial challenge. In an appeal of a PUC order issued in May 1997, an intervenor brought an action asserting that the stranded cost recovery provisions of the Competition Act violated the Commerce Clause of the United States Constitution. On May 7, 1998, the Commonwealth Court of Pennsylvania unanimously rejected the claim. The intervenor petitioned the Supreme Court of Pennsylvania for allowance of appeal. On September 29, 1998, the Pennsylvania Supreme Court denied the petition. On December 28, 1998, the intervenor filed a petition for certiorari with the United States Supreme Court. Limerick Through 1997, the Company was recovering certain deferred Limerick costs. At December 31, 1997, the unamortized portion of these regulatory assets of $321 million was included as part of electric generation-related regulatory assets. Under its electric tariffs and ECA, the Company was allowed to retain for shareholders any proceeds above the average energy cost for sales of 399 megawatts (MW) of near-term excess capacity and/or associated energy and to share in the benefits which resulted from the operation of both Limerick Units No. 1 and No. 2. The Company's ECA was discontinued at December 31, 1996. During 1996, the Company recorded as revenue net of fuel costs $82 million, as a result of the sale of the 399 MW of capacity and/or associated energy and the Company's share of Limerick energy savings. Declaratory Accounting Order Pursuant to a PUC Declaratory Order, effective October 1, 1996, the Company increased depreciation and amortization on assets associated with Limerick by $100 million per year and decreased depreciation and amortization on other Company assets by $10 million per year, for a net increase in depreciation and amortization of $90 million per year. At December 31, 1997, $90 million of depreciation and amortization that would have been recognized in 1998 was deferred as a regulatory asset since the Company's rates continued to be cost-based until January 1, 1999. During 1998 these amounts were amortized and recovered. Energy Cost Adjustment (ECA) Through December 31, 1996, the Company was subject to a PUC-established electric ECA which, in addition to reconciling fuel costs and revenues, incorporated a nuclear performance standard which allowed for financial bonuses or penalties depending on whether the Company's system nuclear capacity factor exceeded or fell below a specified range. For the year ended December 31, 1996 the Company recorded a bonus of $22 million. 4. Accounting Changes The Company accounts for its electric transmission and distribution and gas operations in accordance with SFAS No. 71 which requires the Company to record the financial statement effects of the rate regulation to which the Company is subject. Use of SFAS No. 71 is applicable to the utility operations of the Company which meet the following criteria: (1) third-party regulation of rates; (2) cost-based rates; and (3) a reasonable assumption that all costs will be recoverable from customers through rates. The Company believes that it is probable that regulatory assets associated with these operations will be recovered. Effective December 31, 1997, the Company discontinued the application of SFAS No. 71 for its retail electric generation operations and adopted the provisions of SFAS No. 101 "Regulated Enterprises - Accounting for the Discontinuation of Application of FASB Statement No. 71." As required by SFAS No. 101, at December 31, 1997, the Company performed an impairment test of its electric generation assets pursuant to SFAS No. 121, on a plant specific basis and determined that $6.1 billion of its $7.1 billion of electric generation assets would be impaired as of December 31, 1998. The Company estimated the fair value for each of its electric generating units by determining its estimated future operating cash inflows and outflows. The net future cash flows for each electric generating plant were then compared to its net book value. For any electric generating plant with future undiscounted cash flows less than its book value, net cash flows were discounted using a discount rate commensurate with the risk of each electric generating plant. Since the Company's retail electric rates continued to be cost-based through January 1, 1999, $333 million representing depreciation expense on electric generation-related assets in 1998 and $91 million representing amortization of other regulatory assets in 1998 were reclassified to a regulatory asset and were amortized and recovered in 1998. Notes to Consolidated Financial Statements 33 At December 31, 1997, the Company had total electric generation-related stranded costs of $8.4 billion, representing $5.8 billion of net stranded electric generation plant and $2.6 billion of electric generation-related regulatory assets. The original PUC restructuring order allowed the Company to recover $5.3 billion of its generation-related stranded costs from customers. This resulted in a net unrecoverable amount of $3.1 billion. Accordingly, the Company recorded an extraordinary charge at December 31, 1997 of $3.1 billion ($1.8 billion net of taxes) of electric generation-related stranded costs that will not be recovered from customers. The Final Restructuring Order did not change the amount of allowable stranded costs. Effective December 31, 1997, the Company discontinued the application of SFAS No. 71 for its wholesale energy sales operations. Based on projections of the Company's retail load growth, the Company concluded all of its owned generation capacity would be necessary to meet its electric retail load. As a result, the discontinuance of SFAS No. 71 for its wholesale energy sales operations did not result in a charge against income. 5. Commitments and Contingencies Capital Commitments The Company estimates $440 million of capital expenditures in 1999. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. Capital expenditures do not include investments in joint ventures including investments related to the Company's strategy to expand its generation portfolio. Nuclear Insurance As of December 31, 1998, the Price-Anderson Act limited the liability of nuclear reactor owners to $9.8 billion for claims that could arise from a single incident. The limit is subject to change to account for the effects of inflation and changes in the number of licensed reactors. The Company carries the maximum available commercial insurance of $200 million and the remaining $9.6 billion is provided through mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $88 million per reactor per incident, payable at no more than $10 million per reactor per incident per year. This assessment is subject to inflation and state premium taxes. In addition, the U.S. Congress could impose revenue raising measures on the nuclear industry to pay claims. The Company carries property damage, decontamination and premature decommissioning insurance in the amount of its $2.75 billion proportionate share for each station loss resulting from damage to its nuclear plants. In the event of an accident, insurance proceeds must first be used for reactor stabilization and site decontamination. If the decision is made to decommission the facility, a portion of the insurance proceeds will be allocated to a fund which the Company is required by the Nuclear Regulatory Commission (NRC) to maintain to provide for decommissioning the facility. The Company is unable to predict the timing of the availability of insurance proceeds to the Company for the Company's bondholders, and the amount of such proceeds which would be available. Under the terms of the various insurance agreements, the Company could be assessed up to $30 million for losses incurred at any plant insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the amount of insurance maintained. Such losses could have a material adverse effect on the Company's financial condition and results of operations. The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major accidental outage at a nuclear station. The premium for this coverage is subject to assessment for adverse loss experience. The Company's maximum share of any assessment is $10 million per year. Nuclear Decommissioning and Spent Fuel Storage The Company's current estimate of its nuclear facilities' decommissioning cost is $1.5 billion in 1997 dollars. Through 1998, this amount was being collected through electric rates over the life of each generating unit. Beginning in 1999, decommissioning costs will be recoverable through regulated rates. Under rates in effect through December 31, 1998, the Company collected and expensed approximately $20 million annually from customers which was accounted for as a component of depreciation expense and accumulated depreciation. At December 31,1998 and 1997, $336 and $294 million, respectively, were included in accumulated depreciation. In order to fund future decommissioning costs, at December 31, 1998 and 1997, the Company held $378 and $320 million, respectively, in trust accounts which are included as Investments in the Company's Consolidated Balance Sheets and include both net unrealized and realized gains. Net unrealized gains of $60 and $43 million were recognized as a Deferred Credit in the Company's Consolidated Balance Sheet at December 31, 1998 and 1997, respectively. The Company recognized net realized gains of $12, $11 and $10 million as Other Income in the Company's Consolidated Statement of Income for the years ended December 31, 1998, 1997 and 1996, respectively. The Company believes that the amounts being recovered from customers through regulated rates will be sufficient to fully fund the unrecorded portion of its decommissioning obligation. In an Exposure Draft issued in 1996, the FASB proposed changes in the accounting for closure and removal costs of production facilities, including the recognition, measurement and classification of decommissioning costs for nuclear generating stations. The FASB has expanded the scope of the Exposure Draft to include closure or removal liabilities that are incurred at any time during the operating life of the related long-lived asset. The FASB has decided that it should proceed toward either a final Statement or a revised Exposure Draft. The timing of this project is still to be determined. If current electric utility industry accounting practices for decommissioning are changed, annual provisions for decommissioning could increase and the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation with recognition of an increase in the cost of a related regulatory asset. Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is required to begin taking possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. Based on recent public pronouncements, it is not likely that a permanent disposal site will be available for the industry before 2015, at the earliest. In reaction to statements from the DOE that it was not legally obligated to begin to accept spent fuel in 1998, a group of utilities and state government agencies filed a lawsuit against the DOE which resulted in a decision by the U.S. Court of Appeals for the District of Columbia (D.C. Court of Appeals) in July 1996 that the DOE had an unequivocal obligation to begin to accept spent fuel in 1998. In accordance with the NWPA, the Company pays the DOE one mill ($.001) per kilowatthour of net nuclear generation for the cost of nuclear fuel long-term storage and disposal. This fee may be adjusted prospectively in order to ensure full cost recovery. Because of inaction by the DOE following the D.C. Court of Appeals finding of the DOE's obligation to begin receiving spent fuel in 1998, a group of forty-two utility companies, including the Company, and forty-six state agencies, filed suit against the DOE seeking authorization to suspend further payments to the U.S. government under the NWPA and to deposit such payments into an escrow account until such time as the DOE takes effective 34 PECO Energy Company and Subsidiary Companies action to meet its 1998 obligations. In November 1997, the D.C. Court of Appeals issued a decision in which it held that the DOE had not abided by its prior determination that the DOE has an unconditional obligation to begin disposal of spent nuclear fuel by January 31, 1998. The D.C. Court of Appeals also precluded the DOE from asserting that it was not required to begin receiving spent nuclear fuel because it had not yet prepared a permanent repository or an interim storage facility. The DOE and one of the utility companies filed Petitions for Reconsideration of the decision which were denied, as were petitions seeking U.S. Supreme Court review of the decision. In addition, the DOE is exploring other options to address delays in the waste acceptance schedule. Peach Bottom has on-site facilities with capacity to store spent nuclear fuel discharged from the units through 2000 for Unit No. 2 and 2001 for Unit No. 3. Life-of-plant storage capacity will be provided by on-site dry cask storage facilities, the construction of which began in 1998. Limerick has on-site facilities with capacity to store spent nuclear fuel to 2007. Salem has on-site facilities with spent fuel storage capacity through 2008 for Unit No. 1 and 2012 for Unit No. 2. Energy Commitments The Company's electric utility operations include the wholesale marketing of electricity. The Company utilized certain types of fixed-price contracts and other risk management instruments in connection with its wholesale marketing operations. These contracts include long-term contracts which commit the Company to purchase or sell energy at fixed prices in the future (i.e. fixed-price forward purchase and sales contracts), and short-term bilateral swaps and options contracted for in the over-the-counter market. Under some of these contracts, the Company may purchase at its option additional power as needed. The use of the foregoing types of contracts is so that the Company may manage and hedge its retail and wholesale commitments in coordination with the economic dispatch of the Company's installed capacity. At December 31,1998, the Company had long-term commitments relating to the purchase from unaffiliated utilities and others of energy associated with 632 MW of capacity in 1999, with 2,054 MW of capacity during the period 2000 through 2002 and with 2,431 MW of capacity thereafter. During 1998, purchases under long-term commitments resulted in expenditures of $170 million. As of December 31, 1998, these purchase commitments result in obligations of approximately $121 million for 1999, $526 million for 2000 through 2002 and $805 million thereafter. These purchases will be utilized through a combination of retail sales to customers, long-term sales to other utilities and open market sales. At December 31, 1998, the Company had entered into long-term agreements with unaffiliated utilities to sell energy associated with 5,094 MW of capacity, of which 1,030 MW of these agreements are for 1999, 2,202 MW are for 2000 through 2002 and the remaining 1,862 MW extend through 2009. At December 31, 1998, the Company had entered into long-term agreements with unaffiliated utilities to purchase transmission rights. These purchase commitments result in obligations of approximately $21 million in 1999, $19 million in 2000 and $9 million per year in 2001 through 2003. Environmental Issues The Company's operations have in the past and may in the future require substantial capital expenditures in order to comply with environmental laws. Additionally, under federal and state environmental laws, the Company is generally liable for the costs of remediating environmental contamination of property now or formerly owned by the Company and of property contaminated by hazardous substances generated by the Company. The Company owns or leases a number of real estate parcels, including parcels on which its operations or the operations of others may have resulted in contamination by substances which are considered hazardous under environmental laws. The Company is currently involved in a number of proceedings relating to sites where hazardous substances have been deposited and may be subject to additional proceedings in the future. The Company has identified 28 sites where former manufactured gas plant (MGP) activities have or may have resulted in actual site contamination. The Company is presently engaged in performing various levels of activities at these sites, including initial evaluation to determine the existence and nature of the contamination, detailed evaluation to determine the extent of the contamination and the necessity and possible methods of remediation, and implementation of remediation. The Pennsylvania Department of Environmental Protection has approved the Company's clean up of three sites. Eight other sites are currently under some degree of active study and/or remediation. As of December 31, 1998 and 1997, the Company had accrued $60 and $63 million, respectively, for environmental investigation and remediation costs, including $33 and $35 million, respectively, for MGP investigation and remediation, that currently can be reasonably estimated. The Company cannot reasonably estimate whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether such costs will be recoverable from third parties. Notes to Consolidated Financial Statements 35 Litigation Grays Ferry Cogeneration Partnership On April 9, 1998, Grays Ferry Cogeneration Partnership (Grays Ferry), two of three partners of Grays Ferry and Trigen-Philadelphia Energy Corporation, filed a complaint in Philadelphia County of Common Pleas against the Company for specific performance, breach of contract, fraud and breach of implied covenant of good faith and fair dealing, conversion, unjust enrichment, breach of fiduciary duties and tortious interference with respect to two power purchase agreements (PPAs) that the Company had entered into with Grays Ferry. The plaintiff seeks specific performance, damages in excess of $200 million and punitive damages. A preliminary injunction was entered against the Company on May 5, 1998, enjoining the Company from terminating the PPAs. On May29, 1998, Westinghouse Power Generation filed a complaint in the Philadelphia Court of Common Pleas against the Company for tortious interference with two alleged contracts that Westinghouse has with Grays Ferry. On September 4, 1998, The Chase Manhattan Bank, as agent for a syndicate of banks that are lenders to Grays Ferry, filed a complaint against the Company alleging tortious interference by the Company in the credit agreements between Grays Ferry and the banks and breach of contract of a letter agreement between the Company and the banks. The Company cannot predict the outcome of these matters. Cajun Electric Power Cooperative, Inc. On May 27, 1998, the United States Department of Justice, on behalf of the Rural Utilities Service and the Chapter 11 Trustee for the Cajun Electric Power Cooperative, Inc. (Cajun), filed an action claiming breach of contract against the Company in the United States District Court for the Middle District of Louisiana arising out of the Company's termination of the contract to purchase Cajun's interest in the River Bend nuclear power plant. This action seeks $67 million in damages. The Company cannot predict the outcome of this matter. The Company is involved in various other litigation matters. The ultimate outcome of such matters, while uncertain, is not expected to have a material adverse effect on the Company's financial condition or results of operations. 6. Retirement Benefits The Company and its subsidiaries have a defined benefit pension plan and postretirement benefit plans applicable to essentially all employees. The following provides a reconciliation of benefit obligations, plan assets and funded status of the plans.
Other Postretirement Thousands of Dollars Pension Benefits Benefits - - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1998 1997 - - -------------------------------------------------------------------------------------------------------------------------------- Change in Benefit Obligation Net benefit obligation at beginning of year $ 2,141,040 $ 1,982,915 $ 779,231 $ 662,701 Service cost 30,167 25,368 18,375 14,401 Interest cost 153,644 150,057 53,924 54,149 Plan participants' contributions -- -- 397 -- Plan amendments -- (3,052) -- -- Actuarial (gain)/loss 143,274 129,148 (8,260) 85,452 Curtailments (73,330) -- 10,403 -- Settlements (46,541) -- -- -- Special termination benefits 114,182 -- 29,712 -- Gross benefits paid (152,850) (143,396) (36,011) (37,472) ----------- ----------- ------------- ----------- Net benefit obligation at end of year $ 2,309,586 $ 2,141,040 $ 847,771 $ 779,231 =========== =========== ============= =========== Change in Plan Assets Fair value of plan assets at beginning of year $ 2,538,039 $ 2,302,935 $ 178,045 $ 126,661 Actual return on plan assets 343,754 377,803 23,535 22,691 Employer contributions 16,404 697 57,319 66,165 Plan participants' contributions -- -- 397 -- Gross benefits paid (152,850) (143,396) (36,011) (37,472) ----------- ----------- ------------- ----------- Fair value of plan assets at end of year $ 2,745,347 $ 2,538,039 $ 223,285 $ 178,045 =========== =========== ============= =========== Funded status at end of year $ 435,761 $ 396,999 $ (624,486) $ (601,186) Unrecognized net actuarial (gain)/loss (659,480) (649,903) 37,617 53,110 Unrecognized prior service cost 65,419 83,188 -- -- Unrecognized net transition obligation(asset) (30,512) (35,713) 165,786 223,226 ----------- ----------- ------------- ----------- Net amount recognized at end of year $ (188,812) $ (205,429) $ (421,083) $ (324,850) =========== =========== ============= =========== Amounts recognized in the consolidated balance sheet consist of: Prepaid benefit cost $ 30,462 $ 6,167 $ N/A $ N/A Accrued benefit cost (219,274) (211,596) (421,083) (324,850) ----------- ----------- ------------- ----------- Net amount recognized at end of year $ (188,812) $ (205,429) $ (421,083) $ (324,850) =========== =========== ============= ===========
36
PECO Energy Company and Subsidiary Companies Pension Benefits Other Postretirement Benefits - - -------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 -------------------------------------------------------------------------------------- Weighted-average assumptions as of December 31 Discount rate 7.00% 7.25% 7.75% 7.00% 7.25% 7.75% Expected return on plan assets 9.50% 9.50% 9.50% 8.00% 8.00% 8.00% Rate of compensation increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Health care cost trend on covered charges N/A N/A N/A 6.5% 7.0% 8.0% decreasing to decreasing to decreasing to ultimate trend ultimate trend ultimate trend of 5.0% in 2002 of 5.0% in 2002 5.0% in 2002 Components of net periodic benefit cost Service cost $ 30,167 $ 25,368 $ 27,627 $ 18,375 $14,401 $11,855 Interest cost 153,644 150,057 145,570 53,924 54,149 48,524 Expected return on assets (209,976) (182,866) (171,207) (13,243) (9,984) (3,937) Amortization of: Transition obligation (asset) (4,538) (4,538) (4,538) 14,882 14,882 14,882 Prior service cost 6,441 6,441 5,114 -- -- -- Actuarial (gain)loss (7,028) (3,898) 248 -- -- -- Curtailment charge (credit) (62,002) -- -- 52,961 -- -- Settlement charge (credit) (13,439) -- -- -- -- -- --------- -------- -------- -------- ------- ------- Net periodic benefit cost $(106,731) $ (9,436) $ 2,814 $126,899 $73,448 $71,324 ========= ======== ======== ======== ======= ======= Special termination benefit charge(credit) $ 114,182 $ -- $ -- $ 29,712 $ -- $ -- ========= ======== ======== ======== ======= =======
Sensitivity of retiree welfare results
Effect of a one percentage point increase in assumed health care cost trend on total service and interest cost components $ 10,432 on postretirement benefit obligation $ 90,490 Effect of a one percentage point decrease in assumed health care cost trend on total service and interest cost components $ (8,460) on postretirement benefit obligation $ (75,599)
Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plans. During 1998, costs were recognized for special termination benefits in connection with the retirement incentives and enhanced severance benefits provided under the Company's Workforce Reduction Program. The Company provides certain health care and life insurance benefits for retired employees. Company employees become eligible for these benefits if they retire from the Company with ten years of service. These benefits and similar benefits for active employees are provided by an insurance company whose premiums are based upon the benefits paid during the year. The Company sponsors a qualifying savings plan covering all employees. Contributions made by participating employees are matched based on a specified percentage of employee contribution up to 4% of the employees' pay base. The cost of the Company's matching contribution to the savings plan totaled $7 million, $7 million and $3 million in 1998, 1997 and 1996, respectively. Notes to Consolidated Financial Statements 37 7. Accounts Receivable Accounts receivable at December 31, 1998 and 1997 included unbilled operating revenues of $142 and $135 million, respectively. The allowance for uncollectible accounts at December 31, 1998 and 1997 was $20 and $32 million, respectively. The Company is party to an agreement with a financial institution under which it can sell or finance with limited recourse an undivided interest, adjusted daily, in up to $425 million of designated accounts receivable until November 2000. At December 31, 1998, the Company had sold a $425 million interest in accounts receivable, consisting of a $358 million interest in accounts receivable which the Company accounts for as a sale and a $67 million interest in special agreement accounts receivable which were accounted for as a long-term note payable (see note 12). The Company retains the servicing responsibility for these receivables. The agreement requires the Company to maintain the $425 million interest, which, if not met, requires the Company to deposit cash in order to satisfy such requirements. At December 31, 1998, the Company did not meet this requirement and was required to make a deposit of $7 million. 8. Common Stock At December 31, 1998 and 1997, common stock without par value consisted of 500,000,000 shares authorized and 224,684,306 and 222,546,562 shares outstanding, respectively. At December 31, 1998, there were 5,800,841 shares reserved for issuance under the Company's Dividend Reinvestment and Stock Purchase Plan. Stock Repurchase During 1997, the Company's Board of Directors authorized the repurchase of up to 25 million shares of its common stock from time to time through open-market, privately negotiated and/or other types of transactions in conformity with the rulesof the Securities and Exchange Commission. Pursuant to these authorizations, the Company has entered into forward purchase agreements to be settled from time to time, at the Company's election, on either a physical, net share or net cash basis. The amount at which these agreements can be settled is dependent principally upon the market price of the Company's common stock as compared to the forward purchase price per share and the number of shares to be settled. If these agreements had been settled on a net share basis at December 31, 1998, based on the closing price of the Company's common stock on that date, the Company would have received approximately 4.6 million shares of Company common stock. Stock Option Plans The Company maintains a Long-Term Incentive Plan (LTIP) for certain full-time salaried employees of the Company. The types of long-term incentive awards which have been granted under the LTIP are non-qualified options to purchase shares of the Company's common stock and shares of restricted common stock. In 1998, the Company initiated a Broad-based Incentive Program and awarded non-qualified options to all employees except those in electric transmission and distribution system and gas operations. The Company uses the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." If the Company elected to account for the LTIP based on SFAS No. 123, earnings applicable to common stock and earnings per average common share would have been changed to the pro forma amounts as follows:
1998 1997 - - ------------------------------------------------------------------------------------------------------------ Thousands of Dollars ----------------------------------------------------- Earnings (Loss) applicable to common stock As reported $ 499,615 $ (1,513,910) Pro forma $ 493,696 $ (1,515,895) Earnings (Loss) per average common share (Dollars) As reported $ 2.24 $ (6.80) Pro forma $ 2.20 $ (6.81)
Options granted under the LTIP and the Broad-based Incentive Program become exercisable upon attainment of a target share value and/or time. All options expire 10 years from the date of grant. Information with respect to the LTIP and the Broad-based Incentive Program at December 31, 1998 and changes for the three years then ended, is as follows: 38
PECO Energy Company and Subsidiary Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Price Price Price Shares (per share) Shares (per share) Shares (per share) 1998 1998 1997 1997 1996 1996 - - ---------------------------------------------------------------------------------------------------------------------------------- Balance at January 1 3,816,794 $ 26.14 2,961,194 $ 26.68 2,591,765 $ 26.16 Options granted 2,933,540 27.74 1,139,000 22.49 786,500 28.12 Options exercised (2,130,744) 23.86 -- -- (369,871) 25.07 Options cancelled (91,000) 24.82 (283,400) 24.96 (47,200) 29.36 ---------- --------- --------- Balance at December 31 4,528,590 27.71 3,816,794 26.14 2,961,194 26.68 ========== ========= ========= Exercisable at December 31 3,462,550 23.91 2,800,794 26.65 2,192,694 26.17 ========== ========= ========= Weighted average fair value of options granted during year $ 3.43 $ 2.97 $ 2.78 ========= ========= =========
The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in 1998, 1997 and 1996, respectively: 1998 1997 1996 - - -------------------------------------------------------------------------------- Dividend yield 6.8% 6.2% 6.2% Expected volatility 21.4% 19.5% 16.6% Risk-free interest rate 5.5% 6.4% 5.5% Expected life (years) 9.5 5 5 At December 31, 1998, the option groups outstanding, based on ranges of exercise prices, were as follows:
Options Outstanding Options Exercisable --------------------------------------------------------------------- Weighted- Average Weighted Weighted- Remaining Average Average Number Contractual Life Exercise Number Exercise Range of Exercise Prices Outstanding (Years) Price Exercisable Price - - ------------------------------------------------------------------------------------------------------------ $15.75 - $20.00 899,700 8.71 $ 19.60 899,700 $ 19.60 $20.01 - $25.00 1,019,750 8.41 22.15 1,004,750 22.18 $25.01 - $30.00 1,510,600 5.76 27.38 1,510,600 27.38 $30.01 - $35.00 78,500 9.43 32.97 47,500 31.98 $35.01 - $50.00 1,020,040 9.87 40.48 -- -- --------- --------- Total 4,528,590 3,462,550 ========= =========
The Company issued 7,000 and 4,475 shares of restricted common stock during 1998 and 1997, respectively. Vesting in the restricted common stock awards is ove r a period not to exceed 10 years from the grant date. The compensation cost associated with these awards is amortized to expense over the vesting period. Compensation cost associated with these awards is immaterial. 9. Earnings Per Share Diluted earnings per average common share is calculated by dividing earnings applicable to common stock by the weighted average shares of common stock outstanding including stock options outstanding under the Company's stock option plans considered to be common stock equivalents. The following table shows the effect of these stock options on the weighted average number of shares outstanding used in calculating diluted earnings per average common share:
1998 1997 1996 - - -------------------------------------------------------------------------------------------------------------------- Average Common Shares Outstanding 223,219,000 222,543,000 222,490,000 Assumed Conversion of Stock Options 685,000 -- -- ----------- ----------- ----------- Potential Average Dilutive Common Shares Outstanding 223,904,000 222,543,000 222,490,000 =========== =========== ===========
Notes to Consolidated Financial Statements 39 10. Preferred and Preference Stock At December 31, 1998 and 1997, Series Preference Stock consisted of 100,000,000 shares authorized, of which no shares were outstanding. At December 31, 1998 and 1997, cumulative Preferred Stock, no par value, consisted of 15,000,000 shares authorized.
Current Shares Amount Redemption Outstanding Thousands of Dollars Series of Preferred Stock Price(a) 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------- Series (without mandatory redemption) $4.68 104.00 150,000 150,000 $ 15,000 $ 15,000 $4.40 112.50 274,720 274,720 27,472 27,472 $4.30 112.00 150,000 150,000 15,000 15,000 $3.80 106.00 300,000 300,000 30,000 30,000 $7.48 (b) 500,000 500,000 50,000 50,000 --------- --------- ----------- ----------- 1,374,720 1,374,720 137,472 137,472 Series (with mandatory redemption) $6.12 (c) 927,000 927,000 92,700 92,700 --------- --------- ----------- ----------- Total preferred stock 2,301,720 2,301,720 $ 230,172 $ 230,172 ========= ========= =========== ===========
(a) Redeemable, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends. (b) None of the shares of this series are subject to redemption prior to April 1, 2003. (c) Annual sinking fund requirements in 1999 - 2003 are $18,540,000. None of the shares of this series are subject to redemption prior to August 1, 1999. 11. Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership (COMRPS) At December 31, 1998 and 1997, PECO Energy Capital, L.P. (Partnership), a Delaware limited partnership of which a wholly owned subsidiary of the Company is the sole general partner, had outstanding A, C and D series of COMRPS with liquidation values of $25 (A and C) and $1,000 (D) per security. Each series is supported by the Company's deferrable interest subordinated debentures, held by the Partnership, which bear interest at rates equal to the distribution rates on the related series of COMRPS. The interest expense on the debentures is included in Other Income and Deductions in the Consolidated Statements of Income and is deductible for tax purposes.
Mandatory Amount Redemption Distribution Trust Receipts Outstanding Thousands of Dollars At December 31, Date Rate 1998 1997 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------- Series A 2043 9.00% 8,850,000 8,850,000 $ 221,250 $ 221,250 B (a) 2025 8.72% -- 3,124,183 -- 80,835 C (b) 2037 8.00% 2,000,000 2,000,000 50,000 50,000 D (c) 2028 7.38% 78,105 -- 78,105 -- ---------- ---------- ------------- ------------- Total 10,928,105 13,974,183 $ 349,355 $ 352,085 ========== ========== ============= =============
(a) On May 15, 1998, PECO Energy Capital Trust I redeemed all outstanding Trust Receipts, each representing an 8.72% Cumulative Monthly Income Preferred Security, Series B of PECO Energy Capital, L.P. (b) Ownership of this series is evidenced by Trust Receipts, each representing an 8.00% COMRPS, Series C, representing limited partnership interests. The Trust Receipts were issued by PECO Energy Capital Trust II, the sole assets of which are 8.00% COMRPS, Series C. Each holder of Trust Receipts is entitled to withdraw the corresponding number of 8.00% COMRPS, Series C from the Trust in exchange for the Trust Receipts so held. (c) Ownership of this series is evidenced by Trust Receipts, each representing an 7.38% COMRPS, Series D, representing limited partnership interests. The Trust Receipts were issued by PECO Energy Capital Trust III, the sole assets of which are 7.38% COMRPS, Series D. Each holder of Trust Receipts is entitled to withdraw the corresponding number of 7.38% COMRPS, Series D from the Trust in exchange for the Trust Receipts so held. This Series was issued on April 6, 1998. 40 12. Long-Term Debt
At December 31, Series Due 1998 1997 - - ---------------------------------------------------------------------------------------------------------- Thousands of Dollars ------------------------------------------------------------- First and refunding mortgage bonds (a) 5 3/8% 1998 $ -- $ 225,000 7 1/2%-9 1/4% 1999 325,000 325,000 5 5/8%-7 3/8% 2001 330,000 330,000 7 1/8%-8% 2002 500,000 500,000 6 1/2%-6 5/8% 2003 450,000 450,000 6 3/8%-10 1/4% 2004-2008 111,562 115,625 (b) 2009-2013 154,200 154,200 6 5/8%-8 3/4% 2019-2024 1,082,130 1,607,130 ---------- ---------- Total first and refunding mortgage bonds 2,952,892 3,706,955 Notes payable 15,930 15,574 Pollution control notes (c) 212,705 212,705 Medium-term notes (d) 50,000 62,400 Note Payable - accounts receivable agreement (e) 66,837 128,999 Unamortized debt discount and premium, net (17,249) (26,405) ---------- ---------- Total long-term debt 3,281,115 4,100,228 Due within one year (f) 361,523 247,087 ---------- ---------- Long-term debt included in capitalization (g) $2,919,592 $3,853,141 ========== ==========
(a) Utility plant is subject to the lien of the Company's mortgage. (b) Floating rates, which were an average annual interest rate of 3.13% at December 31, 1998. (c) Floating rates, which were an average annual interest rate of 3.32% at December 31, 1998. (d) Medium-term notes collateralized by mortgage bonds. The average annual interest rate was 9.09% at December 31, 1998. (e) See note 7. (f) Long-term debt maturities, including mandatory sinking fund requirements, in the period 1999-2003 are as follows: 1999 - $361,523,000; 2000 - $74,255,500; 2001 - $337,431,500; 2002 - $507,436,500; 2003 - $406,534,500. (g) The annualized interest on long-term debt at December 31, 1998, was $222 million, of which $210 million was associated with mortgage bonds and $12 million was associated with other long-term debt. In the fourth quarter of 1998, the Company redeemed $525 million of its First Mortgage Bonds consisting of: $150 million of its 8 3/4% series due 2022, $125 million of its 8 5/8% series due 2022 and $250 million of its 8 1/4% series due 2022 at redemption prices of 105.75, 105.20 and 104.85 plus interest, respectively. As a result, the Company recognized an extraordinary charge of $34 million ($20 million net of income taxes). The extraordinary charge consisted primarily of premiums and the write-off of deferred charges. 13. Short-Term Debt
1998 1997 1996 - - --------------------------------------------------------------------------------------------- Thousands of Dollars -------------------------------------------- Average borrowings $ 209,261 $ 248,111 $ 198,090 Average interest rates, computed on daily basis 5.83% 5.83% 5.64% Maximum borrowings outstanding $ 525,000 $ 464,500 $ 369,500 Average interest rates, at December 31 6.17% 6.74% 6.90%
The Company has a $400 million one-year term loan agreement with a group of banks, which expires on November 30, 1999. At December 31, 1998, $400 million of short-term debt was outstanding under this term loan agreement. The Company has a $900 million unsecured revolving credit facility with a group of banks. The credit facility consists of a $450 million 364-day credit agreement and a $450 million three-year credit agreement. The Company uses the credit facility principally to support its $600 million commercial paper program. There was no debt outstanding under this credit facility at December 31, 1998. At December 31, 1998, $125 million of commercial paper was outstanding. At December 31, 1998, the Company had available formal and informal lines of credit with banks aggregating $100 million. Notes to Consolidated Financial Statements 41 14. Income Taxes Income tax expense (benefit) is comprised of the following components:
For the Years Ended December 31, 1998 1997 1996 - - --------------------------------------------------------------------------------------------------- Thousands of Dollars ------------------------------------------------------- Included in operations: Federal Current $ 358,051 $ 251,509 $ 126,471 Deferred (109,211) (11,378) 154,564 Investment tax credit, net (18,066) (18,201) (15,979) State Current 95,309 76,689 62,839 Deferred (6,429) (5,850) 12,206 ----------- ----------- ----------- 319,654 292,769 340,101 =========== =========== =========== Included in extraordinary item: Federal Current (10,583) (123) -- Deferred -- (987,234) -- State Current (3,174) (29) -- Deferred -- (303,575) -- ----------- ----------- ----------- (13,757) (1,290,961) -- ----------- ----------- ----------- Total $ 305,897 $ (998,192) $ 340,101 =========== =========== ===========
The total income tax provisions, excluding the extraordinary item, differed from amounts computed by applying the federal statutory tax rate to pre-tax income as follows:
1998 1997 1996 - - --------------------------------------------------------------------------------------------------- Thousands of Dollars ------------------------------------------------------ Net Income $ 532,378 $ 336,558 $ 517,205 Total income tax provisions 319,654 292,769 340,101 --------- --------- --------- Income before income taxes $ 852,032 $ 629,327 $ 857,306 ========= ========= ========= Income taxes on above at federal statutory rate of 35% $ 298,211 $ 220,264 $ 300,057 Increase (decrease) due to: Property basis differences (10,262) 40,828 9,903 State income taxes, net of federal income tax benefit 57,582 46,046 48,779 Amortization of investment tax credit (18,066) (18,201) (15,979) Prior period income taxes (12,951) (2,985) (1,707) Other, net 5,140 6,817 (952) --------- --------- --------- Total income tax provisions $ 319,654 $ 292,769 $ 340,101 ========= ========= ========= Effective income tax rate 37.5% 46.5% 39.7% ========= ========= =========
42 PECO Energy Company and Subsidiary Companies Provisions for deferred income taxes consist of the tax effects of the following temporary differences:
1998 1997 1996 - - --------------------------------------------------------------------------------------------------------------- Thousands of Dollars ------------------------------------------------------- Deferred generation charges recoverable $ (174,787) $ -- $ -- Depreciation and amortization 140,448 57,530 42,385 Deferred energy costs (2,491) 2,256 27,374 Retirement and separation programs (51,146) (12,734) 19,746 Incremental nuclear outage costs (7,434) (981) 2,440 Uncollectible accounts 4,764 (1,710) (2,805) Reacquired debt (5,026) (8,607) (9,578) Unbilled revenue 3,579 (5,110) 3,910 Environmental clean-up costs (3,574) (15,121) (714) Obsolete inventory 4,206 (7,074) 5,829 Limerick plant disallowances and phase-in plan -- (747) (747) AMT credits (42,067) -- 83,010 Other nuclear operating costs 9,926 (9,892) -- Other 7,962 (15,038) (4,080) ----------- ----------- ----------- Subtotal (115,640) (17,228) 166,770 Extraordinary item -- (1,290,809) -- ----------- ----------- ----------- Total $ (115,640) $(1,308,037) $ 166,770 =========== =========== ===========
The tax effect of temporary differences giving rise to the Company's net deferred tax liability as of December 31, 1998 and 1997 is as follows:
Liability or (Asset) 1998 1997 - - ------------------------------------------------------------------------------------------------ Thousands of Dollars - - ------------------------------------------------------------------------------------------------ Nature of temporary difference: Plant basis difference $ 2,653,760 $ 2,620,254 Deferred investment tax credit 299,999 318,065 Deferred debt refinancing costs 37,575 111,651 Other, net (300,375) (249,167) Deferred income taxes (net) on the balance sheet $ 2,690,959 $ 2,800,803
The net deferred tax liability shown above as of December 31, 1998 and 1997 was comprised of $3,123 and $3,153 million of deferred tax liabilities, and $432 and $352 million of deferred tax assets, respectively. In accordance with SFAS No. 71, the Company recorded a recoverable deferred income tax asset of $614 and $586 million at December 31,1998 and 1997, respectively. These balances are applicable only to regulated assets, due to the discontinuance of SFAS No. 71 for the Company's electric generation operations. These recoverable deferred income taxes include the deferred tax effects associated principally with liberalized depreciation accounted for in accordance with the ratemaking policies of the PUC, as well as the revenue impacts thereon, and assume recovery of these costs in future rates. The Internal Revenue Service (IRS) has completed and settled its examinations of the Company's federal income tax returns through 1990 which resulted in a net increase of $11 million in credits available for carry forward. The 1991 through 1993 federal income tax returns have been examined and the Company and the IRS are in the process of settling the audit which will not have an adverse impact on financial condition or results of operations of the Company. The years 1994 through 1996 are currently being examined by the IRS. Notes to Consolidated Financial Statements 43 15. Taxes, Other Than Income - Operating For the Years Ended December 31, 1998 1997 1996 - - ----------------------------------------------------------------------------- Thousands of Dollars ----------------------------------------- Gross receipts $ 155,663 $ 163,552 $ 160,246 Capital stock 43,754 48,085 41,972 Real estate 51,313 69,597 69,185 Payroll 30,068 25,976 27,585 Other (1,283) 2,881 558 --------- ----------- ----------- Total $ 279,515 $ 310,091 $ 299,546 ========= =========== =========== 16. Leases Leased property included in utility plant was as follows:
At December 31, 1998 1997 - - ------------------------------------------------------------- Thousands of Dollars ------------------------- Nuclear fuel $ 523,325 $ 521,921 Electric plant 2,321 2,321 --------- ----------- Gross leased property 525,646 524,242 --------- ----------- Accumulated amortization (371,338) (348,309) Net leased property $ 154,308 $ 175,933 ========= ===========
Nuclear fuel is amortized as the fuel is consumed. Amortization of leased property totaled $60, $39 and $31 million for the years ended December 31, 1998, 1997 and 1996, respectively. Other operating expenses included interest on capital lease obligations of $9 million in 1998, 1997 and 1996, respectively. Minimum future lease payments as of December 31, 1998 were:
For the Years Ending December 31, Capital Leases Operating Leases Total - - ----------------------------------------------------------------------------------------------------------------- Thousands of Dollars --------------------------------------------------- 1999 $ 69,026 $ 48,806 $ 117,832 2000 65,714 45,457 111,171 2001 32,439 42,850 75,289 2002 92 42,056 42,148 2003 92 49,386 49,478 Remaining years 721 511,164 511,885 ---------- ----------- ---------- Total minimum future lease payments $ 168,084 $ 739,719 $ 907,803 Imputed interest (rates ranging from 6.5% to 17.0%) (13,776) =========== ========== ---------- Present value of net minimum future lease payments $ 154,308 ----------
Rental expense under operating leases totaled $69 million in 1998 and $74 million in 1997 and 1996, respectively. 44 PECO Energy Company and Subsidiary Companies 17. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned electric utility plant at December 31, 1998, were as follows:
Transmission Production Plants and Other Plant ----------------------------------------------------- --------------- Peach Bottom Salem Keystone Conemaugh ----------------------------------------------------- Public Service GPU GPU PECO Energy Electric and Generating Generating Various Operator Company Gas Company Corp. Corp. Companies - - ----------------------------------------------------------------------------------------------------------------- Participating interest 42.49% 42.59% 20.99% 20.72% 21% to 43% Company's share (Thousands of Dollars) Utility plant $ 347,001 $ 20,026 $ 118,256 $ 190,672 $ 82,078 Accumulated depreciation 183,383 12,929 73,644 91,052 32,638 Construction work in progress 22,586 1,632 1,770 3,865 1,300
The Company's participating interests are financed with Company funds and, when placed in service, all operations are accounted for as if such participating interests were wholly owned facilities. 18. Cash and Cash Equivalents For purposes of the Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The following disclosures supplement the accompanying Statements of Cash Flows:
1998 1997 1996 - - ----------------------------------------------------------------------------------------- Thousands of Dollars ---------------------------------------- Cash paid during the year: Interest (net of amount capitalized) $ 384,932 $ 405,838 $ 415,063 Income taxes (net of refunds) 346,539 345,232 251,554 Noncash investing and financing: Capital lease obligations incurred 38,307 32,909 33,063
19. Investments
At December 31, 1998 1997 - - --------------------------------------------------------------------------------------- Thousands of Dollars ---------------------------- Trust accounts for decommissioning nuclear plants $ 377,970 $ 320,442 Telecommunications ventures 48,391 85,601 Energy services and other ventures 39,359 65,578 Nonutility property 40,456 24,697 Other 44,728 19,517 ------------ ----------- Total $ 550,904 $ 515,835 ============ ===========
20. Financial Instruments Fair values of financial instruments, including liabilities, are estimated based on quoted market prices for the same or similar issues. The carrying amounts and fair values of the Company's financial instruments as of December 31, 1998 and 1997 were as follows:
Thousands of Dollars 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------------------------------------------------------- Non-derivatives: Assets Cash and temporary cash investments $ 48,083 $ 48,083 $ 33,404 $ 33,404 Trust accounts for decommissioning nuclear plants 377,970 377,970 320,442 320,442 Liabilities Long-term debt (including amounts due within one year) 3,281,115 3,404,250 4,100,228 4,210,885 Derivatives: Treasure forwards -- (300) -- -- Forward interest rate swaps -- (4,400) -- --
Notes to Consolidated Financial Statements 45 Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and customer accounts receivable. The Company places its temporary cash investments with high-credit quality financial institutions. At times, such investments may be in excess of the Federal Deposit Insurance Corporation limit. Concentrations of credit risk with respect to customer accounts receivable are limited due to the Company's large number of customers and their dispersion across many industries. The fair value of derivatives generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date, thereby taking into account the current unrealized gains or losses of open contracts. Dealer quotes are available for all of the Company's derivatives. The anticipated issuance of Transition Bonds significantly exposes the Company to market risks of changes in interest rates. Derivative financial instruments are used by the Company to reduce these risks. The Company has entered into treasury forwards in an aggregate notional amount of $4 billion with an average interest rate of 4.71%. The Company has entered into forward starting interest rate swaps in the aggregate notional amount of $713 million with an average interest rate of 5.72%. The notional amount of derivatives do not represent amounts that are exchanged by the parties and, thus, are not a measure of the Company's exposure. The amounts exchanged are calculated on the basis of the notional or contract amounts, as well as on the other terms of the derivatives, which relate to interest rates and the volatility of these rates. The Company would be exposed to credit-related losses in the event of non-performance by the counterparties that issued the derivative instruments. The Company does not expect that counterparties to the interest rate swaps and treasury forwards will fail to meet these obligations, given their high credit ratings. The credit exposure of derivatives contracts is represented by the fair value of contracts at the reporting date. The Company's interest-rate swaps are documented under master agreements. Among other things, these agreements provide for a maximum credit exposure for both parties. Payments are required by the appropriate party when the maximum limit is reached. The same maximum credit exposure applies to the treasury forwards. 21. Early Retirement and Separation Program In April 1998, the Board of Directors authorized the implementation of a retirement incentive program and an enhanced severance benefit program. The retirement incentive program allowed employees age 50 and older, who have been designated as excess or who are in job classifications facing reduction, to retire from the Company. The enhanced severance benefit program provided non-retiring excess employees with fewer than ten years of service benefits equal to two weeks pay per year of service. Non-retiring excess employees with more than ten years of service receive benefits equal to three weeks pay per year of service. Through its Cost Competitiveness Review (CCR), the Company identified 1,157 employees across the Company who were considered excess or were in job classifications facing reduction. Of the 1,157 employees, 711 were eligible for and agreed to take the retirement incentive program. The remaining employees are eligible for the enhanced severance benefit program. The Company has eliminated approximately 422 positions as of December 31, 1998 through both attrition and the early retirement and severance program. The Company expects an additional 735 positions to be eliminated during 1999 and 2000. The Company recorded an early retirement and separation program charge to earnings of $125 million ($74 million, net of income taxes) in the fourth quarter of 1998 to recognize costs related to the CCR workforce reduction program. This charge consisted of the following: $121 million for the actuarially determined pension and other postretirement benefits costs and $4 million for outplacement services costs and the continuation of benefits for one year. Approximately $0.8 million of the $125 million charge was related to the Company's non-utility operations and accordingly was recorded in Other Income and Deductions. All cash payments related to the early retirement and severance program are expected to be funded through the assets of the Company's Service Annuity Plan. 22. Other Income and Deductions Settlement of Salem Litigation On December 31, 1997, the Company received $70 million pursuant to the May 1997 settlement agreement with Public Service Electric and Gas Company resolving a suit filed by the Company concerning the shutdown of Salem. During the second quarter of 1997, the Company recorded $70 million ($41 million net of income taxes) as Other Income. Ventures The Company periodically reviews its investments to determine that they are properly valued in its financial statements. Other Income and Deductions reflects write-offs of these investments of $10 million and $20 million in 1998 and 1997, respectively. 46 23. Regulatory Assets and Liabilities At December 31, 1998 and 1997, the Company had deferred the following regulatory assets on the Consolidated Balance Sheets:
1998 1997 - - ------------------------------------------------------------------------------------------ Thousands of Dollars ---------------------------------- Competitive transition charge $ 5,274,624 $ 5,274,624 Recoverable deferred income taxes (see note 14) 614,445 585,661 Deferred generation costs recoverable in current rates -- 424,497 Loss on reacquired debt 77,165 83,918 Compensated absences 4,289 3,881 Deferred energy costs 29,847 35,665 Non-pension postretirement benefits 90,915 97,409 ------------- ------------- Total $ 6,091,285 $ 6,505,655 ============= =============
24. Quarterly Data (Unaudited) The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts:
Operating Revenues Operating Income Net Income (Loss) ---------------------------------------------------------------------------------- Millions of Dollars 1998 1997 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31 $ 1,173 $ 1,163 $ 285 $ 302 $ 114 $ 113 June 30 1,207 1,032 362 250 151 123 September 30 1,774 1,278 546 388 274 158 December 31 1,056 1,145 90 66 (26) (1,891) Earnings Applicable Average Shares Earnings to Common Stock Outstanding Per Average Share ---------------------------------------------------------------------------------- Millions of Dollars (except per share data) 1998 1997 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------- Quarter ended March 31 $ 110 $ 109 222.5 222.5 $ 0.50 $ 0.49 June 30 148 118 222.7 222.5 0.66 0.53 September 30 270 154 223.1 222.5 1.21 0.69 December 31 (28) (1,895) 224.5 222.5 (0.13) (8.51)
The increase in 1998 second quarter results was primarily due to increased operating revenues net of related fuel costs. Revenues from wholesale sales increased significantly compared to 1997. Second quarter 1998 earnings also benefited from the full return to service of Salem which decreased the cost of fuel purchases and outage-related costs compared to 1997, from decreased operating and maintenance expense and from reduced uncollectible expenses. The increase in 1998 third quarter results was due primarily to increased operating revenues net of related fuel costs. Revenues from wholesale sales increased significantly compared to 1997. Third quarter earnings also benefited from the full return to service of Salem, reduction of operating and maintenance costs, reduction of uncollectible expenses and a one-time refund of gross receipts tax. The increase in the fourth quarter results was primarily due to the extraordinary charge of $8.24 per share recorded in 1997 resulting from deregulation of the Company's electric generation operations; several one-time adjustments for changes in employee benefits; write-offs of information systems development charges reflecting clarification of accounting guidelines and additional reserves to revise estimates for accruals; higher income tax adjustments; and higher losses from the Company's non-utility ventures. This increase was partially offset by an Early Retirement and Severance charge and an extraordinary charge for the premiums paid in connection with the redemption of higher-cost, long-term debt recorded in the fourth quarter of 1998. Notes to Consolidated Financial Statements 47 Financial Statistics Summary of Earnings and Financial Condition
For the Years Ended December 31, 1998 1997 1996 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------------------------------- Millions of Dollars, except per share data --------------------------------------------------------------------------------------- Income Data Operating Revenues $ 5,210 $ 4,618 $ 4,284 $ 4,186 $ 4,041 $ 3,988 Operating Income 1,283 1,006 1,249 1,401 1,064 1,390 Income before Extraordinary Item 532 337 517 610 427 591 Extraordinary Item (net of income taxes) (20) (1,834) -- -- -- -- Net Income (Loss) 513 (1,497) 517 610 427 591 Earnings Applicable to Common Stock 500 (1,514) 499 587 389 542 Earnings per Average Common Share Before Extraordinary Item 2.33 1.44 2.24 2.64 1.76 2.45 Extraordinary Item (0.09) (8.24) -- -- -- -- Earnings per Average Common Share 2.24 (6.80) 2.24 2.64 1.76 2.45 Dividends per Common Share 1.00 1.80 1.755 1.65 1.545 1.43 Common Stock Equity 13.61 12.25 20.88 20.40 19.41 19.25 Average Shares of Common Stock Outstanding (Millions) 223.2 222.5 222.5 221.9 221.6 221.1 At December 31, - - -------------------------------------------------------------------------------------------------------------------------------- Balance Sheet Data Net Utility Plant $ 4,610 $ 4,495 $ 10,760 $ 10,758 $ 10,829 $ 10,763 Leased Property, net 154 176 182 181 174 194 Total Current Assets 569 1,003 420 426 427 515 Total Deferred Debits and Other Assets 6,715 6,683 3,899 3,944 3,992 3,905 ---------- ---------- --------- --------- -------- -------- Total Assets $ 12,048 $ 12,357 $ 15,261 $ 15,309 $ 15,422 $ 15,377 ========== ========== ========= ========= ======== ======== Common Shareholders' Equity $ 3,057 $ 2,727 $ 4,646 $ 4,531 $ 4,303 $ 4,263 Preferred and Preference Stock Without Mandatory Redemption 137 137 199 199 277 423 With Mandatory Redemption 93 93 93 93 93 187 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership 349 352 302 302 221 -- Long-Term Debt 2,920 3,853 3,936 4,199 4,786 4,884 ---------- ---------- --------- --------- -------- -------- Total Capitalization 6,556 7,162 9,176 9,324 9,680 9,757 Total Current Liabilities 1,735 1,619 1,103 1,052 850 954 Total Deferred Credits and Other Liabilities 3,757 3,576 4,982 4,933 4,892 4,666 ---------- ---------- --------- --------- -------- -------- Total Capitalization and Liabilities $ 12,048 $ 12,357 $ 15,261 $ 15,309 $ 15,422 $ 15,377 ========== ========== ========= ========= ======== ========
Operating Statistics
For the Years Ended December 31, 1998 1997 1996 1995 1994 1993 - - ---------------------------------------------------------------------------------------------------------------------------------- Electric Operations Output (Millions of Kilowatthours) Fossil 10,262 9,659 10,856 10,792 11,239 10,352 Nuclear 29,732 25,853 24,373 25,499 28,195 27,026 Hydro 1,715 1,558 2,404 1,425 1,970 1,699 Pumped storage output 1,426 1,403 1,540 1,741 1,596 1,478 Pumped storage input (1,853) (1,924) (2,230) (2,507) (2,256) (2,192) Purchase and interchange 34,075 29,615 19,539 13,945 6,164 6,447 Internal combustion 176 144 179 175 106 56 ---------- ---------- ----------- ----------- ----------- ---------- Total electric output 75,533 66,308 56,661 51,070 47,014 44,866 ========== ========== =========== =========== =========== ========== Sales (Millions of Kilowatthours) Residential 10,623 10,407 10,671 10,636 10,859 10,609 Small commercial and industrial 6,888 6,685 6,491 6,200 6,150 5,769 Large commercial and industrial 15,678 15,034 15,208 15,763 15,968 15,956 Other 803 841 902 860 791 771 Unbilled 131 70 (327) 535 (205) 31 ---------- ---------- ----------- ----------- ----------- ---------- Service territory 34,123 33,037 32,945 33,994 33,563 33,136 Interchange sales 3,483 1,927 935 496 768 457 Sales to other utilities 37,258 28,893 20,243 14,041 10,039 8,670 ---------- ---------- ----------- ----------- ----------- ---------- Total electric sales 74,864 63,857 54,123 48,531 44,370 42,263 ========== ========== =========== =========== =========== ========== Number of Customers, December 31, Residential 1,343,791 1,333,861 1,324,448 1,321,379 1,350,210 1,341,873 Small commercial and industrial 145,055 144,142 142,431 141,653 143,605 142,363 Large commercial and industrial 3,248 3,308 3,299 3,394 3,603 3,742 Other 1,150 1,094 1,051 959 944 888 ---------- ---------- ----------- ----------- ----------- ---------- Total electric customers 1,493,244 1,482,405 1,471,229 1,467,385 1,498,362 1,488,866 ========== ========== =========== =========== =========== ========== Operating Revenues (Millions of Dollars) Residential $ 1,377 $ 1,357 $ 1,370 $ 1,379 $ 1,371 $ 1,351 Small commercial and industrial 784 779 749 730 710 679 Large commercial and industrial 1,067 1,077 1,098 1,135 1,149 1,168 Other 150 148 140 137 136 161 Unbilled 1 19 (26) 43 (11) (1) ---------- ---------- ----------- ----------- ----------- ---------- Service territory 3,379 3,380 3,331 3,424 3,355 3,358 Interchange sales 211 59 26 17 23 14 Sales to other utilities 1,221 728 498 334 247 233 ---------- ---------- ----------- ----------- ----------- ---------- Total electric revenues $ 4,811 $ 4,167 $ 3,855 $ 3,775 $ 3,625 $ 3,605 ========== ========== =========== =========== =========== ========== Operating Expenses Operating expenses, excluding depreciation and amortization $ 2,993 $ 2,698 $ 2,244 $ 2,026 $ 2,209 $ 1,894 Depreciation and amortization 611 553 462 431 416 401 ---------- ---------- ----------- ----------- ----------- ---------- Total operating expenses 3,604 3,251 2,706 2,457 2,625 2,295 ---------- ---------- ----------- ----------- ----------- ---------- Electric Operating Income $ 1,207 $ 916 $ 1,149 $ 1,318 $ 1,000 $ 1,310 ========== ========== =========== =========== =========== ========== Average Use per Residential Customer (Kilowatthours) Without electric heating 6,948 6,695 6,771 6,908 6,736 6,727 With electric heating 15,398 16,400 17,946 17,189 17,527 17,096 All customers 7,935 7,830 8,074 8,130 8,041 7,970 Electric Peak Load, Demand (Thousands of Kilowatts) 7,108 7,390 6,509 7,244 7,227 7,100 Net Electric Generating Capacity- Year-end Summer Rating (Thousands of Kilowatts) 9,262 9,204 9,201 9,078 8,956 8,877 Cost of Fuel per Million BTU $ 0.82 $ 0.84 $ 0.93 $ 0.87 $ 0.89 $ 0.90 BTU per Net Kilowatthour Generated 10,496 10,737 10,682 10,705 11,617 10,675
Notes to Consolidated Financial Statements
Operating Statistics (continued) For the Years Ended December 31, 1998 1997 1996 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------------------------------- Gas Operations Sales (Millions of Cubic Feet) Residential 1,496 1,614 1,681 1,516 1,636 1,637 House heating 28,402 32,666 35,471 30,698 32,246 30,242 Commercial and industrial 16,757 19,830 20,999 18,464 19,762 18,635 Other 554 673 2,571 1,582 7,039 9,733 Unbilled (440) 212 (1,306) 1,710 (474) 676 --------- ---------- ---------- ---------- ---------- ---------- Total gas sales 46,769 54,995 59,416 53,970 60,209 60,923 Gas transported for customers 28,204 30,412 27,891 48,531 29,801 22,946 --------- ---------- ---------- ---------- ---------- ---------- Total gas sales and gas transported 74,973 85,407 87,307 102,501 90,010 83,869 ========= ========== ========== ========== ========== ========== Number of Customers Residential 55,417 55,592 56,003 56,533 57,122 59,573 House heating 324,081 314,335 303,996 295,481 287,481 277,500 Commercial and industrial 35,931 35,215 34,182 33,308 32,292 31,573 --------- ---------- ---------- ---------- ---------- ---------- Total gas customers 415,429 405,142 394,181 385,322 376,895 368,646 ========= ========== ========== ========== ========== ========== Operating Revenues (Millions of Dollars) Residential $ 16 $ 17 $ 16 $ 15 $ 16 $ 15 House heating 236 265 249 236 238 202 Commercial and industrial 125 145 133 126 128 110 Other 2 3 11 5 20 28 Unbilled (3) (1) (4) 7 (3) 5 --------- ---------- ---------- ---------- ---------- ---------- Subtotal 376 429 405 389 399 360 Other revenues (including gas transported for customers) 24 22 24 22 17 23 --------- ---------- ---------- ---------- ---------- ---------- Total gas revenues $ 400 $ 451 $ 429 $ 411 $ 416 $ 383 --------- ---------- ---------- ---------- ---------- ---------- Operating Expenses Operating expenses, excluding depreciation and amortization $ 291 $ 333 $ 302 $ 302 $ 326 $ 279 Depreciation and amortization 32 28 27 26 26 24 --------- ---------- ---------- ---------- ---------- ---------- Total operating expenses 323 361 329 328 352 303 --------- ---------- ---------- ---------- ---------- ---------- Gas Operating Income $ 77 $ 90 $ 100 $ 83 $ 64 $ 80 ========= ========== ========== ========== ========== ==========
Securities Statistics Ratings on PECO Energy Company's securities
Mortgage Bonds Preferred Stock -------------------------------------------------------------- Date Date Agency Rating Established Rating Established - - ------------------------------------------------------------------------------------------------------------ Duff and Phelps, Inc. A- 10/98 BBB 10/98 Fitch Investors Service, Inc. A- 9/92 BBB+ 9/92 Moody's Investors Service Baa1 4/92 baa2 4/92 Standard & Poor's Corporation BBB+ 4/92 BBB- 2/99
NYSE-Composite Common Stock Prices, Earnings and Dividends by Quarter (Per Share)
1998 1997 ------------------------------------------------------------------------------------------ Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter ------------------------------------------------------------------------------------------ High price $42-3/16 $36-3/4 $ 30-5/8 $24-11/16 $ 25-1/8 $ 24-5/16 $21-1/8 $ 26-3/8 Low price $ 36-1/2 $28-1/2 $21-3/16 $ 18-7/8 $21-7/16 $ 20-3/4 $18-3/4 $ 20 Close $ 41-3/4 $36-3/4 $29-3/16 $ 22-1/8 $ 24-1/4 $ 23-7/16 $ 21 $ 20-3/8 Earnings $ (0.13) $ 1.21 $ 0.66 $ 0.50 $ (8.51) $ 0.69 $ 0.53 $ 0.49 Dividends $ 0.25 $ 0.25 $ 0.25 $ 0.25 $ 0.45 $ 0.45 $ 0.45 $ 0.45
50 PECO Energy Company and Subsidiary Companies Board of Directors Susan W. Catherwood (55) Chairman, Trustee Board, The University of Pennsylvania Medical Center and Health System Daniel L. Cooper (63) Former Vice President and General Manager, Nuclear Services Division Gilbert/Commonwealth, Inc. M. Walter D'Alessio (65) President and Chief Executive Officer, Legg Mason Real Estate Services (Commercial mortgage banking and pension fund advisors) G. Fred DiBona, Jr. (47)(1) President and Chief Executive Officer, Independence Blue Cross R. Keith Elliott (56) Chairman, Chief Executive Officer, Hercules, Inc. Richard H. Glanton (52)(1) Partner of the law firm Reed Smith Shaw and McClay Rosemarie B. Greco (52)(2) Former President and Chief Executive Officer, Private Industry Council Corbin A. McNeill, Jr. (59)(1) Chairman of the Board President and Chief Executive Officer of the Company John M. Palms, PhD. (63) President, University of South Carolina Joseph F. Paquette, Jr. (64)(1) Former Chairman of the Board of Directors of the Company Ronald Rubin (67) Chief Executive Officer, Pennsylvania Real Estate Investment Trust Robert Subin (60) Former Senior Vice President, Campbell Soup Company Officers Corbin A. McNeill, Jr. (59) Chairman of the Board of Directors President and Chief Executive Officer Gerald R. Rainey (49)(9) President and Chief Nuclear Officer, PECO Nuclear Nancy J. Bessey (45)(6) President, Power Team Gregory A. Cucchi (49)(10) Senior Vice President, Corporate and President, PECO Energy Ventures James W. Durham (61) Senior Vice President and General Counsel Michael J. Egan (45) Senior Vice President, Finance and Chief Financial Officer Kenneth G. Lawrence (51)(10) Senior Vice President, Corporate and President, PECO Energy Distribution William H. Smith, III (50) Senior Vice President, Business Services Group David W. Woods (41)(14) Senior Vice President, Corporate and Public Affairs John B. Cotton (53)(11) Special Projects, PECO Nuclear John Doering, Jr. (55)(4) Vice President, Peach Bottom Atomic Power Station Gregory P. Dudkin (41)(6) Vice President, Operations, PECO Energy Distribution Drew B. Fetters (47)(10) Vice President, Nuclear Development, PECO Nuclear Jean H. Gibson (42)(8) Vice President and Controller Joseph J. Hagan (48)(16) Senior Vice President, Nuclear Operations, PECO Nuclear Paul E. Haviland (44)(5) Vice President, Corporate Development Thomas P. Hill, Jr. (50)(7) Vice President, Regulatory and External Affairs, PECO Energy Distribution Christine A. Jacobs (46)(13) Vice President, Support Services Suzanne L. Keenan (34)(6) Vice President, Customer & Marketing Services, PECO Energy Distribution Cassandra A. Matthews (48) Vice President, Information Technology and Chief Information Officer John P. McElwain (48)(15) Vice President, Nuclear Projects, PECO Nuclear J. Barry Mitchell (51) Vice President, Treasury and Evaluation, and Treasurer James A. Muntz (41)(16) Vice President, Fossil Operations James D. von Suskil (52)(3) Vice President, Limerick Generating Station, PECO Nuclear Richard G. White (40)(12) Vice President, Corporate Planning Katherine K. Combs (48) Corporate Secretary Edward J. Cullen, Jr. (51) Assistant Corporate Secretary Todd D. Cutler (38) Assistant Corporate Secretary Diana Moy Kelly (44) Assistant Treasurer George R. Shicora (52) Assistant Treasurer and Cash Manager (1) Member of the Executive Committee of the Board of Directors (2) Elected February 23, 1998 (3) Effective January 26, 1998 (4) Effective March 2, 1998 (5) Effective March 4, 1998 (6) Effective April 8, 1998 (7) Effective April 9, 1998 (8) Effective May 31, 1998 (9) Effective June 1, 1998 (10) Effective June 22, 1998 (11) Effective August 14, 1998 (12) Effective September 28, 1998 (13) Effective November 9, 1998 (14) Effective December 1, 1998 (15) Effective January 6, 1999, no longer an officer of PECO Energy (16) Effective January 26, 1999 Stock Exchange Listings Most Company securities are listed on the New York Stock Exchange and the Philadelphia Stock Exchange under PE. Dividends The Company has paid dividends on its common stock continually since 1902. The Board of Directors normally considers common stock dividends for payment in March, June, September and December. The Company expects that the $1.00 per share dividend paid to common shareholders in 1998 is fully taxable as dividend income for federal income tax purposes. Shareholders may use their dividends to purchase additional shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan (Plan). The Company pays all brokerage and service fees for Plan purchases. All shareholders have the opportunity to invest additional funds in common stock of the Company, whether or not they have their dividends reinvested, with all purchasing fees paid by the Company. In 1998, over 57 percent of the Company's common shareholders were participants in the Plan. Information concerning the Plan may be obtained from: EquiServe, PECO Energy Company Plan, P.O. Box 2598, Jersey City, NJ 07303-2598. Comments Welcomed The Company is always pleased to answer questions and provide information. Please address your comments to Katherine K. Combs, Corporate Secretary, PECO Energy Company, 2301 Market Street, P.O. Box 8699, Philadelphia, PA 19101-8699. Inquiries relating to shareholder accounting records, stock transfer and change of address should be directed to: EquiServe, P.O. Box 2500, Jersey City, NJ 07303-2500. Toll-Free Telephone Lines Toll-free telephone lines are available to the Company's shareholders for inquiries concerning their stock ownership. Calls should be directed to 1-800-626-8729. For current Company news call 1-888-340-7326 Shareholder Information Annual Meeting The Annual Meeting of the Shareholders of the Company will be held at the Sunnybrook Ballroom and Conference Center in Pottstown, Pennsylvania on April 27, 1999, at 9:30 AM. The record date for voting at the shareholders' meeting is March 5, 1999. Prompt return of proxies will be appreciated. To vote your proxy over the internet visit http://www.vote-by-net.com To receive future Annual Reports and proxy statements electronically, sign-up at: http://www.vote-by-net.com/signup/peco Form 10-K Form 10-K, the annual report filed with the Securities and Exchange Commission, is available without charge to shareholders by calling 1-888-340-7326 or by obtaining a copy from our internet site http://www/peco.com/investor. Shareholders The Company had 142,794 shareholders of record of common stock as of December 31, 1998. Transfer Agents and Registrars Preferred and Common Stock Registrar and Transfer Agent: First Chicago Trust, Division of EquiServe, (1-800-626-8729) P.O. Box 2500, Jersey City, NJ 07303-2500 First and Refunding Mortgage Bond Trustee: First Union National Bank, (1-800-665-9343) Corporate Trust Operations Customer Information Center Redemption Bldg 3C3 1525 West W.T. Harris Blvd.Charlotte, NC 28288-1153 Internet Site Visit our internet site at http://www.peco.com General Office 2301 Market Street Philadelphia, Pennsylvania 19103 (215) 841-4000 EX-21 10 EXHIBIT 21 PECO Energy Company Subsidiaries PECO Energy Power Company (PA) Susquehanna Power Company (MD) The Proprietors of the Susquehanna Canal (inactive) (MD) Susquehanna Electric Company (MD) Eastern Pennsylvania Development Company (PA) Adwin Equipment Company (PA) Adwin (Schuylkill) Cogeneration, Inc. (PA) Adwin Realty Company (PA) Energy Performance Services, Inc. (PA) PECO Energy Capital Corp (DE) Horizon Energy Company (d/b/a Exelon Energy) (PA) PECO Wireless, LLC (DE) Exelon Corporation (PA) Energy Trading Company (DE) ATNP Finance Company (DE) PEC Financial Services, LLC (PA) PECO Energy Corporation (PA) Buttonwoods Associates, Inc. (DE) Route 213 Enterprises, Inc. (DE) EX-23 11 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of PECO Energy Company on Form S-3 (File Nos. 333-27721, 33-31436, 33-43523, 333-47985, 33-49887, 33-53785, 33-53785-01, 33-54935, 33-59152) and Form S-8 (File Nos. 333-00451, 333-27799, 333-27805, 333-27807, 33-30317, 333-36739, 333-67367) of our report dated February 5, 1999, on our audits of the consolidated financial statements and financial statement schedules of PECO Energy Company and Subsidiary Companies as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included (or incorporated by reference) in this Annual Report on Form 10-K /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 30, 1999 EX-24 12 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Susan W. Catherwood of Bryn Mawr, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Susan W. Catherwood ----------------------- DATE: 1/27/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Daniel L. Cooper of Wyomissing, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Daniel L. Cooper -------------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, M. Walter D'Alessio of Philadelphia, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ M. Walter D' Alessio ------------------------ DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, G. Fred DiBona, Jr. of Bryn Mawr, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ G. Fred DiBona, Jr. ----------------------- DATE: 2/2/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, R. Keith Elliott of Mendenhall, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ R. Keith Elliott -------------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Richard H. Glanton of Philadelphia, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Richard H. Glanton ---------------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Rosemarie B. Greco of Philadelphia, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Rosemarie B. Greco ---------------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Dr. John M. Palms of Columbia, SC, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Dr. John M. Palms --------------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Joseph F. Paquette, Jr. of Gladwyne, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Joseph F. Paquette, Jr. --------------------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Ronald Rubin of Narberth, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Ronald Rubin ---------------- DATE: 1/26/99 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that I, Robert Subin of Blue Bell, PA, do hereby appoint C. A. MC NEILL, JR. attorney for me and in my name and on my behalf to sign the annual Securities and Exchange Commission report on Form 10-K for 1998 of PECO Energy Company, to be filed with the Securities and Exchange Commission, and generally to do and perform all things necessary to be done in the premises as fully and effectually in all respects as I could do if personally present. /s/ Robert Subin ---------------- DATE: 1/26/99 EX-27 13 FINANCIAL DATA SCHEDULE
OPUR1 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 4,764 551 569 5,980 184 12,048 3,589 1 (533) 3,057 93 138 2,920 525 0 125 362 0 85 69 4,799 12,048 5,211 320 3,927 4,247 964 (70) 894 362 513 13 500 223 331 1,433 2.24 2.23 (1) Net Income includes an extraordinary item of $20 million (net of income taxes) reflecting the write-off of premium and deferred charges related to the redemption of First Mortgage Bonds.
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