-----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, QS9zRFvCYvhWak8r3aKPVPr3exWydARAvLfVaadIGFkTEDe5rwMwJo9djF3IVXt3 xxeitdq5do3fjq+NdxutIg== 0000950159-96-000037.txt : 19960329 0000950159-96-000037.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950159-96-000037 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PECO ENERGY CO CENTRAL INDEX KEY: 0000078100 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 230970240 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-01401 FILM NUMBER: 96539461 BUSINESS ADDRESS: STREET 1: 2301 MARKET ST STREET 2: P O BOX 8699 CITY: PHILADELPHIA STATE: PA ZIP: 19103 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, 1995 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 (I.R.S. Employer incorporation or organization) Identification No.) P.O. Box 8699 2301 Market Street, Philadelphia, PA (215) 841-4000 (Address of principal executive offices) (Registrant's telephone number, including area code) 19101 (Zip Code) ------------------------------------ Securities registered pursuant to Section 12(b) of the Act: First and Refunding Mortgage Bonds (Registered on the New York Stock Exchange): 6 1/8% Series due 1997 (*) 7 3/8% Series due 2000 6 1/2% Series due 2003 7 1/8% Series due 2023 5 3/8% Series due 1998 5 5/8% Series due 2001 6 3/8% Series due 2005 7 3/4% Series 2 due 2023 7 1/4% Series due 2024 __________________ (*) Also registered on the Philadelphia Stock Exchange
Cumulative Preferred Stock -- without par value (Registered on the New York and Philadelphia Stock Exchanges): $7.96 Series $4.68 Series $4.40 Series $4.30 Series $3.80 Series Common Stock -- without par value (Registered on the New York and Philadelphia Stock Exchanges) 9.00% Cumulative Monthly Income Preferred Securities, Series B, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Registered on the New York Stock Exchange) Trust Receipts of PECO Energy Capital Trust I, each representing a 8.72% Cumulative Monthly Income Preferred Security, Series B, $25 stated value, issued by PECO Energy Capital, L.P. and unconditionally guaranteed by the Company (Registered 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 $6,832,147,699 at January 31, 1996. 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: 222,255,816 shares outstanding at January 31, 1996. ------------------------------------ DOCUMENTS INCORPORATED BY REFERENCE (In Part) Annual Report of PECO Energy Company to Shareholders for the year 1995 is incorporated in part in Parts I, II and IV hereof, as specified herein. Proxy Statement of PECO Energy Company in connection with its 1996 Annual Meeting of Shareholders is incorporated in part in Part III hereof, as specified herein. ================================================================================ TABLE OF CONTENTS Page No. PART I ITEM 1. BUSINESS.......................................................1 The Company....................................................1 Electric Operations............................................1 General...................................................1 Limerick Generating Station...............................4 Peach Bottom Atomic Power Station.........................5 Salem Generating Station..................................6 Fuel...........................................................8 Nuclear...................................................8 Coal.....................................................10 Oil......................................................11 Natural Gas..............................................11 Gas Operations................................................11 Segment Information...........................................12 Rate Matters..................................................12 Construction..................................................14 Capital Requirements and Financing Activities.................15 Employee Matters..............................................16 Environmental Regulations.....................................17 Water....................................................17 Air......................................................17 Solid and Hazardous Waste................................18 Costs....................................................22 Competition...................................................22 Telecommunications............................................24 PECO Energy Capital Corp. and Related Entities................24 Executive Officers of the Registrant..........................25 ITEM 2. PROPERTIES....................................................27 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 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 PECO Energy Company (Company), incorporated in Pennsylvania in 1929, is an operating utility which provides electric and gas service to the public in southeastern Pennsylvania. The total area served by the Company covers 2,107 square miles. Electric service is supplied in an area of 1,972 square miles with a population of about 3,700,000, including 1,600,000 in the City of Philadelphia. Approximately 94% of the electric service area and 64% of retail kilowatthour (kWh) sales are in the suburbs around Philadelphia, and 6% of the service area and 36% of such sales are in the City of Philadelphia. Natural gas service is supplied in a 1,475-square-mile area of southeastern Pennsylvania adjacent to Philadelphia with a population of 1,900,000. The Company has the necessary franchise rights, which are generally non-exclusive, to operate in the areas served. The Company is subject to regulation by the Pennsylvania Public Utility Commission (PUC) as to retail electric and gas rates, issuances of securities and certain other aspects of the Company's operations and by the Federal Energy Regulatory Commission (FERC) as to wholesale electric and 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 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. Electric Operations General During 1995, 90.2% of the Company's operating revenues and 93.5% of its operating income were from electric operations. Electric sales and operating revenues for 1995 by class of customer are set forth below:
Operating Sales Revenues (millions of kWh) (millions of $) Residential ................... 10,859 $1,401 Small commercial and industrial 6,299 739 Large commercial and industrial 15,976 1,147 Other ......................... 860 137 ------ ------ Service territory ........ 33,994 3,424 Interchange sales ............. 496 17 Sales to other utilities ...... 14,041 334 ------ ------ Total .................... 48,531 $3,775 ====== ======
Energy from the Company's installed generating capacity together with power purchases are utilized to satisfy the requirements of jurisdictional customers, to meet sales commitments to other utilities and to make spot sales. 1 The net installed electric generating capacity (summer rating) of the Company and its subsidiaries at December 31, 1995 was as follows:
Type of Capacity Megawatts % of Total Nuclear ....................... 4,040 44.5% Mine-mouth, coal-fired ........ 709 7.8 Service-area, coal-fired ...... 725 8.0 Oil-fired ..................... 1,176 13.0 Gas-fired ..................... 201 2.2 Hydro (includes pumped storage) 1,392 15.3 Internal combustion ........... 835 9.2 ----- ----- Total ..................... 9,078(1)(2) 100.0% ===== ===== - --------------- (1) Includes capacity available for sale to other utilities. (2) See "Fuel" for sources of fuels used in electric generation.
As a result of the developing wholesale generation market, the Company has increased both its wholesale power purchases and sales. In the ordinary course of its business, the Company enters into long-term and short-term commitments to buy and sell power. At December 31, 1995, the Company had 1,199 megawatts (MW) of installed generating capacity available for sales to others. In addition, during 1995, the Company entered into an agreement to purchase energy associated with 300 MW from 1996 through 2000 from an unaffiliated utility. The Company also has agreements with other utilities to sell energy and/or capacity. The Company has long-term agreements over the next five years with unaffiliated utilities to sell energy associated with 1,185 MW of capacity. These power sales agreements extend from 1996 to 2023. See note 4 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1995. 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. The maximum hourly demand on the Company's system was 7,244 MW which occurred on August 4, 1995. The Company estimates its generating reserve margin for 1996 to be 26%. This is based on the most recent annual peak-load forecast which assumes normal peak weather conditions and the sale to other utilities of 400 MW of capacity. The Company is a member of the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM), which fully integrates, on the basis of relative cost of generation, the bulk-power generating and transmission operations of eleven investor-owned electric utilities serving more than 22 million people in a 50,000-square-mile territory. In addition, PJM companies coordinate planning and install facilities to obtain the greatest practicable degree of reliability, compatible economy and other advantages from the pooling of their respective electric system loads, transmission facilities and generating capacity. The maximum PJM demand of 48,524 MW occurred on August 2, 1995 when PJM's installed capacity (summer rating) was 55,962 MW. The Company's installed capacity for 1996-99 is expected to be sufficient for the Company to meet its obligation to supply its PJM reserve margin share during that period. During 1995, the Company notified the FERC of its intention to propose initiatives to increase wholesale electric competition in the Mid-Atlantic region served by PJM. See "Competition." The Company's nuclear-generated electricity is supplied by Limerick Generating Station (Limerick) Units No. 1 and No. 2 and Peach Bottom Atomic Power Station (Peach Bottom) Units No. 2 and No. 3, which are operated by the Company, and by 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 each has a capacity of 1,115 MW; 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. 2 The Company's nuclear generating facilities represent approximately 45% of its installed generating capacity and 65% of its investment in electric plant. In 1995, approximately 50% of the Company's electric output was generated from nuclear sources. 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 sets the limit of liability of approximately $8.9 billion for claims that could arise from an incident involving any licensed nuclear facility in the nation. The limit is subject to increase to reflect the effects of inflation and changes in the number of licensed reactors. All utilities with nuclear generating units, including the Company, have obtained coverage for these potential claims through a combination of private insurances of $200 million and mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $79 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. If the damages from an incident at a licensed nuclear facility exceed $8.9 billion, the President of the United States is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue-raising measures on the nuclear industry to pay claims. The Price-Anderson Act and the extensive regulation of nuclear safety by the NRC do not preempt claims under state law for personal, property or punitive damages related to radiation hazards. Although the NRC requires the maintenance of property insurance on nuclear power plants in the amount of $1.06 billion or the amount available from private sources, whichever is less, the Company maintains coverage in the amount of its $2.75 billion proportionate share for each station. 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 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 $46 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, if not recovered through the ratemaking process, 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 21-week waiting period before recovery of costs can commence. The premium for this coverage is subject to an assessment for adverse loss experience. The Company's maximum share of any assessment is $14 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. The PUC, based on estimates of decommissioning costs for each of the nuclear facilities in which the Company has an ownership interest, 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. The Company's ownership portion of decommissioning costs is approximately $643 million expressed in 1990 dollars to be collected over the life of each generating unit. Under current rates, which reflect decommissioning costs of $643 million, the 3 Company collects and expenses approximately $20 million annually from customers for decommissioning the Company's ownership portion of its nuclear units. At December 31, 1995, the Company held $223 million in trust accounts, representing amounts recovered from customers and net realized and unrealized investment earnings thereon, to fund future decommissioning costs. Based on a recent Company study, the Company's share of the cost to decommission its nuclear units is estimated to be $1.2 billion in 1995 dollars. The Company will ultimately seek to recover through the ratemaking process increased decommissioning costs, although such recovery is not assured. In February 1996, the Financial Accounting Standards Board (FASB) issued an Exposure Draft entitled "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which proposes, among other things, changes in the recognition, measurement and classification of decommissioning costs for nuclear generating stations. The proposed statement would be effective for years beginning after December 15, 1996, and applies to all entities having either legal or constructive obligations (defined as an obligation which the entity has "little or no discretion to avoid") for closure or removal of long-lived assets. The FASB is expected to issue a final pronouncement by the end of 1996. For additional information concerning nuclear decommissioning, see note 4 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1995. Limerick Generating Station Limerick Unit No. 1 achieved a capacity factor of 88% in 1995 and 85% in 1994. Limerick Unit No. 2 achieved a capacity factor of 85% in 1995 and 93% in 1994. 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 1996 and 1995, respectively. On May 24, 1995, the NRC issued its periodic Systematic Assessment of Licensee Performance (SALP) Report for Limerick for the period September 26, 1993 through April 1, 1995. Limerick achieved ratings of "1," the highest of the three rating categories, in all four functional areas - Operations, Maintenance, Engineering and Plant Support. The NRC stated that, overall, it observed an excellent level of performance at Limerick. The NRC noted continued strong performance in the Operations and Engineering areas during this SALP period and improved performance was noted in the Maintenance and Plant Support areas. The NRC stated that factors contributing to this level of performance included excellent management oversight, along with excellent interdepartmental communication and coordination of activities. Particularly, the NRC noted the Company's excellent planning and execution of the two refueling outages during the SALP period and the aggressive use of probabilistic safety assessment in scheduling outage and non-outage maintenance activities. The NRC also stated that, in recognition of Limerick's superior performance, the next SALP period for Limerick has been extended to 24 months and both the number of resident NRC inspectors and planned total inspection hours have been reduced. 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. Initial examination of Unit No. 2 has been scheduled for the refueling outage planned for January 1999 in accordance with industry experience and guidance. 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 finding to the NRC and recommended continued operation of Unit No. 3 for a two-year cycle. Unit No. 3 was re-examined during its last refueling outage in the fall of 1995 and the extent of cracking identified was determined to be within industry-established guidelines. In a letter to the NRC dated November 3, 1995, the Company concluded that there is a substantial margin for each core shroud weld to allow for continued operation of Unit No. 3 until its next refueling outage, scheduled for 1997, at which time it will be reinspected. Peach Bottom Unit No. 2 was 4 examined in October 1994 during its last refueling outage and the inspection revealed a minimal number of flaws. In a letter dated November 7, 1994, the Company submitted its findings to the NRC and also recommended continued operation of Unit No. 2 until its next refueling outage, scheduled for September 1996, at which time it will be reinspected. The Company is also participating in a GE BWR Owners Group to develop long-term corrective actions. The NRC has raised concerns that the Thermo-Lag 330 fire barrier systems used to protect cables and equipment may not provide the necessary level of fire protection and requested licensees to describe short- 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 Peach Bottom and Limerick. 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. In 1992, the Company requested authorization from the NRC to rerate the maximum reactor-core power levels of each Limerick unit by 5% to 1,115 MW. The NRC approved the Company's request for Unit No. 2 on February 16, 1995 and for Unit No. 1 on January 24, 1996. Modifications to Unit No. 2 were completed during the Unit's 1995 refueling outage. Modifications to Unit No. 1 were completed during the Unit's February 1996 refueling outage. 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. The Company has obtained all permits for the construction and operation of the supplemental cooling water system. Certain of the permits relating to the operation of the system must be renewed periodically. The Company has also 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 only enough cooling water to operate both Limerick units simultaneously at 70% of rated capacity for short periods of time. Peach Bottom Atomic Power Station Peach Bottom Unit No. 2 achieved a capacity factor of 98% in 1995 and 81% in 1994. Peach Bottom Unit No. 3 achieved a capacity factor of 78% in 1995 and 98% in 1994. 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 1994 and 1995, respectively. On December 5, 1995, the NRC issued its periodic SALP Report for Peach Bottom for the period May 1, 1994 to October 15, 1995. Peach Bottom achieved ratings of "1" in the areas of Operations, Maintenance and Plant Support. The area of Engineering achieved a rating of "2." Overall, the NRC observed excellent performance at Peach Bottom during the assessment period. Station management oversight, effective use of performance enhancement at all levels of the organization and other measures in identifying and evaluating issues 5 contributed to the strong performance. The NRC noted performance improvements in all of the assessment areas, particularly in Maintenance and Plant Support. Although the NRC noted that excellent performance was often displayed in the Engineering area, errors in modification work, in addition to some other lapses, indicated inconsistent engineering performance. The Company is taking actions to further improve Peach Bottom performance. By letter dated October 18, 1994, the NRC approved the Company's request to rerate the authorized maximum reactor-core power levels of each Peach Bottom unit by 5% to 1,093 MW. The amendment of the Unit No. 2 facility operating license was effective upon the date of the NRC approval letter, and the associated hardware changes were implemented during the Unit No. 2 refueling outage in the fall of 1994. The amendment for Unit No. 3 was issued by the NRC on July 18, 1995 and the associated hardware changes were implemented during the Unit No. 3 refueling outage in the fall of 1995. 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 Salem Unit No. 1 achieved a capacity factor of 26% in 1995 and 59% in 1994. Salem Unit No. 2 achieved a capacity factor of 21% in 1995 and 58% in 1994. Salem Units No. 1 and No. 2 are each on an 18-month refueling cycle. The last refueling outages for Units No. 1 and No. 2 were in 1995. Salem Units No. 1 and No. 2 have been out of service since May 16, 1995 and June 7, 1995, respectively, due to various operational and technical problems. The Company has been informed by PSE&G that since the shutdown of Salem, PSE&G has been engaged in an assessment of each unit to identify and complete the work necessary to achieve restart. PSE&G has stated that it will keep each unit off line until it is satisfied that the unit is ready to return to service and to operate reliably over the long term and the NRC has agreed that the unit is sufficiently prepared to restart. On June 9, 1995, the NRC issued a Confirmatory Action Letter documenting these commitments of PSE&G. On December 11, 1995, PSE&G presented its restart plan for both units to the NRC at a public meeting. On February 13, 1996, the NRC staff issued a letter to PSE&G indicating that it had concluded that PSE&G's overall restart plan, if implemented effectively, should adequately address the numerous Salem issues to support a plant restart, and describing further actions the NRC will undertake to confirm that PSE&G's actions have resulted in the necessary performance improvements to support plant restart. The Company has been informed by PSE&G that as a part of PSE&G's review, an examination is being performed on the steam generators, which are large heat exchangers used to produce steam to drive the turbines. Within the industry, certain pressurized water reactors (PWRs) other than Salem have experienced cracking in a sufficient number of the steam generator tubes to require various modifications to these tubes and replacement of the steam generators in some cases. Until the current outage, regular periodic inspections of the steam generators for each Salem unit have resulted in repairs of a small number of tubes well within NRC limits. As a result of the experience of other utilities with cracking in steam generator tubes, in April 1995, the NRC issued a generic letter to all utilities with PWRs. This generic letter requested utilities with PWRs to conduct steam generator examinations with more sensitive inspection devices capable of detecting evidence of degradation. Subsequently, PSE&G conducted steam generator inspections of the Salem units using the latest technology available, including a new, more sensitive, eddy current testing device. With respect to Salem Unit No. 1, the most recent inspection of the steam generators is not complete, but partial results from eddy current inspections conducted in February 1996 indicate degradation in a significant number of tubes. The inspections are continuing and PSE&G has decided to remove several tubes for laboratory examination to confirm the results of the inspections. Removal of the tubes is expected to commence in April and preliminary results of the state of Salem Unit No. 1 tubes from the subsequent laboratory examinations 6 should be known in the third quarter of 1996. However, based on the results of inspections to date, PSE&G has concluded that the Salem Unit No. 1 outage, which was expected to be completed in the second quarter of 1996, will be required to be extended for a substantial additional period to evaluate the state of the steam generators and to subsequently determine an appropriate course of action. Degradation of steam generators in PWRs has become of increasing concern for the nuclear industry. Nationally and internationally, utilities have undertaken actions to repair or replace steam generators. In the extreme, degradation of steam generators has contributed to the retirement of several American nuclear power reactors. After the Salem Unit No. 1 tubes are fully examined, PSE&G will be able to evaluate its course of action in light of NRC and other industry requirements. The examination of the Salem Unit No. 2 generators was completed in January 1996 using the same inspection procedure used in the examination of Salem Unit No. 1. The results of the Salem Unit No. 2 inspection are being reviewed again to confirm their results in light of the experience with Salem Unit No. 1. Although this review has not yet been completed, results to date appear to confirm that the condition of the Salem Unit No. 2 steam generators are well within current operating limits at the present time. PSE&G has also removed tubes from Salem Unit No. 2 steam generators for laboratory analysis to confirm the results of this testing, the results of which should be known in May. PSE&G had planned to return Salem Unit No. 1 to service in the second quarter of 1996 and Salem Unit No. 2 in the third quarter of 1996. As a result of the extent of the recently discovered degradation in the Salem Unit No. 1 steam generators, PSE&G is focusing its efforts on returning Salem Unit No. 2 to service in the third quarter of 1996. The additional steam generator inspections and testing on Salem Unit No. 2 are not expected to adversely affect the timing of its restart. However, because the timing of the restart is subject to satisfactory completion of the requirements of the restart plan, as determined by PSE&G and the NRC, no assurance can be given that the projected return date will be met. For information concerning additional costs associated with the shutdown of Salem, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" and note 24 of Notes to Consolidated Financial Statements in the Company's Annual Report to Shareholders for the year 1995 and "Rate Matters." The Company has been informed by PSE&G that on January 3, 1995, the NRC issued its periodic SALP Report for Salem for the period June 20, 1993 to November 5, 1994. Salem received ratings of "3" in the areas of Operations and Maintenance, a rating of "2" in the area of Engineering, and a rating of "1" in the area of Plant Support. The NRC noted an overall decline in performance and evidenced particular concern with plant and operator challenges caused by repetitive equipment problems and personnel errors. The NRC also noted that although PSE&G has initiated several comprehensive actions within the past year to improve plant performance, and that some recent incremental gains have been made, these efforts have yet to noticeably change overall performance at Salem. The Company has been informed by PSE&G that PSE&G's own assessments, as well as those by the NRC and the Institute of Nuclear Power Operations, indicate that additional efforts are required to further improve operating performance, and that PSE&G is committed to taking the necessary actions to address Salem's performance needs. It is anticipated that the NRC will maintain a close watch on Salem's performance and corrective actions related to the Salem shutdown. No assurance can be given as to what, if any, further or additional actions may be taken or required by the NRC to improve Salem's performance. In addition to the matters discussed above, see "Legal Proceedings" and "Environmental Regulations -- Water." 7 Fuel The following table shows the Company's sources of electric output for 1995 and as estimated for 1996:
1995 1996 (Est.) (1) Nuclear ....................................... 50.0% 54.5% Mine-mouth, coal-fired ........................ 9.5 9.6 Service-area, coal-fired ...................... 6.2 8.5 Oil-fired ..................................... 1.8 3.2 Gas-fired ..................................... 3.6 4.2 Hydro (includes pumped storage) ............... 1.3 2.6 Internal combustion ........................... 0.3 0.1 Purchased, interchange and nonutility generated 27.3 17.3 ---- ---- 100.0% 100.0% ===== ===== - --------------- (1) Does not reflect the extended outage beyond June 1996 of Salem Unit No. 1 due to cracking in steam generator tubes.
The following table shows the Company's average fuel cost used to generate electricity:
1991 1992 1993 1994 1995 Nuclear Cost per million Btu(1) $ 0.64 $ 0.53 $ 0.56 $ 0.53 $ 0.47 Coal Mine-mouth plants Cost per ton ........ 37.26 33.75 32.73 33.30 32.68 Cost per million Btu 1.51 1.36 1.32 1.34 1.32 Service-area plants Cost per ton ........ 50.24 45.25 43.38 38.76 38.82 Cost per million Btu 2.00 1.78 1.66 1.51 1.51 Oil Residual Cost per barrel ..... 19.42 15.94 15.87 16.22 14.92 Cost per million Btu 3.11 2.53 2.50 2.54 2.40 Distillate Cost per barrel ..... 29.90 24.96 27.21 22.77 20.74 Cost per million Btu 5.12 4.26 4.15 3.87 3.66 Gas Cost per mcf ........ -- 3.05 2.86 2.31 2.13 Cost per million Btu -- 2.96 2.77 2.25 2.00 - ------ (1) British thermal unit.
Nuclear The cycle of production and utilization of nuclear fuel includes the mining and milling of uranium ore; 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 has contracts for the supply of uranium concentrates for Limerick and Peach Bottom which extend through 2002. On February 23, 1995, two companies which supply uranium concentrates to the Company filed petitions for bankruptcy protection under Chapter 11 of the Bankruptcy Code. The Company has contracts with the two companies to supply approximately half of the Company's 1995 and 1996 requirements for uranium concentrates. In addition, one of the companies is under contract to supply approximately 25% of the Company's uranium concentrate requirements for the period 1997 to 2002. The Company has made alternative arrangements 8 with other suppliers to satisfy its short-term requirements for uranium concentrates. The Company is also finalizing arrangements with another supplier to satisfy the Company's longer-term needs. The Company does not anticipate any difficulty in obtaining its requirements for uranium concentrates. The Company's contracts for uranium concentrates are allocated to Limerick and Peach Bottom on an as-needed basis. PSE&G has informed the Company that it presently has under contract sufficient uranium concentrates to fully meet the current projected requirements for Salem through 2000 and 60% of the requirements through 2002. PSE&G has informed the Company that it does not anticipate any difficulty in obtaining its requirements for uranium concentrates. The following table summarizes the years through which the Company and PSE&G have contracted for the other segments of the nuclear fuel supply cycle:
Conversion Enrichment Fabrication Limerick Unit No. 1 ... (1) (2) 2003 Limerick Unit No. 2 ... (1) (2) 2004 Peach Bottom Unit No. 2 (1) (2) 1999 Peach Bottom Unit No. 3 (1) (2) 1998 Salem Unit No. 1 ...... 2000 (3) 2004 Salem Unit No. 2 ...... 2000 (3) 2005 - --------------- (1) The Company has commitments for 100% of its conversion services for Limerick and Peach Bottom through 1997. Approximately 40% of the conversion services requirements are covered through 2001. The Company does not anticipate any difficulty in obtaining necessary conversion services for Limerick and Peach Bottom. (2) The Company has contractual commitments for enrichment services for Limerick and Peach Bottom with the United States Enrichment Corporation. These commitments represent 100% of the enrichment requirements through 1998 and 70% through 1999. The Company does not anticipate any difficulty in obtaining necessary enrichment services for Limerick and Peach Bottom. (3) PSE&G has contractual commitments for 100% of enrichment requirements through 1998; approximately 50% through 2002; and approximately 30% through 2004. The Company has been informed by PSE&G that PSE&G does not anticipate any difficulty in obtaining necessary enrichment services for Salem.
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. By letter dated November 29, 1994, the NRC approved the Company's request to install new high-density, spent-fuel storage racks at Limerick, which will provide for storage capacity to 2007. The new configuration will be designed to accommodate rod consolidation. Spent-fuel racks at Peach Bottom have storage capacity until 2000 for Unit No. 2 and 2001 for Unit No. 3. Options for expansion of storage capacity at Peach Bottom, including rod consolidation, are being investigated. The Company has been informed by PSE&G that as a result of reracking the two spent-fuel pools at Salem, the spent-fuel storage capability of Salem Units No. 1 and No. 2 is estimated to be 2008 and 2012, respectively. Under the Nuclear Waste Policy Act of 1982 (NWPA), the DOE was to begin accepting spent fuel for permanent off-site storage no later than 1998. The DOE has stated that it has no legal obligation under the NWPA to begin accepting spent fuel absent an operational repository or other facility constructed under the NWPA. The DOE acknowledges, however, that it may have created the expectation of such a commitment on the part of utilities by issuing certain regulations and projected waste acceptance schedules. In June 1994, a number of utilities and state agencies, including the PUC, filed a lawsuit against the DOE seeking a determination of the DOE's legal obligation to accept fuel by 1998. The DOE has stated that it will not be able to open a permanent, high-level nuclear waste repository until 2015, at the earliest. The DOE stated that the delay was a result of federal budget cuts, the DOE seeking new data about the suitability of the proposed repository site at Yucca Mountain, Nevada, opposition to this location for the repository and the DOE's revision of its civilian nuclear waste program. Legislation has been introduced in Congress for the construction of a temporary storage 9 facility which would accept spent nuclear fuel from utilities beginning in 1998 or soon thereafter. Although progress is being made at Yucca Mountain and several communities have expressed interest in providing a temporary storage site, the Company cannot predict when the temporary federal storage facilities or permanent repository will become available. The DOE is exploring options to address delays in the currently projected waste acceptance schedules. The options under consideration by the DOE include offsetting a portion of the financial burden associated with the costs of continued on-site storage of spent fuel after 1998. Under the NWPA, the DOE is authorized to assess utilities for the cost of nuclear fuel disposal. The current cost of such disposal is one mil ($.001) per kWh of net nuclear generation. The 1995 charge collected by the Company from its customers for spent-fuel disposal was $21 million. The DOE may revise this charge as necessary for full-cost recovery of nuclear fuel disposal. 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 site located in Barnwell, South Carolina for disposal. Due to the uncertainty of the continued availability of LLRW disposal sites, on-site storage facilities were constructed at Peach Bottom and Limerick, each with five-year storage capacities. The Company is also pursuing alternative disposal strategies for LLRW generated at Peach Bottom and Limerick, including an aggressive LLRW reduction program. Pennsylvania is the host site for LLRW generators located in Pennsylvania, Delaware, Maryland and West Virginia and is pursuing a permanent disposal site through a volunteer siting process. The Company has contributed $12 million towards the total cost of a permanent Pennsylvania disposal site. The Company has been informed by PSE&G that it has an on-site LLRW storage facility at Salem, with a five-year storage capacity. PSE&G ships LLRW generated at Salem to Barnwell, South Carolina and currently uses the Salem facility for interim storage. PSE&G has also advised the Company that New Jersey also plans to host a LLRW disposal site. The Company, as a Salem co-owner, has paid $857,000 as its share of the New Jersey siting costs. 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 $54 million for such costs at December 31, 1995. The Company is currently recovering these costs through the Energy Cost Adjustment (ECA). The Company is currently recovering in rates the costs for nuclear decommissioning and decontamination (based on 1990 cost estimates) 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, although such recovery is not assured. 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 Pennsylvania Electric Company. 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 varying amounts of coal purchases as follows: between 3,000,000 and 3,500,000 tons for each of the years 1996 through 1999; and a total of 6,500,000 tons for the years 2000 through 2004. At December 31, 1995, approximately 20% of Conemaugh's fuel requirements were secured by a long-term contract and 21% by several short-term contracts. 10 The Company has entered into medium-term 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, 1996, 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. The coal requirements of each station not covered by existing contracts are met through additional short-term contracts or spot purchases from suppliers. Oil The Company customarily enters into yearly purchase orders with its various oil suppliers for the bulk of its requirements and makes spot purchases for the balance. At present, the Company's purchase orders are sufficient to meet the estimated residual fuel oil needs of its oil-fired generating units through June 1996, when current orders expire and new yearly orders begin. Purchase orders for distillate fuel oil are expected to meet the Company's needs through June 1996, when current orders expire and new yearly orders begin. Natural Gas The Company obtains natural gas for electric generation through a combination of short-term orders and spot purchases made on the open market, as well as through the Company's own City Gate Sales 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. Gas Operations During 1995, 9.8% of the Company's operating revenues and 6.5% of its operating income were from gas operations. Gas sales and operating revenues for 1995 by class of customer are set forth below:
Operating Sales Revenues (mmcf) (millions of $) House heating ......................... 31,848 $ 240 Residential (other than house heating) 1,516 15 Commercial and industrial ............. 19,422 129 Other ................................. 1,184 4 ------- ------- Total gas sales ................... 53,970 388 Gas transported for customers ......... 48,531 22 ------- ------- Total gas sales and gas transported 102,501 $ 410 ======= =======
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 98.1 million dekatherms. Peak gas is provided by the Company's liquefied natural gas facility and propane-air plant (see "ITEM 2. PROPERTIES"). 11 Through service agreements with Texas Eastern, Transcontinental, Equitrans, Inc. and CNG Transmission Corporation, underground storage capacity of 21.5 million dekatherms is under contract to the Company. Natural gas from underground storage represents approximately 40% of the Company's 1995-96 heating season supplies. As a result of FERC Order 636 and the subsequent restructuring of the interstate pipeline industry, the gas distribution merchant function has come under continued pressure as smaller customers elect to purchase non- utility gas supplies. This has raised significant issues at the state level regarding the long-term role of the gas distribution utility as a merchant. Other policy issues have arisen regarding the obligation to serve by the utility, the erosion of tax base, the potential for stranded costs associated with long-term contracts, the implications for social programs now supported by utilities and overall system reliability. PECO Gas Supply Company, a wholly owned subsidiary, was formed in 1995 as an unregulated marketing enterprise. PECO Gas Supply Company is a member of a natural gas buying cooperative, also formed in 1995, to enhance reliability of service and access less expensive gas supplies for its eight gas utility members. Eastern Pennsylvania Exploration Company, a wholly owned subsidiary, is a party to several joint ventures formed to develop natural gas resources in the Gulf Coast area. These joint ventures do not contribute to the Company's natural gas supply. The Company is engaged in pursuing the sale of these joint ventures. 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 1995. Rate Matters In 1995, approximately 90% of the Company's electric sales revenue and 100% of its gas sales revenue were derived pursuant to rates regulated by the PUC. The PUC establishes through regulatory proceedings the base rates which the Company may charge for electric and gas service in Pennsylvania. In addition, the PUC regulates various fuel and tax adjustment clauses applicable to customers' bills. The Company's wholesale electric and transmission rates are regulated by the FERC. For information concerning wholesale electric competition, see "Competition." The Company has agreed with the PUC not to seek an increase in electric base rates before April 1, 1999 except under specified circumstances for items such as energy cost adjustments, changes in state taxes, changes in federal taxes, demand side management surcharges, and increases in nuclear plant decommissioning expenses or funding requirements and spent nuclear fuel disposal expenses. The Company's last electric base rate case, intended primarily to recover costs associated with Limerick Unit No. 2 and associated common facilities, was filed in 1989. The Company voluntarily excluded 400 MW of capacity from base rates, and the PUC denied a return on common equity on an additional 399 MW of capacity. Under its electric tariffs, the Company is allowed to retain for shareholders any proceeds above the average energy cost for sales of this 399 MW of capacity and/or associated energy. In addition, beginning April 1994, the Company became entitled to share in the benefits which result from the operation of both Limerick Units No. 1 and No. 2 through the retention of 16.5% of the energy savings, subject to certain limits. During 1995, 1994 and 1993, the Company recorded as revenue net of fuel costs $79, $68 and $38 million, respectively, 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. On February 22, 1996, the PUC approved the Company's petition for a declaratory accounting order to change the estimated depreciable lives of certain of the Company's electric plant. The order approves the reduction of the terminal dates by ten years, for depreciation accrual purposes only, of Limerick Units No. 1 and 12 No. 2 and associated common facilities, the utilization of new life spans for various categories of electric production plant and changes in the remaining life estimates for transmission, distribution, general and common plant. The order also approves the amortization over a nine-year period of $331 million of deferred Limerick costs representing $240 million of carrying charges and depreciation associated with 50% of Limerick common facilities and $91 million of operating and maintenance expenses, depreciation and accrued carrying charges on the Company's capital investment in Limerick Unit No. 2 and 50% of Limerick common facilities during the period from January 8, 1990, the commercial operation date of Limerick Unit No. 2, until April 20, 1990, the effective date of the Limerick Unit No. 2 rate order. The changes will increase depreciation and amortization on assets associated with Limerick by approximately $100 million per year and decrease depreciation and amortization on other Company assets by approximately $10 million per year, for a net increase in depreciation and amortization of approximately $90 million per year. The order will not increase rates charged to customers. The changes will be effective October 1, 1996. Effective January 1995, in accordance with a PUC Joint Petition, the Company increased electric base rates by $25 million per year to recover the increased costs, including the annual amortization of the transition obligation (over 18 years) deferred in 1994 and 1993, associated with the implementation of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." See note 7 of Notes to Consolidated Financial Statements included in the Company's Annual Report to Shareholders for the year 1995. Subsequent to January 1, 1995, retail electric non-pension postretirement benefits expense in excess of the amount allowed to be recovered under the Joint Petition may not be deferred for future rate recovery. In accordance with the Joint Petition, any of the parties to the Joint Petition may elect to void the settlement in the event current rate recovery of non-pension postretirement benefits expense is ultimately disallowed as a result of the Office of Consumer Advocate's appeal to the Supreme Court of Pennsylvania of cases involving other Pennsylvania utilities. In such event, the Company would refund to customers, with interest, any increased base rate amounts collected. The Company recovers fuel and gas costs through base rates and various automatic adjustment clauses. The Company's ECA, applicable to retail electric service, is adjusted annually. Pursuant to a PUC proceeding applicable to all Pennsylvania gas utilities, effective March 1, 1996, purchased gas cost rates are adjusted quarterly in lieu of annual filings. Regulatory audits of the operation of the adjustment clauses are conducted to determine if refunds to or recoupments from customers are necessary as a result of over- or under-collections of fuel and gas costs. In addition, the PUC may investigate outages of electric generating units which exceed 120 days or if the annual capacity factor of a unit is less than 50% to determine whether to deny the recovery of replacement power costs. The Company's ECA provides for recovery of 100% of the difference between the Company's PUC- jurisdictional costs of fuel, energy interchange and purchased power and the costs billed to customers in base rates. The ECA also incorporates a nuclear performance standard which allows for financial bonuses or penalties depending on whether the Company's system nuclear capacity factor exceeds or falls below a specified range. If the capacity factor is within the range of 60% to 70%, there is no bonus or penalty. If the capacity factor exceeds 70%, then progressive bonuses are allowed. If the capacity factor falls below 60%, then progressive penalties are imposed. The bonuses or penalties are based upon average system replacement energy costs. For the year ended December 31, 1995, the Company's system nuclear capacity factor was 72%, which entitled the Company to a bonus of $2.5 million. On March 6, 1996, the Company filed its new ECA to become effective April 1, 1996. The ECA filing proposes a change from a credit value of 5.086 mils per kWh to a credit value of 4.424 mils per kWh, which represents a decrease in annual revenue of $21.7 million. The ECA filing reflects a settlement agreement with the Office of Consumer Advocate, the Office of Small Business Advocate and a group of the Company's industrial customers, which was filed with the ECA, under which recovery of $33.1 million of replacement power costs associated with the shutdown of Salem would be denied for the reconciliation period ended January 31, 1996, offset by an additional $6 million adjustment to the Company's nuclear performance bonus. The approval of the ECA, including the joint settlement agreement, is pending before the PUC. 13 On May 31, 1995, the Company filed Purchased Gas Cost (PGC) No. 12 rates for the period December 1, 1995 through November 30, 1996, which reflected a $0.80 per thousand cubic feet (mcf) decrease in natural gas sales rates. On November 13, 1995, the PUC approved the Joint Settlement setting a $0.88 per mcf decrease, effective December 1, 1995, representing a decrease in annual revenue of $48.4 million. Effective March 1, 1996, the first quarterly adjustment of the PGC resulted in an increase of $0.335 per mcf in natural gas sales rates. The Company is authorized under a general order of the PUC to add a State Tax Adjustment Surcharge to customers' bills to reflect the cost of increases or decreases in certain state tax rates not recovered in base rates. On October 2, 1990, the PUC issued an order initiating an investigation into Demand-Side Management (DSM) by electric utilities. Generally, DSM programs involve utilities providing assistance or incentives to customers to encourage them to conserve energy and reduce peak demand. On December 1, 1993, the PUC issued an order establishing a special DSM cost-recovery mechanism for a five-year period. The PUC order would have permitted surcharge recovery of DSM program costs and allowed utilities to earn an incentive on kWh saved from DSM. The PUC order also would have permitted utilities to defer "lost revenues," with interest, for eventual recovery in the next base rate case. On January 9, 1995, the Commonwealth Court issued a decision in which it upheld the PUC's order related to surcharge recovery of DSM program costs, but reversed the PUC's decision to award DSM incentives through a surcharge. The Commonwealth Court also remanded all issues related to "lost revenue" recovery for further consideration by the PUC. The PUC appealed the decision to the Supreme Court of Pennsylvania which affirmed the Commonwealth Court's decision. In addition to the matters discussed above, see "Competition" for a discussion of the PUC's investigation of electric power competition issues. Construction The Company maintains a construction program designed to meet the projected requirements of its customers and to provide service reliability, including the timely replacement of existing facilities. The Company's current construction program includes no new generating facilities. During the five years 1991-95, gross property additions (excluding capital leases) amounted to $2.6 billion and retirements amounted to $272 million, resulting in a net increase of approximately 17% in the Company's gross utility plant. Investment in new plant and equipment in 1995 amounted to $480 million. At December 31, 1995, construction work in progress, excluding nuclear fuel, aggregated $494 million. The following table shows the Company's most recent estimates of capital expenditures for plant additions and improvements for 1996 and for 1997-99:
(Millions of $) 1996 1997-99 Electric: Production .................. $ 158 $ 402 Nuclear fuel ................ 67 139 Transmission and distribution 117 280 Other electric .............. 2 9 ------ ------ Total electric .......... 344 830 Gas .............................. 55 158 Other ............................ 139 254 ------ ------ Total ....................... $ 538 $1,242 ====== ======
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 1995. 14 Capital Requirements and Financing Activities The following table shows the Company's most recent estimates of capital requirements for 1996 and for 1997-99:
(Millions of $) 1996 1997-99 Construction .............................. $ 538 $1,242 Long-term debt maturities and sinking funds 401 867 ------ ------ Total capital requirements ....... $ 939 $2,109 ====== ======
The Company expects to meet its capital requirements, including long-term debt maturities, for 1996 with internally generated funds and short-term borrowings; however, for 1997-99 the Company expects internally generated funds to more than satisfy its capital requirements including long-term debt maturities. The estimates of capital requirements do not include any amounts for unscheduled refundings of higher-dividend preferred stock or higher-interest debt, which refundings are dependent on future market conditions and internal cash generation. The following table shows the Company's financing activities for 1995:
(Millions of $) Term Loan: Floating Rate due 1997 ................... $175 Trust Receipts, each representing a Company Obligated Mandatorily Redeemed Preferred Securities of a Partnership (1): 8.72% ............................... 81 Pollution Control: Floating Rate due 1996 ................... 8 ---- $264 ==== - --------------- (1) Issued through PECO Energy Capital, L.P., of which a wholly owned subsidiary of the Company is the general partner.
The long-term debt and the Trust Receipts (recorded in the financial statements as Company Obligated Mandatorily Redeemed Preferred Securities of a Partnership) issued during 1995 replaced debt and preferred stock carrying higher after-tax rates of interest and dividends. During 1995, the Company utilized cash from operations, proceeds from the sale of its subsidiary Conowingo Power Company and $100 million from the sale of an undivided interest in trade receivables to reduce debt by $401 million. 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 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 in accordance with the prescribed system of accounts. The coverage under the earnings test of the Mortgage for the 12 months ended December 31, 1995 was 4.94 times. Earnings coverages under the Mortgage for the calendar years 1994 and 1993 were 3.48 and 4.20 times, respectively. At December 31, 1995, the most restrictive issuance test of the Mortgage related to available property additions. At December 31, 1995, the Company had at least $1.44 billion of available property additions against which $864 million of mortgage bonds could have been issued. In addition, 15 at December 31, 1995, the Company was entitled to issue approximately $3.5 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 12 months ended December 31, 1995 was 2.74 times. Earnings coverage under the Articles for the calendar years 1994 and 1993 was 2.05 and 2.47 times, respectively. 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:
1991 1992 1993 1994 1995 Ratio of Earnings to Fixed Charges..................... 2.55 2.43 3.15 2.66 3.49 Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends......................... 2.14 2.06 2.67 2.32 3.18
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. At December 31, 1995, the Company had a total of $517 million outstanding under unsecured term-loan agreements with banks with maturities extending to 1997. Most of the Company's unsecured debt agreements contain cross-default provisions to the Company's other debt obligations. The Company has a $300 million commercial paper program supported by a $400 million revolving credit agreement. At December 31, 1995, there was no commercial paper outstanding. At December 31, 1995, the Company and its subsidiaries had formal and informal lines of credit with banks aggregating $221 million against which there was no short-term debt outstanding. The Company's bank lines are comprised of both committed and uncommitted lines of credit. As of December 31, 1995, the Company had no compensating balance agreements with any bank. Employee Matters The Company and its subsidiaries had 7,217 employees at December 31, 1995. None of the Company's employees are represented by a union. In 1993, in a National Labor Relations Board (NLRB) certified election, a majority of non-management employees voted to continue not to be represented by a union. On March 7, 1995, a New Jersey local of the International Brotherhood of Electrical Workers (IBEW) filed two petitions with the NLRB to hold a certification election to determine whether a group of production and maintenance employees from Eddystone and Cromby want the IBEW to represent them. The petitions seek to establish separate bargaining units for 225 employees from Eddystone and 70 employees from Cromby. The petitions cover craft and technical employees, including operators, but exclude office clerical, professional, supervisory and management employees. On March 22, 1995, the Utility Workers Union of America, AFL-CIO (UWUA) filed a petition with the NLRB to hold a certification election to determine whether certain production and maintenance employees from Peach Bottom and Limerick want the UWUA to represent them. The petition seeks a bargaining unit of 16 approximately 600 employees composed of all maintenance employees and all control room and alternate control room operators and auxiliary operators, instrumental and control technicians, health physics technicians, chemistry technicians, material handlers and technicians, and rad waste technicians. The petition excludes security guards, clerical and supervisory employees. On March 23, 1995, the NLRB issued an order consolidating for hearing the three petitions. From April through September, the NLRB conducted hearings regarding the appropriateness of the petitioned units and the eligibility issues for those units. The Company has taken the position that the only appropriate bargaining unit is the same system-wide unit that was certified by the NLRB for the 1993 election, and that it will oppose any attempt by outside interests to organize its employees. An NLRB decision is pending. On October 2, 1995, ten days after the record in proceedings discussed above were closed, the UWUA filed another petition seeking certification of a bargaining unit consisting of all production and maintenance employees of the Consumer Energy Services Group. The Company unsuccessfully sought to consolidate this petition with the other three petitions. Hearings regarding the latest UWUA petition are scheduled to begin in April 1996. 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 electric and 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. On January 11, 1995, researchers at the University of North Carolina released the results of an EMF study in which the Company had participated. The researchers stated that this study does not resolve the fundamental question of whether magnetic fields cause cancer. The Company supports further research in this area and is funding, monitoring and participating in such studies. The Company cannot predict at this time what effect, if any, this matter will have on future operations. Public concerns about the possible health risks of exposure to EMF have, 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. 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. In addition, PSE&G is seeking permits and approvals from various agencies needed to fully implement the special conditions of the permit. No assurances can be given as to receipt of any such additional permits or approvals. The estimated capital cost of compliance with the final permit is approximately $100 million, of which the Company's share is 42.59% and is included in the Company's capital requirements for 1996 and 1997-98. PSE&G must apply to renew the Salem permit in March 1999 which renewal application must provide updated demonstrations for review by the New Jersey Department of Environmental Protection and Energy (NJDEPE). Air Air quality regulations promulgated by the PDEP and the City of Philadelphia in accordance with the federal Clean Air Act impose restrictions on emission of particulates, sulfur dioxide (SO2) and other pollutants and require permits for operation of emission sources. Such permits have been obtained by the Company and must 17 be renewed periodically. Under the Clean Air Act Amendments of 1990 (Amendments), new permits will have to be obtained. The Amendments establish a comprehensive and complex national program to substantially reduce air pollution over the next decades. The Amendments include a two-phase program to reduce acid rain effects by significantly reducing emissions of SO2 and nitrogen oxides (NOx) from electric power plants. Flue-gas desulfurization systems (scrubbers) have been installed at Conemaugh Units No. 1 and No. 2 to reduce SO2 emissions to meet the 1995 Phase I requirements of the Amendments. The Company's share of the capital costs to construct the scrubbers and make other related improvements at Conemaugh was approximately $78 million. Units No. 1 and No. 2 at Keystone are subject to the Phase II SO2 and NOx 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 and the installation of scrubbers. The Company's service-area, coal-fired generating units at Eddystone and Cromby are equipped with scrubbers and their SO2 emissions meet the SO2 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 NOx emissions controls and the imposition of certain operational constraints, to comply with the Reasonably Available Control Technology limitations of the Amendments. The Company's capital expenditures to satisfy these compliance requirements were approximately $19 million. The Company expects that the cost of compliance with anticipated air-quality regulations may be substantially higher due to further limitations on permitted NOx emissions. As a result of its prior investments in scrubbers for Eddystone and Cromby and its investment in nuclear and hydroelectric generating capacity, the Company believes that compliance with the Amendments will have less impact on the Company's electric rates than on the rates of other Pennsylvania utilities which are more dependent on coal-fired generation. Many other provisions of the Amendments affect the Company's business. The Amendments establish stringent new 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. 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 18 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 PRPs, 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 June 5, 1995, a consent decree, which included the terms of the settlement, was filed with the United States District Court for the Eastern District of Kentucky. The United States Department of Justice, following a public comment period, filed a motion with the court for entry of the decree. 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, have 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 agree 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. Until the Record of Decision has been issued by the EPA, the Company cannot estimate its share of the cost to implement the selected remedy. 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/Douglasville site) where waste oils generated from Company operations were transported, treated, stored and disposed. In August 1991, the EPA filed suit in the United States District Court for the Eastern District of Pennsylvania (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 require the Company to pay approximately $800,000 in exchange for the EPA agreeing not to sue, take administrative action under CERCLA for recovery of past or future response costs or seek injunctive relief with respect to the site. The Company has notified the EPA that it wishes to participate with other eligible PRPs in the de minimus settlement, and is currently awaiting approval of the settlement. In June 1989, a group of PRPs (Metro PRP Group) entered into an Administrative Order on Consent (AOC) 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 based on evidence which it believes indicates between 200 and 300 empty Company drums were transported to the site. The Company was invited to participate in the allocation process and was further informed that, unless it agreed to sign the AOC, the Company risked either being named in a cost recovery action brought by the EPA or in a contribution action to be filed by the Metro PRP Group. In response, the Company notified the Metro PRP Group that it would be 19 interested in participating in the allocation process. The Metro PRP Group has proposed a settlement which would involve the Company paying less than $10,000 towards the costs of a removal action estimated to cost approximately $5 million. The Company has requested additional information from the Metro PRP Group. 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 minimus 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 minimus party for less than $10,000. In April 1990, the Company received a notice from the NJDEPE which alleges that the Company is potentially liable for certain cleanup costs at the Gloucester Environmental Management Services, Inc. (GEMS) site located in New Jersey because wastes generated by the Company were deposited at the site by a third party. The Company was added as a defendant in a suit commenced by the NJDEPE several years ago, which now names several hundred defendants, and which relates to the GEMS site. The Company has joined a pre-existing group of PRPs which is dealing with the NJDEPE on these matters. Settlement negotiations are ongoing. In February 1995, the Company was named as an additional defendant in a private party class action seeking damages associated with the GEMS site. The Company settled the private party class action for $52,500. On October 16, 1989, the EPA and the NJDEPE commenced a civil action in the United States District Court for the District of New Jersey 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 direct and third-party defendants are presently involved in settlement negotiations involving an allocation process. In November 1987, the Company received correspondence from the EPA which indicated that the EPA was investigating the source, extent and nature of the release or threatened release of hazardous substances from the Blosenski Landfill located in West Caln Township, Chester County, Pennsylvania (Blosenski Landfill Superfund Site). The EPA letter requested information on several Blosenski entities and affiliates (Blosenski entities) and also whether any wastes generated by the Company had been transported to, stored, treated or disposed at the Blosenski Landfill Superfund Site. In January 1988, the Company notified the EPA that, after searching its files and records, it was unable to locate or identify any information related to the Blosenski entities or activities conducted at the Blosenski Landfill Superfund Site. Subsequently, on July 8, 1992, the Company was notified by a group of PRPs who had been ordered by the EPA to implement one portion of the four-part remedial plan for the site, that based on information which it believed indicated Company wastes were disposed of at the site, the group considered the Company to be responsible for a share of the cleanup and remediation costs. The PRP group advised the Company that unless it voluntarily joined the existing PRP group, the Company risked being named as a defendant in a contribution lawsuit which had been filed against certain other PRPs in federal court. On August 3, 1992, the PRP group served the Company with a subpoena which required the production of Company documents and records relating to Company operations and waste disposal practices and procedures. In September 1992, the Company informed the PRP group that due to its inability to identify any pertinent records in its own files or confirm the PRP group's allegations, that it did not, at that time, intend to join the Blosenski PRP Group or contribute to the remediation costs. In addition, the Company submitted documentation which responded to some of the subpoena requests and notified the PRP group of its objection to others. On September 7, 1995, the federal court approved a consent decree which required the site owner and approximately 20 PRPs to implement an estimated $13 million remedy at the site and reimburse the federal government and the Commonwealth of Pennsylvania $5 million for past costs and oversight costs related to the cleanup. 20 In November 1992, the Company received a subpoena from the non-government parties (party participants) in a consolidated action relating to the Bridgeport Rental and Oil Services (BROS) site which requested information on various haulers who transported hazardous and solid waste materials to the BROS site. Information gathered pursuant to the subpoena indicates that one of the haulers associated with the BROS site picked up and transported waste generated by the Company. Additionally, the party participants possess information which they believe connects the Company to the site. At the invitation of the party participants, the Company along with several others (voluntary participants) is participating in a "voluntary, informal, non-litigated settlement/mediation process." In April 1993, the Company received a Request for Information from the EPA regarding the Company's potential involvement at the BROS site. On May 27, 1993, the Company provided the EPA with the same documents gathered in response to the subpoena served by the party participants. The voluntary participants are presently engaged in negotiations with the party participants. On March 3, 1989, the Company received a Notice of Violation from the PDEP for soil contamination at one of the Company's maintenance facilities. The Company suspects that the contamination was caused by leakage of transformer dielectric fluid. The PDEP required the Company to initiate sampling to determine the scope of the contamination. The Company conducted sampling and ground water monitoring and submitted the results to the PDEP on November 18, 1991. The Company has identified the presence of oil and polychlorinated byphenols (PCBs) at the site. On February 19, 1993, the Company submitted to the PDEP a revised remedial clean-up strategy. On March 9, 1993, the PDEP accepted the Company's revised remedial clean-up strategy. The Company is implementing the remedial clean-up strategy accepted by the PDEP, which is expected to cost approximately $2 million over a period of three to five years. On November 30, 1995, the Company was added as a third party defendant in an existing suit alleging that the Company is responsible for sending waste to the Cinnaminson Ground Water Contamination Site located in the Township of Cinnaminson in Burlington County, New Jersey. The Company joined with other third party defendants in filing a motion to dismiss the complaint for failure to state a claim. While the parties await a ruling by the court, they will participate in a court-ordered mediation process. The Company is currently unable to estimate the cost of any potential corrective action. The Company has been named as a defendant in a Superfund matter involving the Greer Landfill in South Carolina. The Company is currently involved in settlement discussions with the plaintiff. The Company is currently unable to estimate the cost of any potential corrective action. The Company has identified 23 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. Seven of the sites are currently in the detailed evaluation or remediation stage. At December 31, 1995, the Company had accrued approximately $13 million for investigation and remediation of these manufactured gas plant sites. The Company expects that it will incur additional liabilities with respect to these sites, which cannot be reasonably estimated at this time. 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 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% 21 of the costs incurred under the CACO and Clean Harbors will be responsible for 75% of the costs. The Company estimates that its share of the costs to comply with the CACO will be approximately $2.5 million. At December 31, 1995, the Company had spent $1.0 million to comply with the CACO. Until completion of the required investigation, the Company is unable to predict the nature and cost of any potential corrective action. Costs At December 31, 1995, the Company had accrued $27 million for various investigation and remediation costs that can be reasonably estimated, including approximately $13 million for investigation and remediation of former manufactured gas plant sites. 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 1996 and its most recent estimate of capital requirements for 1997-98 for compliance with environmental requirements total $80 million. This estimate includes the Company's share of the costs to comply with the revised NJDEPE permit for Salem, but does not include any amounts that may be required for its share of scrubbers or other systems at Keystone to comply with the Amendments. In addition, the Company may be required to make significant additional expenditures not presently determinable. Competition Over the last few years, legislative and regulatory initiatives and market forces have laid the foundation for continued development of competition in the electric utility industry. As a result, the electric utility industry is reviewing the potential impacts of a major transition from a traditional rate regulated environment of bundled service based on cost recovery to unbundled services with some combination of a competitive marketplace for some services, principally generation, and modified regulation of other market segments. Increased competition is expected to reduce the margin on certain classes of energy sales and may result in customer and revenue losses. Increased competition may also limit high cost utilities' ability to recover capital investment through rates, resulting in stranded investment and potential writedown of assets. Potential competition has resulted in increased focus on cost cutting and consideration of strategic alternatives, including mergers and restructuring of operations. For additional information concerning competition, see "Competition" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1995. The Energy Act was enacted to promote competition among utility and nonutility generators in the wholesale electric generation market. The Energy Act allows the FERC to order owners of electric transmission systems to provide third parties with transmission access for wholesale power transactions. During 1995, the FERC issued proposed rules which, if adopted, would require that all public utilities have on file with the FERC nondiscriminatory open-access transmission tariffs for network and point-to-point services, including separate rates for ancillary services. The FERC's proposed rules would also provide for recovery of legitimate and verifiable wholesale stranded investment. These proposals further expressed the FERC's strong expectation that state regulatory commissions provide for similar full recovery of legitimate and verifiable stranded investment that could result if state regulatory commissions ordered retail competition and direct access. The Company filed comments in response to the FERC's proposal. The comments, while generally supportive, suggested several adjustments to ensure full stranded investment recovery. An order from the FERC is expected in the first half of 1996. The Company also filed a tariff for network and point-to-point services and a market-based rate tariff that would allow the Company to sell wholesale energy at market-based rates outside the PJM control area. These tariffs would be available to wholesale buyers and sellers of electricity, although the Company would continue to make sales within the PJM control area under its existing FERC-approved cost-based tariffs. The market-based 22 tariff described above is not expected to affect the applicability of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," to the Company's operations. For additional information concerning SFAS No. 71, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report to Shareholders for the year 1995. During 1995, the Company proposed a plan to enable the PJM companies to offer regional open access to their transmission facilities, to create an independent system operator, to adapt the existing PJM regional wholesale energy market to increased competition and to preserve those elements of power pooling which are still beneficial. While the Energy Act encourages competition on a wholesale level, the Energy Act prohibits the FERC from ordering wheeling for sales to retail customers. Currently, a number of states, including Pennsylvania, are assessing the issue of retail competition with varying outcomes. While assessing their positions, many issues must be considered which will require significant deliberation and may result in legal challenges. These issues include the recovery of any resulting stranded investment, the impact of inter-jurisdictional sales and whether such change is enacted by regulatory or legislative action. In August 1995, after seeking input from Pennsylvania utilities and interest groups, the PUC staff issued a report recommending against the implementation of retail electric power competition at this time. The PUC also issued an order inviting further comments and establishing hearings on competition issues with the expectation of submitting a report to the Pennsylvania legislature and the Governor in June 1996. In November 1995, the Company submitted testimony which proposes five major initiatives to reduce the costs of electricity while preserving the reliability and universal service that is essential to Pennsylvania citizens. These initiatives are: 1) improvements in the PJM interconnection to incorporate an independent system operator, provide for wholesale energy exchange based on a market bidding mechanism, provide a regional transmission tariff and expand participation in the wholesale energy market to others, including firms that are not traditional utilities; 2) performance-based regulation which would link utility earnings to performance rather than historic costs; 3) flexible pricing to allow utilities to offer customers a variety of service options tailored to individual requests, and to bring certain rates closer to market levels; 4) accelerated depreciation and other cost mitigation measures that challenge the utilities to reduce possible stranded investment associated with existing generation assets; and 5) competitive bidding of new generation to ensure that needs are met as efficiently as possible. The Company believes that these proposed initiatives will allow the PUC to improve the efficiency of the electric industry, while continuing to assure the availability of reliable service for all customers at reasonable rates, without significant adverse consequences on the financial condition of the electric utilities. The Company believes that retail competition should not be adopted if it represents a mere shifting of costs from one class of customers to another or to shareholders, and that retail competition does not currently provide a net benefit. Regulatory changes permitting retail competition may also create stranded investment if the FERC's position of allowing full recovery of stranded investment as described in its proposal is not adopted. Investments by the Company in assets which would not be recoverable from customers, including its investment in nuclear facilities, may have to be written down, which would have a material adverse effect on the Company's financial condition and results of operations. The Company is not able to predict whether retail competition will be implemented and, if implemented, what impact it would have on the Company's financial condition or results of operations. As a result of competitive pressures, the Company has negotiated long-term contracts with many of its larger- volume industrial customers. Although these agreements have resulted in lower revenues from this class of customers, they have permitted the Company to maintain this segment of its customer base. The gas industry is also undergoing structural changes in response to FERC policies designed to increase competition in this market. This has included requirements that interstate gas pipelines unbundle their gas sales service from other regulated tariff services, such as transportation and storage. In anticipation of these policies, 23 the Company has modified its gas purchasing arrangements to enable the purchase of gas and transportation at lower costs, and has become more active in the area of gas transportation. During 1995, there were an unprecedented number of mergers in the utility industry and this trend is expected to continue. In August 1995, the Company proposed a merger with PP&L Resources, Inc., an electric utility with operations in northeast Pennsylvania. In November, PP&L Resources declined the Company's final offer and the Company withdrew its proposal. The Company will continually evaluate all opportunities to improve its strategic and competitive position but, because of its strong stand-alone position, is not compelled to pursue such opportunities at any cost. Telecommunications To take advantage of emerging opportunities in the telecommunications field, in 1995, the Company created a new strategic business unit, the Telecommunications Group. The business unit has initiated several joint ventures in newly emerging wireless personal communications services businesses and other competitive telecommunications opportunities. The telecommunications field presents the Company with many opportunities to expand its business and generate additional revenues. 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. Such loans to the Company are evidenced by the Company's subordinated debentures, which are the only assets of the Partnership. The only revenues of the Partnership are interest on the Company's subordinated debentures (Subordinated Debentures). All of the operating expenses of the Partnership are paid by PECO Energy Capital Corp. At December 31, 1995, the Partnership held $308,612,964 aggregate principal amount of the Subordinated Debentures. PECO Energy Capital Trust I (Trust) 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 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 December 19, 1995, the Trust issued 3,124,183 Trust Receipts. At December 31, 1995, the assets of the Trust consisted solely of 3,124,183 Series B Preferred Securities with an aggregate stated liquidation preference of $78,104,575. Distributions were made on the Trust Receipts on December 29, 1995 in the aggregate amount of $1,074,893, or $0.3441 per Trust Receipt. The payment reflects accrued distributions at the rate of 7.96% per annum from November 1, 1995 through December 18, 1995 and at the rate of 8.72% per annum from December 19, 1995 through December 31, 1995. Expenses of the Trust for 1995 were approximately $2.1 million, all of which were paid by PECO Energy Capital Corp. or the Company. The number of holders of record of the Trust Receipts as of March 20, 1996 was 884. 24 Executive Officers of the Registrant
Age at Effective Date of Election Name Dec. 31, 1995 Position to Present Position J. F. Paquette, Jr............. 61 Chairman of the Board............................... April 12, 1995 C. A. McNeill, Jr.............. 56 President and Chief Executive Officer............... April 12, 1995 D. M. Smith.................... 62 President-- PECO Nuclear and Chief Nuclear Officer................................. February 1, 1996 W. L. Bardeen.................. 57 Senior Vice President and Group Executive-- Consumer Energy Services Group.................. March 1, 1994 J. W. Durham................... 58 Senior Vice President and General Counsel........... October 24, 1988 W. J. Kaschub.................. 53 Senior Vice President-- Human Resources............. June 10, 1991 G. S. King..................... 55 Senior Vice President-- Corporate and Public Affairs.................................. October 1, 1992 K. G. Lawrence................. 48 Senior Vice President-- Finance and Chief Financial Officer............................... March 1, 1994 J. M. Madara, Jr............... 52 Senior Vice President and Group Executive-- Power Generation Group.............. March 1, 1994 R. J. Patrylo.................. 49 Senior Vice President and Group Executive-- Gas Services Group.................. August 1, 1994 G. R. Rainey................... 46 Senior Vice President-- Nuclear Operations.......... April 1, 1996 A. J. Weigand.................. 57 Senior Vice President and Group Executive-- Bulk Power Enterprises ............. March 1, 1994 J. M. Bauer.................... 49 Vice President-- Customer Services.................. April 13, 1994 G. A. Cucchi................... 46 Vice President-- Planning and Performance........... March 1, 1994 D. B. Fetters.................. 44 Vice President-- Station Support.................... September 25, 1995 D. R. Helwig................... 44 Vice President-- Power Delivery..................... March 1, 1995 T. P. Hill, Jr................. 47 Vice President and Controller....................... January 1, 1991 K. C. Holland.................. 43 Vice President-- Information Systems and Chief Information Officer................... March 21, 1994 W. G. MacFarland, IV........... 46 Vice President-- Limerick Generating Station......................................... March 1, 1995 J. B. Mitchell................. 47 Vice President-- Finance and Treasurer.............. December 1, 1994 W. E. Powell, Jr............... 59 Vice President-- Support Services................... January 30, 1995 T. N. Mitchell................. 40 Vice President-- Peach Bottom Atomic Power Station................................... April 1, 1996 W. H. Smith, III............... 47 Vice President and Group Executive, Telecommunications Group........................ September 25, 1995 D. A. Thomas................... 49 Vice President-- Marketing and Sales................ January 30, 1995 N. J. Zausner.................. 42 Vice President-- Power Transactions................. October 11, 1994 K. K. Combs.................... 45 Corporate Secretary................................. November 1, 1994
The present term of office of each of the above executive officers extends to the first meeting of the Company's Board of Directors after the next annual election of Directors (scheduled to be held April 10, 1996). Prior to his election to his current position with the Company, Mr. Paquette was Chairman and Chief Executive Officer of the Company. Prior to his election to his current position with the Company, Mr. McNeill was President and Chief Operating Officer and Executive Vice President - Nuclear of the Company. Prior to his election to his current position with the Company, Mr. Bardeen was Senior Vice President Finance and Chief Financial Officer. Prior to joining the Company in 1992, Mr. Bardeen was Vice President Finance and Controller for Bell Atlantic Corporation. 25 Prior to joining the Company in 1991, Mr. Kaschub was Vice President of Human Resources with GTE North Incorporated. Prior to joining the Company in 1992, Mrs. King served as Commissioner of the United States Social Security Administration. Prior to his election to his current position with the Company, Mr. Lawrence was Vice President - Gas Operations. Prior to his election to his current position with the Company, Mr. Madara was Vice President - Production, Assistant Manager - Mechanical Engineering and General Manager - Nuclear Quality Assurance. Prior to joining the Company in 1994, Mr. Patrylo was Senior Vice President - - Gas Services Business Unit at Niagara Mohawk Power Corporation and President of RJP Associates, Inc., a business consulting firm. Prior to his election to his current position with the Company, Mr. D. M. Smith was Senior Vice President - Nuclear Generation Group, Senior Vice President - Nuclear and Vice President - Peach Bottom Atomic Power Station. Prior to his election to his current position with the Company, Mr. Weigand was Vice President - Transmission and Distribution Systems. Prior to joining the Company in March 1994, Mrs. Holland was Director of Technology Services and Director of Business Services and Operations at SmithKline Beecham, Inc. Prior to joining the Company in 1996, Mr. T.N. Mitchell was Team Manager - Institute of Nuclear Power Operations (INPO), Director - Site Engineering at Peach Bottom (on loan from INPO), Department Manager Engineering Support at INPO, Core Team Member - Nuclear Electric, U.K. (on loan from INPO), and Department Manager - Plant Analysis at INPO. Prior to joining the Company in 1995, Mr. Powell was Vice President - Logistics with E.I. DuPont DeNemours & Co. Prior to joining the Company in 1995, Mr. Thomas was General Manager - American Parts and Services, Manager - Utility Parts Sales, Manager - Gateway Region - Utility Sales, and Manager - Product Services at General Electric Company. Prior to joining the Company in 1994, Ms. Zausner was Vice President of U.S. Generating Company, an independent power producer. Prior to their election to the positions shown above, the following executive officers held other positions with the Company since January 1, 1991: Ms. Bauer was Operations Manager - Montgomery County Division and Manager - Nuclear Operations; Mr. Cucchi was Director of System Planning and Performance; Mr. Fetters was Director - Nuclear Engineering, Director - Limerick Maintenance and a project manager; Mr. Helwig was Vice President - Limerick Generating Station and Vice President - Nuclear Engineering and Services; Mr. Hill was Controller; Mr. MacFarland was Outage Director - Limerick, Manager - Nuclear Maintenance, Manager - Peach Bottom Installation Division and Senior Project Manager - Limerick Nuclear Engineering; Mr. Mitchell was Director of Financial Operations and Assistant Treasurer; Mr. Rainey was Vice President - Peach Bottom Atomic Power Station, Vice President - Nuclear Services and Plant Manager - Eddystone Generating Station; Mr. W. H. Smith was Vice President - Station Support, Vice President - Planning and Performance, Manager - Corporate Strategy and Performance, General Manager - Human Resources, Director - Organization Change Task Force and Manager - Purchasing; and Ms. Combs was an Assistant General Counsel. There are no family relationships among directors or executive officers of the Company. 26 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, 1995:
Net Generating Estimated Capacity (1) Retirement Station Location (Kilowatts) Year Nuclear Limerick.................................. Limerick Twp., PA.............. 2,170,000(2) 2024(3), 2029(3) Peach Bottom.............................. Peach Bottom Twp., PA.......... 928,000(4) 2013, 2014 Salem..................................... Hancock's Bridge, NJ........... 942,000(4) 2016, 2020 Hydro Conowingo................................. Harford Co., MD................ 512,000 2014 Pumped Storage Muddy Run................................. Lancaster Co., PA.............. 880,000 2014 Fossil (Steam Turbines) Cromby .................................. Phoenixville, PA............... 345,000 2004 Delaware.................................. Philadelphia, PA............... 250,000 (5) Eddystone................................. Eddystone, PA.................. 1,341,000 2009, 2010, 2011 Schuylkill................................ Philadelphia, PA............... 166,000 (5) Conemaugh................................. New Florence, PA............... 352,000(4) 2005, 2006 Keystone.................................. Shelocta, PA................... 357,000(4) 2002, 2003 Fossil (Gas Turbines) Chester .................................. Chester, PA.................... 39,000 (5) Croydon................................... Bristol Twp., PA............... 370,000 (5) Delaware.................................. Philadelphia, PA............... 60,000 (5) Eddystone................................. Eddystone, PA.................. 62,000 (5) Falls..................................... Falls Twp., PA................. 48,000 (5) Moser..................................... Lower Pottsgrove Twp., PA...... 48,000 (5) Richmond.................................. Philadelphia, PA............... 96,000 (5) Schuylkill................................ Philadelphia, PA............... 30,000 (5) Southwark................................. Philadelphia, PA............... 53,000 (5) Salem..................................... Hancock's Bridge, NJ........... 16,000(4) (5) Fossil (Internal Combustion) Cromby .................. ............... Phoenixville, PA............... 2,700 (5) Delaware.................................. Philadelphia, PA............... 2,700 (5) Schuylkill................................ Philadelphia, PA............... 2,800 (5) Keystone.................................. Shelocta, PA................... 2,300(4) 2003 Conemaugh................................. New Florence, PA............... 2,300(4) 2006 --------- Total.................................................................... 9,077,800 ========= - --------------- (1) Summer rating. (2) Effective January 24, 1996, Limerick Unit No. 1 was rerated to 1,115,000 kilowatts, making the entire station's capacity 2,230,000 kilowatts. This rerate increased the Company's net generating capacity to 9,137,800 kilowatts. (3) For depreciation accrual purposes only, retirement dates have been reduced by 10 years. See "Rate Matters." (4) Company portion. (5) Retirement dates are under on-going review by the Company. Current plans call for the continued operation of these units beyond 1996.
27 The following table sets forth the Company's major transmission and distribution lines in service at December 31, 1995:
Voltage in Kilovolts (Kv) Conductor Miles Transmission: 500 Kv .............. 824 220 Kv .............. 1,746 132 Kv .............. 656 66 Kv ............... 646 33 Kv and below ..... 37 Distribution: 33 Kv and below ..... 48,809
At December 31, 1995, the Company's principal electric distribution system included 11,770 pole-line miles of overhead lines and 20,673 cable miles of underground cables. The Company is in the midst of an ongoing program to implement a 33 Kv distribution system for a large portion of outlying suburban areas. These areas are now primarily served by a combination of 4 Kv distribution circuits, which are being phased out, and direct connections to 33 Kv subtransmission lines, which are being converted to 33 Kv distribution circuits. The new system is designed to improve the Company's ability to meet the growing load requirements of suburban areas, improve system reliability and reduce service interruptions. The following table sets forth the Company's gas pipeline miles at December 31, 1995:
Pipeline Miles Transmission ..... 28 Distribution ..... 5,458 Service piping.... 4,401 ----- Total ........ 9,887 =====
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 200,000 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 30,000 mcf/day. In addition, the Company owns 23 natural gas city gate stations (including one temporary station) at various locations throughout its gas service territory. 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 1995. 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 $46 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, if not recovered through the ratemaking process, could have a material adverse effect on the Company's financial condition and results of operations. 28 ITEM 3. LEGAL PROCEEDINGS On April 11, 1991, 33 former employees of the Company filed an amended class action suit against the Company in the Eastern District Court on behalf of approximately 141 persons who retired from the Company between January and April 1990. The lawsuit, filed under the Employee Retirement Income Security Act (ERISA), alleged that the Company fraudulently and/or negligently misrepresented or concealed facts concerning the Company's 1990 Early Retirement Plan and thus induced the plaintiffs to retire or not to defer retirement immediately before the initiation of the 1990 Early Retirement Plan, thereby depriving the plaintiffs of substantial pension and salary benefits. In June 1991, the plaintiffs filed amended complaints adding additional plaintiffs. The lawsuit named the Company, the Company's Service Annuity Plan (SAP) and two Company officers as defendants. On May 13, 1994, the Eastern District Court issued a decision, finding the Company liable to all plaintiffs who made inquiries about any early retirement plan after March 12, 1990 and retired prior to April 1990. In an order dated August 23, 1995, the Eastern District Court awarded the plaintiffs $1.5 million. The Company has filed appeals from the order and has accrued the amount of the award. On May 2, 1991, 37 former employees of the Company filed an amended class action suit against the Company, the SAP and three former Company officers in the Eastern District Court, on behalf of 147 former employees who retired from the Company between January and June 1987. The lawsuit was filed under ERISA and concerned the August 1, 1987 amendment to the SAP. The plaintiffs claimed that the Company concealed or misrepresented the fact that the amendment to the SAP was planned to increase retirement benefits and, as a consequence, they retired prior to the amendment to the SAP and were deprived of significant retirement benefits. On May 13, 1994, the Eastern District Court issued a decision, finding the Company liable to all plaintiffs who made inquiries about any pension improvement after March 1, 1987 and retired prior to June 1987. In an order dated August 23, 1995, the Eastern District Court awarded the plaintiffs $1.8 million. The Company has filed appeals from the order and has accrued the amount of the award. On May 25, 1993, the Company received a letter from attorneys on behalf of a shareholder demanding that the Company's Board of Directors commence legal action against certain Company officers and directors with respect to the Company's credit and collections practices. The basis of the demand was the findings and conclusions contained in the Credit and Collection section of the May 1991 PUC Management Audit Report (Audit Report) prepared by Ernst & Young. At its June 28, 1993 meeting, the Board of Directors appointed a special committee of directors to consider whether such legal action would be in the best interests of the Company and its shareholders. On March 14, 1994, upon the recommendation of the special committee, the Board of Directors approved a resolution refusing the shareholder demand set forth in the May 25, 1993 demand letter, and authorizing and directing officers of the Company to take all steps necessary to terminate the derivative suit discussed below. On August 15, 1995, attorneys on behalf of the shareholders filed a derivative action in the Court of Common Pleas of Philadelphia County (Court of Common Pleas) asserting the same claims against several present and former officers which are asserted in the July 26, 1993 shareholder derivative suit discussed below. On February 20, 1996, the Court of Common Pleas ordered that the suit be consolidated with the July 26, 1993 shareholder derivative suit. Any monetary damages which may be recovered, net of expenses, would be paid to the Company because the lawsuit is brought derivatively by shareholders on behalf of the Company. On July 26, 1993, attorneys on behalf of two shareholders filed a shareholder derivative action in the Court of Common Pleas against several of the Company's present and former officers alleging mismanagement, waste of corporate assets and breach of fiduciary duty in connection with the Company's credit and collections practices. The derivative suit is based on the findings and conclusions contained in the Credit and Collections section of the Audit Report. The plaintiffs seek, among other things, an unspecified amount of damages and the awarding to the plaintiffs of the costs and disbursements of the action, including attorneys' fees. A trial date has been set for November 4, 1996. Any monetary damages which may be recovered, net of expenses, would be paid to the Company because the lawsuit is brought derivatively by shareholders on behalf of the Company. On March 5, 1996, the Company and Delmarva Power & Light Company (Delmarva) filed an action in the United States District Court for the Eastern District of Pennsylvania against Public Service Enterprise Group 29 Incorporated and its subsidiary PSE&G (Enterprise Group) concerning the shutdown of Salem; on the same date, Atlantic Electric Company (Atlantic Electric) filed a similar suit against Enterprise Group in New Jersey state court. The suit alleges that Enterprise Group breached the provisions of the Owners Agreement pursuant to which the four companies own Salem and under which Enterprise Group operates Salem. The suit also alleges negligence, gross negligence, reckless, and willful and wanton misconduct. The plaintiffs seek compensation for certain replacement power costs they incurred as a result of the shutdown of Salem and for increased operating and maintenance costs and lost profits. The complaint does not specify any dollar amount of damages. 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 and Delmarva, the co-owners of Salem, filed an action in the United States District Court for the District of New Jersey 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. For additional information concerning the cracking of steam generator tubes at Salem, see "ITEM 1. BUSINESS - Electric Operations - Salem Generating Station." 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, 1996, there were 186,754 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 1995 and 1994 is incorporated herein by reference to "Operating Statistics" in the Company's Annual Report to Shareholders for the year 1995. The book value of the Company's common stock at December 31, 1995 was $20.40 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, 1995, such capital ($4.53 billion) amounted to about 12 times the liquidating value of the outstanding preferred stock ($292.1 million). 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 Company's subordinated debentures (Subordinated Debentures) which were issued to the Partnership; (2) the Company defaults on its guarantee of 30 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 1995. 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 1995. 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 1995. 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 1996 Annual Meeting of Shareholders to be held April 10, 1996, under the heading "Proposal 1. Election of Directors" and is incorporated herein by reference. (b) Identification of Executive Officers. The information required for Executive Officers is set forth in "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 1996 Annual Meeting of Shareholders to be held April 10, 1996, 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 1996 Annual Meeting of Shareholders to be held April 10, 1996, under the heading "Proposal 1. 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 1996 Annual Meeting of Shareholders to be held April 10, 1996, under the heading "Proposal 1. 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 1995: Report of Independent Accountants............................................. -- 19 Consolidated Statements of Income for the years ended December 31, 1995, 1994 and 1993............................................ -- 20 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993............................................ -- 21 Consolidated Balance Sheets as of December 31, 1995 and 1994.................. -- 22 Consolidated Statements of Changes in Common Shareholders' Equity and Preferred Stock for the years ended December 31, 1995, 1994 and 1993............................................ -- 24 Notes to Consolidated Financial Statements.................................... -- 25 Data submitted herewith: Report of Independent Accountants............................................. 34 -- Schedule II-- Valuation and Qualifying Accounts for the years ended December 31, 1995, 1994 and 1993....................... 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 1995 and incorporated by reference into this Form 10-K Annual Report, the Annual Report to Shareholders for the year 1995 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 report on the consolidated financial statements of PECO Energy Company has been incorporated by reference in this Form 10-K from page 19 of the 1995 Annual Report to Shareholders of PECO Energy Company. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index in Item 14 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1996 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, 1995 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS............................. $16,500 $39,043 $ -- $34,683 $20,860 ------- ------- -------- ------- ------- TOTAL.......................... $16,500 $39,043 $ -- $34,683 $20,860 ======= ======= ======== ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1994 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS............................. $15,086 $44,186 $ -- $42,772 $16,500 ------- ------- -------- ------- ------- TOTAL.......................... $15,086 $44,186 $ -- $42,772 $16,500 ======= ======= ======== ======= ======= FOR THE YEAR ENDED DECEMBER 31, 1993 ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS............................. $17,916 $40,758 $ -- $43,588 $15,086 ------- ------- -------- ------- ------- TOTAL.......................... $17,916 $40,758 $ -- $43,588 $15,086 ======= ======= ======== ======= ======= - --------------- (1) Write-off of individual accounts receivable.
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 24 of the Commission's Rules of Practice. Certain other instruments which would otherwise be required 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 24, 1994 (1993 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 Fidelity Bank, National Association, 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 May 1, 1964 2-25628 4(b)-21 October 1, 1967 2-28242 2(b)-23 March 1, 1968 2-34051 2(b)-24 May 1, 1970 2-38849 2(b)-28 December 15, 1970 2-41081 2(b)-29 December 15, 1971 2-44195 2(b)-31 January 15, 1973 2-49842 2(b)-33 March 1, 1981 2-72802 4-46 March 1, 1981 2-72802 4-47 November 15, 1984 1984 Form 10-K 4-2(a) December 1, 1984 1984 Form 10-K 4-2(b) May 15, 1985 1985 Form 10-K 4-2(a) October 1, 1985 1985 Form 10-K 4-2(b) November 1, 1986 1986 Form 10-K 4-2(c) 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 August 1, 1987 33-17438 4(c)-65 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
36
Dated as of File Reference Exhibit No. 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 January 15, 1992 Form 8-K dated January 27, 1992 4(e)-78 April 1, 1992 March 31, 1992 Form 10-Q 4(e)-79 April 1, 1992 March 31, 1992 Form 10-Q 4(e)-80 June 1, 1992 June 30, 1992 Form 10-Q 4(e)-81 June 1, 1992 June 30, 1992 Form 10-Q 4(e)-82 July 15, 1992 June 30, 1992 Form 10-Q 4(e)-83 September 1, 1992 1992 Form 10-K 4(e)-84 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 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 August 15, 1993 Form 8-A dated August 19, 1993 4(e)-93 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 Deposit Agreement with respect to $7.96 Cumulative Preferred Stock (Form 8-K dated October 20, 1992, Exhibit 4-5). 4-4 PECO Energy Company Dividend Reinvestment and Stock Purchase Plan, as amended January 28, 1994 (Post-Effective Amendment No. 1 to Registration No. 33-43523, Exhibit 28). 4-5 Indenture, dated as of July 1, 1994, between the Company and Meridian Trust Company, as trustee (1994 Form 10-K, Exhibit 4-5). 4-6 Deferrable Interest Subordinated Debenture Certificate, Series A (1994 Form 10-K, Exhibit 4-6). 4-7 First Supplemental Indenture, dated as of December 1, 1995, between the Company and Meridian Trust Company, as trustee, to Indenture dated as of July 1, 1994. 4-8 Deferrable Interest Subordinated Debenture Certificates, Series B, No. 1 and No. 2. 4-9 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). 4-10 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. 37 10-1 Pennsylvania-New Jersey-Maryland Interconnection Agreement dated September 26, 1956 (Registration No. 2-13340, Exhibit 13-40) and agreements supplemental thereto:
Dated as of File Reference Exhibit No. March 1, 1965 2-38342 5-1(a) January 1, 1971 2-40368 5-1(b) June 1, 1974 2-51887 5-1(c) September 1, 1977 1989 Form 10-K 10-1(a) October 1, 1980 1989 Form 10-K 10-1(b) June 1, 1981 1989 Form 10-K 10-1(c)
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; and supplemental agreement dated January 26, 1977 (1991 Form 10-K, Exhibit 10-3). 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 September 1, 1975; and supplemental agreement dated January 26, 1977 (1988 Form 10-K, Exhibit 10-4). 10-4 Deferred Compensation and Supplemental Pension Benefit Plan (1981 Form 10-K, Exhibit 10-16).* 10-5 Forms of Agreement between the Company and certain officers. 10-6 PECO Energy Company Long-Term Incentive Plan (Registration No. 333-451, Exhibit 99).* 10-7 Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., dated July 25, 1994 (1994 Form 10-K, Exhibit 10-7). 10-8 Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. 10-9 Amendment No. 2 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P. 10-10 Amended and Restated Trust Agreement of PECO Energy Capital Trust I, dated as of December 19, 1995. 10-11 Agreement between the Company and Delmarva Power & Light Company for the purchase and sale of capacity and energy, dated May 24, 1994 (1994 Form 10-K, Exhibit 10-9). 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 1995. 38 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. Reports on Form 8-K During the quarter ended December 31, 1995, the Company filed Current Reports on Form 8-K, dated: October 17, 1995 reporting information under "ITEM 5. OTHER EVENTS" relating to the shutdown of Salem Generating Station operated by Public Service Electric and Gas Company. October 23, 1995 reporting information under "ITEM 5. OTHER EVENTS" relating to the proposed merger with PP&L Resources, Inc. November 1, 1995 reporting information under "ITEM 5. OTHER EVENTS" relating to the proposed merger with PP&L Resources, Inc. December 11, 1995 reporting information under "ITEM 5. OTHER EVENTS" relating to the shutdown of Salem Generating Station operated by Public Service Electric and Gas Company. Subsequent to December 31, 1995, the Company filed a Current Report on Form 8-K, dated: February 23, 1996 reporting information under "ITEM 5. OTHER EVENTS" relating to the cracking of steam generator tubes at Unit No. 1 at Salem Generating Station operated by Public Service Electric and Gas Company. 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 27th day of March 1996. PECO ENERGY COMPANY By /s/ C.A. MCNEILL, JR. ---------------------------------------- C.A. McNeill, Jr., 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/ J. F. PAQUETTE, JR. - ------------------------------------ Chairman of the Board and Director March 27, 1996 J. F. Paquette, Jr. /s/ C. A. MCNEILL, JR. - ----------------------------------- President, Chief Executive Officer March 27, 1996 C. A. McNeill, Jr. and Director (Principal Executive Officer) /s/ K. G. LAWRENCE - ----------------------------------- Senior Vice President - Finance March 27, 1996 K. G. Lawrence and Chief Financial Officer (Principal Financial and 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 JOSEPH C. LADD M. WALTER D'ALESSIO EDITHE J. LEVIT RICHARD G. GILMORE KINNAIRD R. MCKEE RICHARD H. GLANTON JOSEPH J. MCLAUGHLIN JAMES A. HAGEN JOHN M. PALMS NELSON G. HARRIS RONALD RUBIN ROBERT SUBIN By /s/ C. A. MCNEILL, JR. March 27, 1996 - ----------------------------------- C. A. McNeill, Jr., Attorney-in-Fact EX-4.7 2 Exhibit 4-7 PECO ENERGY COMPANY AND Meridian Trust Company, as Trustee FIRST SUPPLEMENTAL INDENTURE Dated as of December 1, 1995 to INDENTURE Dated as of July 1, 1994 Providing for the Issuance of 8.72% Deferrable Interest Subordinated Debentures, Series B TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions....................................................2 ARTICLE 2 THE SERIES B DEBENTURES SECTION 2.01 Form of the Series B Debentures; Denominations..................................................2 ARTICLE 3 REDEMPTION SECTION 3.01 Redemption; Notice to Trustee..................................3 SECTION 3.02. Compliance with Terms of Indenture.............................3 ARTICLE 4 EXTENSION PERIOD SECTION 4.01 Limitation on Right of Company to Extend Interest Payment Period........................................4 ARTICLE 5 CONCERNING THE TRUSTEE SECTION 5.01. Not Responsible for Recitals...................................4 SECTION 5.02. Qualification Under Trust Indenture Act of 1939.........................................................4 ARTICLE 6 MISCELLANEOUS SECTION 6.01 Trust Indenture Act Controls...................................5 SECTION 6.02 Severability Clause............................................5 SECTION 6.03 Governing Law..................................................5 SECTION 6.04 No Recourse Against Others.....................................5 SECTION 6.05. Use of Term "Trustee"..........................................5 SECTION 6.06. Confirmation of Original Indenture.............................6 SECTION 6.07 Successors.....................................................6 SECTION 6.08 Multiple Original Copies of this Indenture.....................6 SECTION 6.09 Table of Contents; Headings, Etc...............................6 SECTION 6.10 Benefits of the Indenture......................................6 SECTION 6.11. Date of Indenture..............................................7 (i) FIRST SUPPLEMENTAL INDENTURE, dated as of December 1, 1995, by and between PECO Energy Company, a Pennsylvania corporation (the "Company"), and Meridian Trust Company, a Pennsylvania trust company, as trustee (the "Trustee), to an Indenture, dated as of July 1, 1994, by and between the Company and the Trustee (the "Original Indenture", together with this Supplemental Indenture, 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 issue 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; and WHEREAS, the Company desires to effect the exchange of Trust Receipts, each representing a 8.72% Cumulative Monthly Income Preferred Security, Series B of PECO Energy Capital for up to 5,400,000 Depositary Shares, each representing a one-fourth interest in a share of $7.96 Cumulative Preferred Stock of the Company and the Company has authorized the issuance of $229,900,000 aggregate principal amount of its 8.72% Deferrable Subordinated Debentures, Series B (the "Series B Debentures") under this First Supplemental Indenture for such purpose; WHEREAS, all things necessary to make the Series B Debentures when duly issued and executed by the Company and authenticated and delivered hereunder, the valid obligations of the Company, and to make this 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 B Debentures: ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE SECTION 1.01 Definitions. "Additional Interest", with respect to the Series B Debentures, 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 B Debentures. "Additional Payments" means an amount equal to interest on the principal amount of the Series B Debentures at the rate of 7.96% per annum from and including November 1, 1995 through but not including the Issue Date of the Series B Debentures, payable on the first interest payment date for the Series B Debentures. "Exchange Agent" means First Chicago Trust Company of New York in its capacity as the Exchange Agent under an Exchange Agreement dated as of November 8, 1995 between the Company and the Exchange Agent. "Issue Date" means December 19, 1995. "Series B Debentures" means any of the Company's 8.72% Deferrable Interest Subordinated Debentures, Series B issued under this Supplemental Indenture. "Series B Debentureholder" or "Series B Holder" means a Person in whose name a Series B Debenture is registered on the Registrar's books. "Series B Preferred Securities" means the 8.72% Cumulative Monthly Income Preferred Securities, Series B, 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 B DEBENTURES SECTION 2.01 Form of the Series B Debentures; Denominations. The Series B Debentures and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A 2 attached hereto. The terms and provisions contained in the Series B Debentures, a form of which is annexed hereto as Exhibit A, shall constitute, and are hereby expressly made, a part of this Supplemental Indenture. The Company and the Trustee, by their execution and delivery of this First 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 B Debentures for original issue in the aggregate principal amount of $80,520,180 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. Upon authentication by the Trustee, the Series B Debentures shall be delivered by the Trustee as follows: (i) $78,104,575 of Series B Debentures shall be delivered to the Exchange Agent in exchange for Depositary Shares and subsequent delivery by the Exchange Agent (acting pursuant to the directions of the holders of such Depositary Shares) to PECO Energy Capital and (ii) $2,415,605 of Series B Debentures shall be delivered to PECO Energy Capital as evidence of the Company's obligation with respect to the loan to the Company of the investment by PECO Energy Capital Corp. in PECO Energy Capital on the date of issuance of the Series B Subordinated Debentures. The Series B Debentures shall be issuable only in registered form without coupons and only in denominations of $25.00 and any integral multiple thereof attached hereto as Exhibit A. ARTICLE 3 REDEMPTION SECTION 3.01 Redemption; Notice to Trustee. (a) The Series B Debentures 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 B Debentures 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. 3 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 B Debentures 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. The Company agrees not to exercise its right under Section 4.01(b) of the Original Indenture to extend the interest payment period for the Debentures for up to 60 months until the Additional Payment has been paid in full. The Company also agrees that no extended interest payment period shall extend beyond the stated maturity date or redemption date of the Series B Debentures. 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 this First 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 First 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 First Supplemental Indenture under the Trust Indenture Act of 1939, as amended. 4 ARTICLE 6 MISCELLANEOUS SECTION 6.01 Trust Indenture Act Controls. If any provision of this First 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 First Supplemental Indenture, except as, and to the extent, they are expressly excluded from this Supplemental Indenture, as permitted by the TIA. SECTION 6.02 Severability Clause. If any provision in this First Supplemental Indenture or in the Series B Debentures 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 First Supplemental Indenture and the Series B Debentures 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 B Debentures or this First Supplemental Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Series B Debenture, each Series B Debentureholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Series B Debentures. 5 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 First 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 this First Supplemental Indenture, the Original Indenture is in all respects ratified and confirmed, and this First 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 Original Indenture shall apply and remain in full force and effect with respect to this First Supplemental Indenture and to the Series B Debentures issued hereunder. SECTION 6.07 Successors. All agreements of the Company in this First Supplemental Indenture and the Series B Debentures shall bind its successors and assigns. All agreements of the Trustee in this First 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 First 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 First 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 First 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 First Supplemental Indenture or in the Series B Debentures, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder, the Series B Holders and the Special Representative, 6 any benefit or any legal or equitable right, remedy or claim under this First Supplemental Indenture. SECTION 6.11. Date of Indenture. This First Supplemental Indenture is dated as of December 1, 1995, but was actually executed and delivered on December 19, 1995. 7 SIGNATURES IN WITNESS WHEREOF, the undersigned, being duly authorized, have executed this First 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 MERIDIAN TRUST COMPANY, as Trustee By: /s/ William J. Roberts Name: William J. Roberts Title: Relationship Officer PECO Energy Capital, L.P. By its General Partner, PECO Energy Capital Corp. By: /s/ J. Barry Mitchell Solely for the purposes stated in the recitals hereto. 8 Exhibit A 8.72% Deferrable Interest Subordinated Debentures, Series B due 2025 No. ___ PECO Energy Company, a Pennsylvania corporation (the "Company"), which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to PECO Energy Capital, L.P. or registered assigns, the principal sum of ______________________________________ Dollars on December 19, 2025, and to pay interest on said principal sum from December 19, 1995 (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, monthly in arrears on the last day of each calendar month of each year commencing December 29, 1995 at the rate of 8.72% 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. The Company also promises to pay to PECO Energy Capital, L.P. or registered assigns on December 29, 1995 an amount (the "Additional Payment") equal to interest on the principal amount hereof at the rate of 7.96% per annum from and including November 1, 1995 through but not including the Issue Date. 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. The amount of interest payable on any Interest Payment Date (and the Additional Payment) 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 B Debentures 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 A-1 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 Debenture is registered at the close of business on the regular record date for such interest installment, which shall be the fifteenth day of the month of, or in the case of an Interest Payment Date which is on the first Business Day of a month, the fifteenth day of the month next preceding, such Interest Payment Date. 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 Debenture 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 10 days prior to such special record date, as more fully provided in the Indenture hereinafter referred to. The principal of (and premium, if any) and the interest on this Debenture 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 Debenture is PECO Energy Capital, the payment of the principal of (and premium) and interest (including the Additional Payment and Additional Interest, if any) in this Debenture will be made at such place and to such account as may be designated by PECO Energy Capital. The indebtedness evidenced by this Debenture 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 Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Debenture, 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. A-2 This Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Series B Debentures"), 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, as supplemented by a First Supplemental Indenture, dated as of December 1, 1995 (as supplemented, the "Indenture") executed and delivered between the Company and Meridian Trust Company, as trustee (the "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 Debentures. 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 in the Indenture provided. The Series B Debentures 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 B Preferred Securities (as defined in the Indenture), but if in part, in an aggregate principal amount equal to the aggregate stated liquidation preference of the Series B Preferred Securities redeemed. At the option of the Company, the Series B Debentures are subject to redemption prior to maturity (i) at any time on or after October 1, 1997 at the option of the Company, in whole or in part, and (ii) if a Tax Event shall occur and be continuing, in whole (but not in part), and in each case at 100% of the principal amount thereof plus accrued interest to the redemption date. "Tax Event" shall mean that PECO Energy Capital shall have received an opinion of counsel (which may be regular counsel to the Company or an Affiliate, but not an employee thereof) experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such interpretation or pronouncement is announced on or after the date of original issuance of the Series B Preferred Securities, there is more than an insubstantial risk that (i) PECO Energy Capital is subject to United States Federal income tax with respect to interest A-3 received on the Debentures or PECO Energy Capital will otherwise not be taxed as a partnership, (ii) interest payable by the Company to PECO Energy Capital on the Series B Debentures will not be deductible for United States Federal income tax purposes or (iii) PECO Energy Capital is subject to more than a de minimis amount of other taxes, duties or other governmental charges. In the event of redemption of this Debenture in part only, a new Debenture or Debentures of this series 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, as defined in the Indenture, 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 Debenture 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 B Debentures may be amended with the written consent of the Holders of a majority in aggregate principal amount of the Series B Debentures 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 B Debentures 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. No reference herein to the Indenture and no provision of this Debenture 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 Debenture at the time and place and at the rate and in the money herein prescribed. A-4 After payment in full of the Additional Payment, the Company shall have the right at any time during the term of the Series B Debentures, from time to time to extend the interest payment period of such Debentures 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 unpaid (together with interest thereon at the rate specified for the Series B Debentures 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 Debenture is transferable by the registered holder hereof on the Debenture Register of the Company, upon surrender of this Debenture 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 Debentures 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. Prior to presentment for registration of transfer of this Debenture, 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 Debenture 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 Debenture, or for any claim based hereon, or otherwise in respect hereof, or based on or in A-5 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. Debentures of this series so issued are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Debentures of this series are exchangeable for a like aggregate principal amount of Debentures of this series of a different authorized denomination, as requested by the Holder surrendering the same. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. This Debenture shall not be valid until an authorized officer of the Trustee manually signs the Trustee's Certificate of Authentication below. IN WITNESS WHEREOF, the Company has caused this Debenture 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: December 19, 1995 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. MERIDIAN TRUST COMPANY, as Trustee By: __________________________ Name ______________________________ Authorized Signatory A-6 EX-4.8 3 Exhibit 4-8 8.72% Deferrable Interest Subordinated Debentures, Series B due 2025 No. 1 PECO Energy Company, a Pennsylvania corporation (the "Company"), which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to PECO Energy Capital, L.P. or registered assigns, the principal sum of Seventy-eight Million, One Hundred and Four Thousand, Five Hundred and Seventy-five Dollars ($78,104,575) on December 19, 2025, and to pay interest on said principal sum from December 19, 1995 (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, monthly in arrears on the last day of each calendar month of each year commencing December 29, 1995 at the rate of 8.72% 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. The Company also promises to pay to PECO Energy Capital, L.P. or registered assigns on December 29, 1995 an amount (the "Additional Payment") equal to interest on the principal amount hereof at the rate of 7.96% per annum from and including November 1, 1995 through but not including the Issue Date. 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. The amount of interest payable on any Interest Payment Date (and the Additional Payment) 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 B Debentures 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 Debenture is registered at the close of business on the regular record date for such interest installment, which shall be the fifteenth day of the month of, or in the case of an Interest Payment Date which is on the first Business Day of a month, the fifteenth day of the month next preceding, such Interest Payment Date. 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 Debenture 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 10 days prior to such special record date, as more fully provided in the Indenture hereinafter referred to. The principal of (and premium, if any) and the interest on this Debenture 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 Debenture is PECO Energy Capital, the payment of the principal of (and premium) and interest (including the Additional Payment and Additional Interest, if any) in this Debenture will be made at such place and to such account as may be designated by PECO Energy Capital. The indebtedness evidenced by this Debenture 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 Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Debenture, 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. 2 This Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Series B Debentures"), 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, as supplemented by a First Supplemental Indenture, dated as of December 1, 1995 (as supplemented, the "Indenture") executed and delivered between the Company and Meridian Trust Company, as trustee (the "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 Debentures. 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 in the Indenture provided. The Series B Debentures 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 B Preferred Securities (as defined in the Indenture), but if in part, in an aggregate principal amount equal to the aggregate stated liquidation preference of the Series B Preferred Securities redeemed. At the option of the Company, the Series B Debentures are subject to redemption prior to maturity (i) at any time on or after October 1, 1997 at the option of the Company, in whole or in part, and (ii) if a Tax Event shall occur and be continuing, in whole (but not in part), and in each case at 100% of the principal amount thereof plus accrued interest to the redemption date. "Tax Event" shall mean that PECO Energy Capital shall have received an opinion of counsel (which may be regular counsel to the Company or an Affiliate, but not an employee thereof) experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such interpretation or pronouncement is announced on or after the date of original issuance of the Series B Preferred Securities, there is more than an insubstantial risk that (i) PECO Energy Capital is subject to 3 United States Federal income tax with respect to interest received on the Debentures or PECO Energy Capital will otherwise not be taxed as a partnership, (ii) interest payable by the Company to PECO Energy Capital on the Series B Debentures will not be deductible for United States Federal income tax purposes or (iii) PECO Energy Capital is subject to more than a de minimis amount of other taxes, duties or other governmental charges. In the event of redemption of this Debenture in part only, a new Debenture or Debentures of this series 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, as defined in the Indenture, 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 Debenture 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 B Debentures may be amended with the written consent of the Holders of a majority in aggregate principal amount of the Series B Debentures 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 B Debentures 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. No reference herein to the Indenture and no provision of this Debenture 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 4 Debenture at the time and place and at the rate and in the money herein prescribed. After payment in full of the Additional Payment, the Company shall have the right at any time during the term of the Series B Debentures, from time to time to extend the interest payment period of such Debentures 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 unpaid (together with interest thereon at the rate specified for the Series B Debentures 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 Debenture is transferable by the registered holder hereof on the Debenture Register of the Company, upon surrender of this Debenture 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 Debentures 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. Prior to presentment for registration of transfer of this Debenture, 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 Debenture 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. 5 No recourse shall be had for the payment of the principal of or the interest on this Debenture, 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. Debentures of this series so issued are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Debentures of this series are exchangeable for a like aggregate principal amount of Debentures of this series of a different authorized denomination, as requested by the Holder surrendering the same. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. This Debenture shall not be valid until an authorized officer of the Trustee manually signs the Trustee's Certificate of Authentication below. 6 IN WITNESS WHEREOF, the Company has caused this Debenture 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: /s/ J. Barry Mitchell Name: J. Barry Mitchell Title: Vice President/Finance Attest: /s/ Todd D. Cutler Dated: December 19, 1995 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. MERIDIAN TRUST COMPANY, as Trustee By: /s/ William S. Roberts Name Relationship Officer Authorized Signatory 7 Exhibit 4-8 8.72% Deferrable Interest Subordinated Debentures, Series B due 2025 No. 2 PECO Energy Company, a Pennsylvania corporation (the "Company"), which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to PECO Energy Capital, L.P. or registered assigns, the principal sum of Two Million, Four Hundred and Fifteen Thousand, Six Hundred and Five Dollars ($2,415,605) on December 19, 2025, and to pay interest on said principal sum from December 19, 1995 (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, monthly in arrears on the last day of each calendar month of each year commencing December 29, 1995 at the rate of 8.72% 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. The Company also promises to pay to PECO Energy Capital, L.P. or registered assigns on December 29, 1995 an amount (the "Additional Payment") equal to interest on the principal amount hereof at the rate of 7.96% per annum from and including November 1, 1995 through but not including the Issue Date. 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. The amount of interest payable on any Interest Payment Date (and the Additional Payment) 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 B Debentures 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 Debenture is registered at the close of business on the regular record date for such interest installment, which shall be the fifteenth day of the month of, or in the case of an Interest Payment Date which is on the first Business Day of a month, the fifteenth day of the month next preceding, such Interest Payment Date. 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 Debenture 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 10 days prior to such special record date, as more fully provided in the Indenture hereinafter referred to. The principal of (and premium, if any) and the interest on this Debenture 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 Debenture is PECO Energy Capital, the payment of the principal of (and premium) and interest (including the Additional Payment and Additional Interest, if any) in this Debenture will be made at such place and to such account as may be designated by PECO Energy Capital. The indebtedness evidenced by this Debenture 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 Debenture is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Debenture, 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. 2 This Debenture is one of a duly authorized series of Debentures of the Company (herein sometimes referred to as the "Series B Debentures"), 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, as supplemented by a First Supplemental Indenture, dated as of December 1, 1995 (as supplemented, the "Indenture") executed and delivered between the Company and Meridian Trust Company, as trustee (the "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 Debentures. 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 in the Indenture provided. The Series B Debentures 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 B Preferred Securities (as defined in the Indenture), but if in part, in an aggregate principal amount equal to the aggregate stated liquidation preference of the Series B Preferred Securities redeemed. At the option of the Company, the Series B Debentures are subject to redemption prior to maturity (i) at any time on or after October 1, 1997 at the option of the Company, in whole or in part, and (ii) if a Tax Event shall occur and be continuing, in whole (but not in part), and in each case at 100% of the principal amount thereof plus accrued interest to the redemption date. "Tax Event" shall mean that PECO Energy Capital shall have received an opinion of counsel (which may be regular counsel to the Company or an Affiliate, but not an employee thereof) experienced in such matters to the effect that, as a result of any amendment to, or change (including any announced prospective change) in, the laws (or any regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein affecting taxation, or as a result of any official administrative pronouncement or judicial decision interpreting or applying such laws or regulations, which amendment or change is effective or such interpretation or pronouncement is announced on or after the date of original issuance of the Series B Preferred Securities, there is more than an insubstantial risk that (i) PECO Energy Capital is subject to 3 United States Federal income tax with respect to interest received on the Debentures or PECO Energy Capital will otherwise not be taxed as a partnership, (ii) interest payable by the Company to PECO Energy Capital on the Series B Debentures will not be deductible for United States Federal income tax purposes or (iii) PECO Energy Capital is subject to more than a de minimis amount of other taxes, duties or other governmental charges. In the event of redemption of this Debenture in part only, a new Debenture or Debentures of this series 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, as defined in the Indenture, 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 Debenture 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 B Debentures may be amended with the written consent of the Holders of a majority in aggregate principal amount of the Series B Debentures 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 B Debentures 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. No reference herein to the Indenture and no provision of this Debenture 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 4 Debenture at the time and place and at the rate and in the money herein prescribed. After payment in full of the Additional Payment, the Company shall have the right at any time during the term of the Series B Debentures, from time to time to extend the interest payment period of such Debentures 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 unpaid (together with interest thereon at the rate specified for the Series B Debentures 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 Debenture is transferable by the registered holder hereof on the Debenture Register of the Company, upon surrender of this Debenture 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 Debentures 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. Prior to presentment for registration of transfer of this Debenture, 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 Debenture 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. 5 No recourse shall be had for the payment of the principal of or the interest on this Debenture, 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. Debentures of this series so issued are issuable only in registered form without coupons in denominations of $25 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Debentures of this series are exchangeable for a like aggregate principal amount of Debentures of this series of a different authorized denomination, as requested by the Holder surrendering the same. All terms used in this Debenture which are defined in the Indenture shall have the meanings assigned to them in the Indenture. This Debenture shall not be valid until an authorized officer of the Trustee manually signs the Trustee's Certificate of Authentication below. 6 IN WITNESS WHEREOF, the Company has caused this Debenture 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: /s/ J. Barry Mitchell Name: J. Barry Mitchell Title: Vice President/Finance Attest: /s/ Todd D. Cutler Dated: December 19, 1995 TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debentures referred to in the within-mentioned Indenture. MERIDIAN TRUST COMPANY, as Trustee By: /s/ William S. Roberts Name Relationship Officer Authorized Signatory 7 EX-4.10 4 Exhibit 4-10 PAYMENT AND GUARANTEE AGREEMENT THIS PAYMENT AND GUARANTEE AGREEMENT ("Guarantee Agreement"), dated as of December 19, 1995, 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 B 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 $78,104,575 aggregate stated liquidation preference of limited partner interests of a series designated the 8.72% Cumulative Monthly Income Preferred Securities, Series B (the "Series B 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 B Subordinated Debentures (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 B 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"). "Guarantee Payments" shall mean the following payments, without duplication, to the extent not paid by PECO Energy Capital: (i) any accumulated and unpaid monthly distributions on the Series B 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 B Preferred Securities called for redemption by PECO Energy Capital out of moneys legally available therefor held by PECO Energy Capital, (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 and (iv) a cash distribution at the rate of 7.96% per annum of the stated liquidation preference of $25 per Series B Preferred Security accumulating from November 1, 1995 through but not including December 19, 1995. "Holders" shall mean the persons or entities in whose name any Series B 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 B 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 Supplemental Indenture, between the Guarantor and Meridian Trust Company, 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 $25 per Series B Preferred Security and all accumulated and unpaid distributions to the date of payment. "Preferred Trust Receipts" shall mean the trust receipts issued by the Trust each representing a Series B Preferred Security. "Redemption Price" shall mean the aggregate of $25 per Series B Preferred Security and all accumulated and unpaid distributions to the date fixed for redemption. "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 First Supplemental Indenture, dated as of December 19, 1995, between 2 the Guarantor and Meridian Trust Company, pursuant to which the Guarantor has issued its 8.72% Deferrable Interest Subordinated Debentures, Series B (the "Series B Subordinated Debentures") in an amount equal to the aggregate stated liquidation preference of the Series B Preferred Securities and the G.P. Capital Contribution. "Trust" shall mean PECO Energy Capital Trust I, a Delaware business trust. "Trust Agreement" shall mean the Amended and Restated Trust Agreement of PECO Energy Capital Trust I, as amended from time to time, among PECO Energy Capital, L.P., as Grantor and PNC Bank, Delaware, as Trustee, dated as of December 19, 1995. "Trustee" shall mean PNC Bank, Delaware 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 B Subordinated Debentures and the Guarantor shall not be obligated hereunder to pay during an Extension Period any monthly distributions on the Series B 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. 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: 3 (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 B 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 B Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Series B 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 B 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 B 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 Guarantee Agreement on behalf of the Holders; (iv) the holders of Preferred Trust Receipts, together with the holders of the Series B Preferred Securities other than the Trust, representing not less than 10% in aggregate stated liquidation preference of the Series B Preferred Securities have the right to direct the time, 4 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 Preferred Trust Receipts representing Series B 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 B 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 B 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 B 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 B 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 B 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 662/3% of the aggregate stated liquidation preference of all Series B 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 B Preferred Securities remain outstanding, any amendment that materially adversely affects the Holders, any termination of this Guarantee Agreement and any waiver of compliance with any covenant hereunder shall be effected only with the prior approval of the holders of Preferred Trust Receipts together with the holders of Series B Preferred Securities other than the Trust, representing not less than 662/3% of the aggregate liquidation preference of all Series B 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) 841-5743 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 B 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 ----------------------------- J. Barry Mitchell Vice President - Finance 8 EX-10.5 5 Exhibit 10-5 Forms of Agreement between the Company and Certain Officers GROUP 1 AGREEMENT Agreement made as of the ___ day of ____________, 1995, between PECO Energy Company (the "Company"), and [name of employee] (the "Employee"). WHEREAS, the Employee is presently employed by the Company as its [title]; WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company; and WHEREAS, in order to induce the Employee to remain in the employ of the Company, the Company agrees that the Employee shall receive the compensation set forth in this Agreement as a cushion against the financial and career impact on the Employee in the event the Employee's employment with the Company is terminated subsequent to a "Change of Control" (as defined in Section 1.3 hereof) of the Company; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. For all purposes of this Agreement, the following terms shall have the meanings specified in this Section unless the context clearly otherwise requires: 1.1 "Annual Base Salary" shall mean twelve times the greater of (a) the highest monthly base salary paid or payable (including any base salary which has been earned but deferred) to the Employee by the Company, and its affiliates (as defined in Section 1504 of the Code without regard to subsection (b) thereof), together with any and all salary reduction authorized amounts under any -1- of the Company's benefit plans or programs, in respect of the twelve-month period immediately preceding the date of the Change in Control, or (b) the monthly base salary paid or payable to the Employee by the Company (including authorized deferrals and salary reduction amounts) immediately prior to the Employee's Termination of Employment. 1.2 "Annual Bonus" shall mean an amount equal to the Employee's highest annual bonus for the last three full fiscal years prior to the Change of Control (annualized in the event that the Employee was not employed for the whole of such fiscal year). 1.3 "Change of Control" shall mean (a) the purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 20 percent or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, or (b) the approval by the shareholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or of a liquidation or dissolution of the Company or the sale of all or substantially all of the Company's assets, or (c) a change of 25% (rounded up to the next whole person) in the membership of the Board of Directors of the Company within a 12-month period, unless the election or nomination for election by shareholders of each new director within such period was approved by a vote of 85% (rounded up to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.5 "Separation Period" shall mean the two-year period beginning on the date of the Employee's Termination of Employment. 1.6 "Termination Date" shall mean the date of receipt of the Notice of Termination described in Section 2 hereof or any later date specified therein, as the case may be. 1.7 "Termination of Employment" shall mean the termination of the Employee's actual employment relationship with the Company. -2- 1.8 "Termination following a Change of Control" shall mean a Termination of Employment within three years after a Change of Control either: 1.8 (a) initiated by the Company for any reason other than (i) the Employee's death, continuous illness, injury or incapacity for a period of twelve consecutive months or (ii) for "cause," which shall mean misappropriation of funds, habitual insobriety, substance abuse, conviction of a crime involving moral turpitude, or gross negligence in the performance of duties, which gross negligence has had a material adverse effect on the business, operations, assets, properties or financial condition of the Company and its Subsidiaries taken as a whole; or 1.8 (b) initiated by the Employee upon one or more of the following occurrences: (i) any failure of the Company to comply with and satisfy any of the terms of this Agreement; (ii) any change resulting in a significant reduction by the Company of the authority, duties, compensation or responsibilities of the Employee; (iii) any removal by the Company of the Employee from the employment grade, compensation level or officer positions which the Employee holds as of the effective date hereof except in connection with promotions to higher office; or (iv) the requirement that the Employee undertake business travel (or commuting in excess of seventy-five miles each way from the Company's current headquarters at 2301 Market Street, Philadelphia, Pennsylvania) to an extent substantially greater than is reasonable and customary for the position the Employee holds. 2. Notice of Termination. Any Termination following a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 15 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (a) indicates the specific termination provision in this Agreement relied upon, (b) briefly summarizes the facts and circumstances deemed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). -3- 3. Compensation Upon Termination. Subject to the provisions of Section 10 hereof, in the event of the Employee's Termination following a Change of Control, the Company shall pay or provide to the Employee during the Separation Period ( or, in the event of the Employee's death following such termination during the Separation Period, to the Employee's estate), the following: 3.1 the Employee's earned but unpaid compensation as of the date of Termination of Employment; 3.2 the benefits, if any, to which the Employee is entitled as a former employee under the employee benefit programs and compensation plans and programs maintained for the benefit of the Company's officers and employees; 3.3 continued group hospitalization, health, dental care, life or other insurance, travel or accident insurance and disability insurance, for the Separation Period, with coverage equivalent to the coverage to which the Employee would have been entitled had the Employee continued working for the Company during the Separation Period at his Annual Base Salary; 3.4 the Annual Base Salary and Annual Bonus the Employee would have earned if the Employee had continued working for the Company during the Separation Period; 3.5 the benefits to which the Employee would be entitled under the Company's long term incentive, stock option, savings and retirement plans if the Employee had continued working for the Company during the Separation Period at his Annual Base Salary, and were making the maximum amount of employee contributions, if any, as are required under such plans, together with dividend equivalents on awards under the Company's long term incentive plan assuming the Employee's ratings justified a 100% pay-out. In the event that applicable law does not permit continued coverage under any tax qualified benefit plan or incentive or option plan during the Separation Period, the Company shall provide economically- equivalent benefits to the employee on a nonqualified, supplemental or other basis; 3.6 in the event the Employee and the Employee's spouse are not otherwise eligible for the Company's retiree health care coverage, following the end of the Separation Period, Employee (or if employee is deceased, Employee's surviving spouse) may continue to purchase health care coverage for himself and eligible dependents under the Company's health benefits plan at the prevailing rate then in effect for COBRA continuation coverage, until the Employee and the Employee's spouse have attained eligibility for Medicare coverage; and -4- 3.7 a minimum of twenty credited years of service under the Company's Deferred Compensation and Supplemental Pension Benefit Plan for purposes of determining the Employee's pension. 4. Other Payments. The payment due under Section 3 hereof shall be in addition to and not in lieu of any payments or benefits due to the Employee under any other plan, policy or program of the Company except that no payments shall be due to the Employee under the Company's then severance pay plan for employees, if any. 5. Enforcement. 5.1 In the event that the Company shall fail or refuse to make payment of any amounts due the Employee under Sections 3 and 4 hereof within the respective time periods provided therein, the Company shall pay to the Employee, in addition to the payment of any other sums provided in this Agreement, interest, compounded daily, on any amount remaining unpaid from the date payment is required under Section 3 and 4, as appropriate, until paid to the Employee, at the rate from time to time announced by Chase Manhattan Bank as its "prime rate" plus 2%, each change in such rate to take effect on the effective date of the change in such prime rate. 5.2 It is the intent of the parties that the Employee not be required to incur any expenses associated with the enforcement of his rights under this Agreement by arbitration, litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder. Accordingly, the Company shall pay the Employee on demand the amount necessary to reimburse the Employee in full for all expenses (including all attorneys' fees and legal expenses) incurred by the Employee in enforcing any of the obligations of the Company under this Agreement. 6. No Mitigation. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for herein be reduced by any compensation earned by other employment or otherwise. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries or affiliates and for which the Employee may qualify; provided, however, that following a Change of Control, the Employee hereby waives the Employee's right to receive any payments under any severance pay plan -5- or similar program applicable to other employees of the Company (other than outplacement services, if such services are provided as part of the severance program) for so long as the Employer is eligible for termination benefits under this Agreement. 8. No Set-Off. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Employee or others. 9. Taxes. Any payment required under this Agreement shall be subject to all requirements of the law with regard to the withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. 10. Parachute Payment Limitations. 10.1 Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be subject to taxation under Section 4999 of the Code. For purposes of this Section 10, present value shall be determined in accordance with Section 280G(d)(4) of the Code. In the event that the amount payable to the Employee shall be limited to the Reduced Amount, then the Employee shall have the right, in the Employee's sole discretion, to designate those payments or benefits under this Agreement that should be reduced or eliminated so as to avoid having the payment to the Employee under this Agreement be subject to the Excise Tax. 10.2 All determinations as to applicability of the Excise Tax to be made under this Section 10 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm")), which firm shall provide its determinations and any supporting calculations both to the Company and the Employee within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and the Employee. Within five days after this determination, the Company shall pay (or -6- cause to be paid) or distribute (or cause to be distributed) to or for the benefit of the Employee such amounts as are then due to the Employee under this Agreement. 10.3 As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that payments under this Agreement, will have been made by the Company which should not have been made ("Overpayment") or that additional payments which have not been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. Within two years after the Termination of Employment, the Accounting Firm shall review the determination made by it pursuant to the preceding paragraph. In the event that the Accounting Firm determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to the Employee which the Employee shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no amount shall be payable by the Employee to the Company if and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Accounting Firm determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee together with interest at the Federal Rate. 10.4 All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections 10.2 and 10.3 above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections 10.2 and 10.3 above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 11. Term of Agreement. The term of this Agreement shall be for three years from the date hereof and shall be automatically renewed for successive one-year periods unless the Company notifies the Employee in writing that this Agreement will not be renewed at least sixty days prior to the end of the current term; provided, however, that (a) after a Change of Control during the term of this Agreement, this Agreement shall remain in effect until all of the obligations of the parties hereunder are satisfied or have expired, and (b) this Agreement shall terminate if, prior to a Change of Control, the employment of the Employee with the Company or any of its subsidiaries, as the case may be, shall terminate for any reason, or the Employee shall cease to be an Employee. -7- 12. Restrictive Covenant. Employee agrees that following any termination of Employee's employment relationship following a Change of Control which entitles Employee to the payments due under Section 3, for a period of two years Employee will not participate (either in any employee or non-employee capacity, e.g., as a consultant or partner) in the gas or electric business with any corporation, partnership, sole proprietorship or entity engaged in competition with the Company or any of its affiliates. For this purpose, an entity shall be considered to be "engaged in competition" if such entity is, or is a holding company for, a gas or electric utility or generator with the ability to sell into the Company's service territory, or the service territory of a gas or electric utility or generator which is interconnected with the Company's system or engages in transactions with the members of the Pennsylvania-New Jersey-Maryland-Interconnection Association. Employee further agrees that if he were to breach this restrictive covenant, said breach would cause the Company irreparable harm for which injunctive relief, as well as damages, would be appropriate. Employee hereby consents to the jurisdiction and venue of the Court of Common Pleas of Philadelphia County, Pennsylvania as the forum in which any suit to enforce this restrictive covenant may be instituted. 13. Arbitration; Expenses. 13.1 Except as provided in Section 12, in the event of any dispute under the provisions of this Agreement, either party shall have the right to have such dispute, controversy or claim to be settled by arbitration in the City of Philadelphia, Pennsylvania, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the Company, one of whom shall be selected by the Employee, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The party or parties bringing the challenge under this Agreement shall in all circumstances have the burden of proof. 13.2 In the event of an arbitration or lawsuit by either party to enforce the provisions of this Agreement following a Change of Control, Employee shall be entitled to recover reasonable costs, expenses and attorney's fees from the Company pursuant to Section 5.2. 14. Successor Company. The Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Employee, to acknowledge expressly that this Agreement is binding upon and enforceable against the -8- Company in accordance with the terms hereof, and to become jointly and severally obligated with the Company to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or successions had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement. As used in this Agreement, the Company shall mean the Company as hereinbefore defined and any such successor or successors to its business and/or assets, jointly and severally. 15. Notice. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be delivered personally or mailed by registered or certified mail, return receipt requested, or by overnight express courier service, as follows: If to the Company, to: PECO Energy Company Attn: Senior Vice President of Human Resources 2301 Market Street Philadelphia, PA 19101 If to the Employee, to: [Name of Employee] [Address] or to such other names or addresses as the Company or the Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section; provided, however, that if no such notice is given by the Company following a Change of Control, notice at the last address of the Company or to any successor pursuant to Section 14 hereof shall be deemed sufficient for the purposes hereof. Any such notice shall be deemed delivered and effective when received in the case of personal delivery, five days after deposit, postage prepaid, with the U.S. Postal Service in the case of registered or certified mail, or on the next business day in the case of overnight express courier service. 16. Governing Law. This Agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws provisions. -9- 17. Contents of Agreement, Amendment and Assignment. 17.1 This Agreement supersedes all prior agreements, sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment executed by the Employee and approved by the Board and executed on the Company's behalf by the Chairman of the Compensation Committee of the Board. The provisions of this Agreement may provide for payments to the Employee under certain compensation or bonus plans under circumstances where such plans would not provide for payment thereof. It is the specific intention of the parties that the provisions of this Agreement shall supersede any provisions to the contrary in such plans, and such plans shall be deemed to have been amended to correspond with this Agreement without further action by the Company or the Board. 17.2 Nothing in this Agreement shall be construed as giving the Employee any right to be retained in the employ of the Company. 17.3 All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee and the Company hereunder shall not be assignable in whole or in part by the Company. 18. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. If any restriction in this Section 12 of the Agreement is adjudicated to exceed the time, geographic, service or other limitations permitted by applicable law in any jurisdiction, the Employee agrees that such may be modified and narrowed, either by a court or the Company, to the maximum time, geographic, service or other limitations permitted by applicable law so as to preserve and protect the Company's legitimate business interest, without negating or impairing any other restrictions or undertaking set forth in the Agreement. 19. Remedies Cumulative; No Waiver. No right conferred upon the Employee by this Agreement is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Employee in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, including, without limitation, any delay by the -10- Employee in delivering a Notice of Termination pursuant to Section 2 hereof after an event has occurred which would, if the Employee had resigned, have constituted a Termination following a Change of Control pursuant to Section 1.8(b) of this Agreement. 20. Miscellaneous. All section headings are for convenience only. This Agreement may be executed in several counterparts, each of which is an original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. Attest: PECO Energy Company [Seal] ____________________ By_________________________ Secretary Chairman, Compensation Committee of the Board of Directors and By_________________________ Member, Compensation Committee of the Board of Directors _________________________ _________________________ Witness [Name of Employee] -11- GROUP 2 AGREEMENT Agreement made as of the ___ day of ____________, 1995, between PECO Energy Company (the "Company"), and [name of employee] (the "Employee"). WHEREAS, the Employee is presently employed by the Company as its [title]; WHEREAS, the Board of Directors of the Company (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Company exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of key management personnel to the detriment of the Company; WHEREAS, the Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of key members of the Company's management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company; and WHEREAS, in order to induce the Employee to remain in the employ of the Company, the Company agrees that the Employee shall receive the compensation set forth in this Agreement as a cushion against the financial and career impact on the Employee in the event the Employee's employment with the Company is terminated subsequent to a "Change of Control" (as defined in Section 1.3 hereof) of the Company; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements hereinafter set forth and intending to be legally bound hereby, the parties hereto agree as follows: 1. Definitions. For all purposes of this Agreement, the following terms shall have the meanings specified in this Section unless the context clearly otherwise requires: 1.1 "Annual Base Salary" shall mean twelve times the greater of (a) the highest monthly base salary paid or payable (including any base salary which has been earned but deferred) to the Employee by the Company, and its affiliates (as defined in Section 1504 of the Code without regard to subsection (b) thereof), together with any and all salary reduction authorized amounts under any of the Company's benefit plans or programs, in respect of the twelve-month period immediately preceding the date of the Change in Control, or (b) the monthly base salary paid or payable to the Employee by the Company (including authorized deferrals and salary reduction amounts) immediately prior to the Employee's Termination of Employment. 1.2 "Annual Bonus" shall mean an amount equal to the Employee's highest annual bonus for the last three full fiscal years prior to the Change of Control (annualized in the event that the Employee was not employed for the whole of such fiscal year). 1.3 "Change of Control" shall mean (a) the purchase or other acquisition by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 20 percent or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, or (b) the approval by the shareholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were shareholders of the Company immediately prior to such reorganization, merger or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged or consolidated Company's then outstanding securities, or of a liquidation or dissolution of the Company or the sale of all or substantially all of the Company's assets, or (c) a change of 25% (rounded up to the next whole person) in the membership of the Board of Directors of the Company within a 12-month period, unless the election or nomination for election by shareholders of each new director within such period was approved by a vote of 85% (rounded up to the next whole person) of the directors then still in office who were in office at the beginning of the 12-month period. 1.4 "Code" shall mean the Internal Revenue Code of 1986, as amended. 1.5 "Separation Period" shall mean the two-year period beginning on the date of the Employee's Termination of Employment. 1.6 "Termination Date" shall mean the date of receipt of the Notice of Termination described in Section 2 hereof or any later date specified therein, as the case may be. 1.7 "Termination of Employment" shall mean the termination of the Employee's actual employment relationship with the Company. -2- 1.8 "Termination following a Change of Control" shall mean a Termination of Employment within three years after a Change of Control either: 1.8 (a) initiated by the Company for any reason other than (i) the Employee's death, continuous illness, injury or incapacity for a period of twelve consecutive months or (ii) for "cause," which shall mean misappropriation of funds, habitual insobriety, substance abuse, conviction of a crime involving moral turpitude, or gross negligence in the performance of duties, which gross negligence has had a material adverse effect on the business, operations, assets, properties or financial condition of the Company and its Subsidiaries taken as a whole; or 1.8 (b) initiated by the Employee upon one or more of the following occurrences: (i) any failure of the Company to comply with and satisfy any of the terms of this Agreement; (ii) any change resulting in a significant reduction by the Company of the authority, duties, compensation or responsibilities of the Employee; (iii) any removal by the Company of the Employee from the employment grade, compensation level or officer positions which the Employee holds as of the effective date hereof except in connection with promotions to higher office; or (iv) the requirement that the Employee undertake business travel (or commuting in excess of seventy-five miles each way from the Company's current headquarters at 2301 Market Street, Philadelphia, Pennsylvania) to an extent substantially greater than is reasonable and customary for the position the Employee holds. 2. Notice of Termination. Any Termination following a Change of Control shall be communicated by a Notice of Termination to the other party hereto given in accordance with Section 15 hereof. For purposes of this Agreement, a "Notice of Termination" means a written notice which (a) indicates the specific termination provision in this Agreement relied upon, (b) briefly summarizes the facts and circumstances deemed to provide a basis for termination of the Employee's employment under the provision so indicated, and (c) if the Termination Date is other than the date of receipt of such notice, specifies the Termination Date (which date shall not be more than 15 days after the giving of such notice). -3- 3. Compensation Upon Termination. Subject to the provisions of Section 10 hereof, in the event of the Employee's Termination following a Change of Control, the Company shall pay or provide to the Employee during the Separation Period ( or, in the event of the Employee's death following such termination during the Separation Period, to the Employee's estate), the following: 3.1 the Employee's earned but unpaid compensation as of the date of Termination of Employment; 3.2 the benefits, if any, to which the Employee is entitled as a former employee under the employee benefit programs and compensation plans and programs maintained for the benefit of the Company's officers and employees; 3.3 continued group hospitalization, health, dental care, life or other insurance, travel or accident insurance and disability insurance, for the Separation Period, with coverage equivalent to the coverage to which the Employee would have been entitled had the Employee continued working for the Company during the Separation Period at his Annual Base Salary; 3.4 the Annual Base Salary and Annual Bonus the Employee would have earned if the Employee had continued working for the Company during the Separation Period; 3.5 the benefits to which the Employee would be entitled under the Company's long term incentive, stock option, savings and retirement plans if the Employee had continued working for the Company during the Separation Period at his Annual Base Salary, and were making the maximum amount of employee contributions, if any, as are required under such plans, together with dividend equivalents on awards under the Company's long term incentive plan assuming the Employee's ratings justified a 100% pay-out. In the event that applicable law does not permit continued coverage under any tax qualified benefit plan or incentive or option plan during the Separation Period, the Company shall provide economically- equivalent benefits to the employee on a nonqualified, supplemental or other basis; 3.6 in the event the Employee and the Employee's spouse are not otherwise eligible for the Company's retiree health care coverage, following the end of the Separation Period, Employee (or if employee is deceased, Employee's surviving spouse) may continue to purchase health care coverage for himself and eligible dependents under the Company's health benefits plan at the prevailing rate then in effect for COBRA continuation coverage, until the Employee and the Employee's spouse have attained eligibility for Medicare coverage. 4. Other Payments. The payment due under Section 3 hereof shall be in addition to and not in lieu of any payments or benefits due to the -4- Employee under any other plan, policy or program of the Company except that no payments shall be due to the Employee under the Company's then severance pay plan for employees, if any. 5. Enforcement. 5.1 In the event that the Company shall fail or refuse to make payment of any amounts due the Employee under Sections 3 and 4 hereof within the respective time periods provided therein, the Company shall pay to the Employee, in addition to the payment of any other sums provided in this Agreement, interest, compounded daily, on any amount remaining unpaid from the date payment is required under Section 3 and 4, as appropriate, until paid to the Employee, at the rate from time to time announced by Chase Manhattan Bank as its "prime rate" plus 2%, each change in such rate to take effect on the effective date of the change in such prime rate. 5.2 It is the intent of the parties that the Employee not be required to incur any expenses associated with the enforcement of his rights under this Agreement by arbitration, litigation or other legal action because the cost and expense thereof would substantially detract from the benefits intended to be extended to the Employee hereunder. Accordingly, the Company shall pay the Employee on demand the amount necessary to reimburse the Employee in full for all expenses (including all attorneys' fees and legal expenses) incurred by the Employee in enforcing any of the obligations of the Company under this Agreement. 6. No Mitigation. The Employee shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for herein be reduced by any compensation earned by other employment or otherwise. 7. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in or rights under any benefit, bonus, incentive or other plan or program provided by the Company or any of its subsidiaries or affiliates and for which the Employee may qualify; provided, however, that following a Change of Control, the Employee hereby waives the Employee's right to receive any payments under any severance pay plan or similar program applicable to other employees of the Company (other than outplacement services, if such services are provided as part of the severance program) for so long as the Employer is eligible for termination benefits under this Agreement. -5- 8. No Set-Off. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which the Company may have against the Employee or others. 9. Taxes. Any payment required under this Agreement shall be subject to all requirements of the law with regard to the withholding of taxes, filing, making of reports and the like, and the Company shall use its best efforts to satisfy promptly all such requirements. 10. Parachute Payment Limitations. 10.1 Anything in this Agreement to the contrary notwithstanding, in the event that it shall be determined that any payment or distribution by the Company to or for the benefit of the Employee, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (a "Payment"), would constitute an "excess parachute payment" within the meaning of Section 280G of the Code, the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement (such payments or distributions pursuant to this Agreement are hereinafter referred to as "Agreement Payments") shall be reduced (but not below zero) to the Reduced Amount. The "Reduced Amount" shall be an amount expressed in present value which maximizes the aggregate present value of Agreement Payments without causing any Payment to be subject to taxation under Section 4999 of the Code. For purposes of this Section 10, present value shall be determined in accordance with Section 280G(d)(4) of the Code. In the event that the amount payable to the Employee shall be limited to the Reduced Amount, then the Employee shall have the right, in the Employee's sole discretion, to designate those payments or benefits under this Agreement that should be reduced or eliminated so as to avoid having the payment to the Employee under this Agreement be subject to the Excise Tax. 10.2 All determinations as to applicability of the Excise Tax to be made under this Section 10 shall be made by the Company's independent public accountant immediately prior to the Change of Control (the "Accounting Firm")), which firm shall provide its determinations and any supporting calculations both to the Company and the Employee within 10 days of the Termination Date. Any such determination by the Accounting Firm shall be binding upon the Company and the Employee. Within five days after this determination, the Company shall pay (or cause to be paid) or distribute (or cause to be distributed) to or for the benefit of the Employee such amounts as are then due to the Employee under this Agreement. -6- 10.3 As a result of the uncertainty in the application of Section 280G of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that payments under this Agreement, will have been made by the Company which should not have been made ("Overpayment") or that additional payments which have not been made by the Company could have been made ("Underpayment"), in each case, consistent with the calculations required to be made hereunder. Within two years after the Termination of Employment, the Accounting Firm shall review the determination made by it pursuant to the preceding paragraph. In the event that the Accounting Firm determines that an Overpayment has been made, any such Overpayment shall be treated for all purposes as a loan to the Employee which the Employee shall repay to the Company together with interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code (the "Federal Rate"); provided, however, that no amount shall be payable by the Employee to the Company if and to the extent such payment would not reduce the amount which is subject to taxation under Section 4999 of the Code. In the event that the Accounting Firm determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee together with interest at the Federal Rate. 10.4 All of the fees and expenses of the Accounting Firm in performing the determinations referred to in subsections 10.2 and 10.3 above shall be borne solely by the Company. The Company agrees to indemnify and hold harmless the Accounting Firm of and from any and all claims, damages and expenses resulting from or relating to its determinations pursuant to subsections 10.2 and 10.3 above, except for claims, damages or expenses resulting from the gross negligence or willful misconduct of the Accounting Firm. 11. Term of Agreement. The term of this Agreement shall be for three years from the date hereof and shall be automatically renewed for successive one-year periods unless the Company notifies the Employee in writing that this Agreement will not be renewed at least sixty days prior to the end of the current term; provided, however, that (a) after a Change of Control during the term of this Agreement, this Agreement shall remain in effect until all of the obligations of the parties hereunder are satisfied or have expired, and (b) this Agreement shall terminate if, prior to a Change of Control, the employment of the Employee with the Company or any of its subsidiaries, as the case may be, shall terminate for any reason, or the Employee shall cease to be an Employee. 12. Restrictive Covenant. Employee agrees that following any termination of Employee's employment relationship following a Change of Control which entitles Employee to the payments due under Section 3, for a period of two years Employee will not participate (either in any employee or non-employee capacity, e.g., as a consultant or partner) in the gas or electric business with any -7- corporation, partnership, sole proprietorship or entity engaged in competition with the Company or any of its affiliates. For this purpose, an entity shall be considered to be "engaged in competition" if such entity is, or is a holding company for, a gas or electric utility or generator with the ability to sell into the Company's service territory, or the service territory of a gas or electric utility or generator which is interconnected with the Company's system or engages in transactions with the members of the Pennsylvania-New Jersey-Maryland-Interconnection Association. Employee further agrees that if he were to breach this restrictive covenant, said breach would cause the Company irreparable harm for which injunctive relief, as well as damages, would be appropriate. Employee hereby consents to the jurisdiction and venue of the Court of Common Pleas of Philadelphia County, Pennsylvania as the forum in which any suit to enforce this restrictive covenant may be instituted. 13. Arbitration; Expenses. 13.1 Except as provided in Section 12, in the event of any dispute under the provisions of this Agreement, either party shall have the right to have such dispute, controversy or claim to be settled by arbitration in the City of Philadelphia, Pennsylvania, in accordance with the commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the Company, one of whom shall be selected by the Employee, and the third of whom shall be selected by the other two arbitrators. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction. This arbitration provision shall be specifically enforceable. The party or parties bringing the challenge under this Agreement shall in all circumstances have the burden of proof. 13.2 In the event of an arbitration or lawsuit by either party to enforce the provisions of this Agreement following a Change of Control, Employee shall be entitled to recover reasonable costs, expenses and attorney's fees from the Company pursuant to Section 5.2. 14. Successor Company. The Company shall require any successor or successors (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company, by agreement in form and substance satisfactory to the Employee, to acknowledge expressly that this Agreement is binding upon and enforceable against the Company in accordance with the terms hereof, and to become jointly and severally obligated with the Company to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession or successions had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this -8- Agreement. As used in this Agreement, the Company shall mean the Company as hereinbefore defined and any such successor or successors to its business and/or assets, jointly and severally. 15. Notice. All notices and other communications required or permitted hereunder or necessary or convenient in connection herewith shall be in writing and shall be delivered personally or mailed by registered or certified mail, return receipt requested, or by overnight express courier service, as follows: If to the Company, to: PECO Energy Company Attn: Senior Vice President of Human Resources 2301 Market Street Philadelphia, PA 19101 If to the Employee, to: [Name of employee] [Address] or to such other names or addresses as the Company or the Employee, as the case may be, shall designate by notice to the other party hereto in the manner specified in this Section; provided, however, that if no such notice is given by the Company following a Change of Control, notice at the last address of the Company or to any successor pursuant to Section 14 hereof shall be deemed sufficient for the purposes hereof. Any such notice shall be deemed delivered and effective when received in the case of personal delivery, five days after deposit, postage prepaid, with the U.S. Postal Service in the case of registered or certified mail, or on the next business day in the case of overnight express courier service. 16. Governing Law. This Agreement shall be governed by and interpreted under the laws of the Commonwealth of Pennsylvania without giving effect to any conflict of laws provisions. 17. Contents of Agreement, Amendment and Assignment. 17.1 This Agreement supersedes all prior agreements, sets forth the entire understanding between the parties hereto with respect to the subject matter hereof and cannot be changed, modified, extended or terminated except upon written amendment executed by the Employee and approved by the Board and executed on the Company's behalf by the Chairman of the Compensation Committee of the Board. The provisions of this Agreement may provide for -9- payments to the Employee under certain compensation or bonus plans under circumstances where such plans would not provide for payment thereof. It is the specific intention of the parties that the provisions of this Agreement shall supersede any provisions to the contrary in such plans, and such plans shall be deemed to have been amended to correspond with this Agreement without further action by the Company or the Board. 17.2 Nothing in this Agreement shall be construed as giving the Employee any right to be retained in the employ of the Company. 17.3 All of the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective heirs, representatives, successors and assigns of the parties hereto, except that the duties and responsibilities of the Employee and the Company hereunder shall not be assignable in whole or in part by the Company. 18. Severability. If any provision of this Agreement or application thereof to anyone or under any circumstances shall be determined to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions or applications of this Agreement which can be given effect without the invalid or unenforceable provision or application. If any restriction in this Section 12 of the Agreement is adjudicated to exceed the time, geographic, service or other limitations permitted by applicable law in any jurisdiction, the Employee agrees that such may be modified and narrowed, either by a court or the Company, to the maximum time, geographic, service or other limitations permitted by applicable law so as to preserve and protect the Company's legitimate business interest, without negating or impairing any other restrictions or undertaking set forth in the Agreement. 19. Remedies Cumulative; No Waiver. No right conferred upon the Employee by this Agreement is intended to be exclusive of any other right or remedy, and each and every such right or remedy shall be cumulative and shall be in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. No delay or omission by the Employee in exercising any right, remedy or power hereunder or existing at law or in equity shall be construed as a waiver thereof, including, without limitation, any delay by the Employee in delivering a Notice of Termination pursuant to Section 2 hereof after an event has occurred which would, if the Employee had resigned, have constituted a Termination following a Change of Control pursuant to Section 1.8(b) of this Agreement. 20. Miscellaneous. All section headings are for convenience only. This Agreement may be executed in several counterparts, each of which is an -10- original. It shall not be necessary in making proof of this Agreement or any counterpart hereof to produce or account for any of the other counterparts. IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have executed this Agreement as of the date first above written. Attest: PECO Energy Company [Seal] ____________________ By_________________________ Secretary Chairman, Compensation Committee of the Board of Directors and By_________________________ Member, Compensation Committee of the Board of Directors _________________________ _________________________ Witness [Name of Employee] -11- EX-10.8 6 Exhibit 10-8 AMENDMENT NO. 1 TO THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF PECO ENERGY CAPITAL, L.P. This Amendment No. 1 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., a Delaware limited partnership (the "Partnership"), dated as of October 20, 1995 (this "Amendment"), is made by and among PECO Energy Capital Corp., as general partner of the Partnership, and the Persons who are limited partners of the Partnership. WHEREAS, PECO Energy Capital Corp. and PECO Energy Company 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 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 (the "Partnership Agreement"); WHEREAS, upon the admission of one Preferred Partner as a limited partner of the Partnership, the Class A Limited Partner withdrew from the Partnership as a limited partner of the Partnership and has no further interest in the Partnership; 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. Article I of the Partnership Agreement is hereby amended to add a new definition of "Global Certificate" in its proper alphabetical order to read as follows: "Global Certificate" shall mean a Certificate issued in the form of a typewritten Certificate or Certificates representing the Book Entry Interests to be delivered to a Clearing Agency in accordance with Section 14.04. 1.2. Section 2.03 of the Partnership Agreement is hereby amended by inserting "(a)" immediately before the first sentence thereof and by adding a new subsection to said section to be designated as subsection "(b)" to read as follows: (b) In furtherance of the purposes set forth in Section 2.03(a) and without limiting the generality thereof, the Partnership may issue Preferred Partner Interests for consideration other than cash, including Subordinated Debentures, which consideration shall constitute payment for the Preferred Partner Interests so issued. 1.3. The last sentence of Section 3.01 of the Partnership Agreement is hereby deleted in its entirety and replaced with the following: Each Preferred Partner, or its predecessor in interest, will be deemed to have contributed to the capital of the Partnership the amount of the Purchase Price for the Preferred Partner Interests held by it. 1.4. Section 8.04 of the Partnership Agreement is hereby amended by (i) redesignating paragraph (h) thereof as paragraph (i), (ii) deleting the word "and" at the end of paragraph (g), and (iii) adding a new paragraph (h) to read as follows: (h) Enter into and perform one or more trust agreements or other organizational documents relating to the creation of one or more Preferred Partners that will own Preferred Partner Interests, including by entering into and performing agreements or documents referred to in such trust agreements or other organizational documents, in each case on behalf of the Partnership; and 1.5. Section 14.04(d) of the Partnership Agreement is hereby amended by deleting the word "To" contained therein and substituting therefor the words "Subject in all respects to Section 14.07, to". 1.6. The Partnership Agreement is hereby amended by adding a new Section 14.07 in its proper numerical order to read as follows: Section 14.07. Definitive Certificates on Original Issuance. Notwithstanding anything in this Agreement to the contrary, including, without limitation, Sections 14.04, 14.05 and 14.06, on original issuance, Certificates may but need not be issued to The Depository Trust Company in the form of a Global Certificate or Global Certificates in accordance with 2 Section 14.04, and may but need not be issued to any Person in the form of a Definitive Certificate or Definitive Certificates in accordance with this Section 14.07. Without limiting the generality of the foregoing, in connection with the original issuance of Certificates as Definitive Certificates in accordance with this Section 14.07, (i) a Clearing Agency or a nominee of the Clearing Agency that is a limited partner of the Partnership in accordance with Sections 14.03 and 14.04 with respect to one or more series of Preferred Partner Interests shall continue to be a limited partner of the Partnership notwithstanding the fact that another Person holding a Definitive Certificate issued in accordance with this Section 14.07 has been admitted to the Partnership as a limited partner of the Partnership with respect to one or more series of Preferred Partner Interests, and (ii) Sections 14.04, 14.05 and 14.06 shall be inapplicable to a Person holding a Definitive Certificate issued in accordance with this Section 14.07. The General Partner will appoint a registrar, transfer agent and paying agent for the Preferred Partner Interests. The Definitive Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the General Partner, as is evidenced by its execution thereof. Registration of transfers of Preferred Partner Interests will be effected without charge by or on behalf of the Partnership, but upon payment of any tax or other governmental charges which may be imposed in relation to it. The Partnership will not be required to register or cause to be registered the transfer of Preferred Partner Interests after such Preferred Partner Interests have been called for redemption. Any Person receiving a Definitive Certificate in accordance with this Section 14.07 shall be admitted to the Partnership as a Preferred Partner pursuant to Section 2.06. 1.7. Exhibit A to the Partnership Agreement is hereby amended (a) by deleting the reference to "Cede & Co." contained therein and substituting for such reference a "________________," by deleting the reference to "1994" contained in the 31st line of the first paragraph thereof and substituting for such reference "199_," and (c) by deleting the reference to "1994" contained in the last paragraph thereof and substituting for such reference "199_." ARTICLE II - MISCELLANEOUS 2.1. Capitalized Terms. Capitalized terms used herein and not otherwise defined are used as defined in the Partnership Agreement. 3 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 laws principles), 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 Powers of Attorney now or hereafter executed in favor of, and delivered to, the General Partner. By: /s/ J. Barry Mitchell Name: J. Barry Mitchell Title: President 4 EX-10.9 7 Exhibit 10-9 AMENDMENT NO. 2 TO THE AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT OF PECO ENERGY CAPITAL, L.P. This Amendment No. 2 to the Amended and Restated Limited Partnership Agreement of PECO Energy Capital, L.P., a Delaware limited partnership (the "Partnership"), dated as of March 1, 1996 (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 (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 - AMENDMENT Section 7.02(b) of the Partnership Agreement is hereby amended and restated as follows: The General Partner shall cause to be prepared, within ninety days after the end of any Fiscal Year of the Partnership, annual financial statements of the Partnership, including a balance sheet of the Partnership as of the end of such Fiscal Year and the related statements of income or loss. The General Partner shall cause such financial statements to be delivered to each Partner that so requests in writing, together with a statement indicating such Partner's share of each item of Partnership income, gain, loss, deduction or credit for such Fiscal Year for income tax purposes. 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 inure 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: 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: Name: J. Barry Mitchell Title: President 2 EX-10.10 8 Exhibit 10-10 =============================================================================== AMENDED AND RESTATED TRUST AGREEMENT OF PECO ENERGY CAPITAL TRUST I PECO ENERGY CAPITAL, L.P., as Grantor and PNC BANK, DELAWARE as Trustee Dated as of December 19, 1995 =============================================================================== 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 Receipts .............................6 ARTICLE III FORM OF RECEIPTS, EXECUTION AND DELIVERY, TRANSFER, AND SURRENDER OF RECEIPTS SECTION 3.01. Form and Transferability of Receipts .........................6 SECTION 3.02. Issuance of Receipts .........................................7 SECTION 3.03. Registration, Transfer and Exchange of Receipts .....................................................7 SECTION 3.04. Lost or Stolen Receipts, Etc .................................8 SECTION 3.05. Cancellation and Destruction of Surrendered Receipts .........................................9 ARTICLE IV DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF RECEIPTS SECTION 4.01. Distributions of Monthly Distributions on Preferred Securities .....................................12 SECTION 4.02. Redemptions of Preferred Securities .........................12 SECTION 4.03. Distributions in Liquidation of Grantor .....................13 SECTION 4.04. Fixing of Record Date for Holders of Receipts ....................................................13 SECTION 4.05. Payment of Distributions ....................................14 SECTION 4.06. Special Representative and Voting Rights ......................................................14 SECTION 4.07. Changes Affecting Preferred Securities and Reclassifications, Recapitalizations, Etc ...............15 ARTICLE V THE GUARANTEE SECTION 5.01. The Guarantee................................................15 i Page ARTICLE VI THE TRUSTEE SECTION 6.01. Eligibility .................................................16 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 6.07. Indemnification by the General Partner ......................20 SECTION 6.08. Fees, Charges and Expenses ..................................20 SECTION 6.09. Appointment of Co-Trustee or Separate Trustee .....................................................21 ARTICLE VII AMENDMENT AND TERMINATION SECTION 7.01. Supplemental Trust Agreement ................................22 SECTION 7.02. Termination .................................................23 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 ................................................24 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 Receipts Are Parties .............................25 SECTION 9.07. Governing Law ...............................................25 SECTION 9.08. Headings ....................................................25 SECTION 9.09. Receipts Non-Assessable and Fully Paid ......................25 SECTION 9.10. No Preemptive Rights ........................................26 TESTIMONIUM..................................................................27 SIGNATURES...................................................................27 EXHIBIT A.................................................................. A-1 ii AMENDED AND RESTATED TRUST AGREEMENT AMENDED AND RESTATED TRUST AGREEMENT, dated as of December 19, 1995 (as amended from time to time, this "Trust Agreement") among PECO ENERGY CAPITAL, L.P., a Delaware limited partnership, as grantor (the "Grantor"), PNC BANK, DELAWARE, a Delaware banking corporation, 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 October 20, 1995 (the "Original Trust Agreement"), and a Certificate of Trust filed with the Secretary of State of the State of Delaware on October 20, 1995; 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, PECO Energy Company ("PECO Energy") proposes to effect the exchange (the "Exchange") of Receipts each representing a 8.72% Cumulative Monthly Income Preferred Security, Series B, representing a limited partner interest of the Grantor (the "Preferred Securities"), for Depositary Shares (as hereinafter defined), each representing a one-fourth interest in a share of $7.96 Cumulative Preferred Stock of PECO Energy; and WHEREAS, to facilitate the Exchange, PECO Energy requests the Grantor to issue one Preferred Security for each Depositary Share accepted in the Exchange and to deposit the Preferred Securities in trust for the benefit of the holders of the Depositary Shares tendering shares which have been accepted in the Exchange; and WHEREAS, interests in the Trust are to be evidenced by Receipt certificates issued by the Trustee in accordance with this Trust Agreement, which are to be delivered to the Exchange Agent (as hereinafter defined) for distribution to the holders of the Depositary Shares which have been accepted in the Exchange; 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 Receipts: "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. "Commission" shall have the meaning set forth in Section 6.06. "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 222 Delaware Avenue, Wilmington, Delaware 19801. "Depositary Shares" mean receipts issued pursuant to a Deposit Agreement dated as of October 20, 1992 among Philadelphia Electric Company (now PECO Energy), First Chicago Trust Company of New York, as Depositary, and the holders of such receipts, each evidencing a one-fourth interest in a share of $7.96 Cumulative Preferred Stock of PECO Energy. "Exchange" shall have the meaning set forth in the recitals to this Trust Agreement. 2 "Exchange Agent" means First Chicago Trust Company of New York in its capacity as the Exchange Agent under an Exchange Agreement dated as of November 8, 1995 between PECO Energy and the Exchange Agent to effect the exchange of Depository Shares for Receipts. "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 December 19, 1995, 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 Receipts 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. "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 8.72% Cumulative Monthly Income Preferred Securities, Series B, 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. "Receipt" shall mean a trust receipt issued hereunder representing an interest in the Trust equal to and representing a 3 Preferred Security and evidenced by a certificate issued by the Trustee pursuant to Article III. "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 Receipt 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. "Tendering Holders" means the holders of the Depositary Shares which have been validly tendered to the Exchange Agent and accepted by the Company for exchange. "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 PNC Bank, Delaware, a Delaware banking corporation, in its capacity as Trustee and not in its individual capacity and any successor as trustee hereunder. ARTICLE II CONTINUATION OF TRUST SECTION 2.01. Continuation of Trust. (a) The Trust continued hereby shall be known as "PECO Energy Capital Trust I." The Trust exists for the sole purpose of issuing Receipts representing the Preferred Securities held by the Trust and performing functions directly related 4 thereto. The Grantor hereby delivers to the Trustee for deposit in the Trust a certificate representing 3,124,183 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 Receipts 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 Receipts 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 it shall hold the Preferred Securities (including any Successor Securities) in the Trust for the benefit of the Holders. SECTION 2.02. Trust Account. The Trustee shall open an account entitled "PECO Energy Capital Trust I - 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 Trustee. 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 5 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 Receipts. With respect to the Trust, Holders of Receipts 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 RECEIPTS, EXECUTION AND DELIVERY, TRANSFER, AND SURRENDER OF RECEIPTS SECTION 3.01. Form and Transferability of Receipts. (a) Receipts 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 Receipts 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 Receipts by manual signature of a duly authorized signatory of the Registrar. No certificate evidencing one or more Receipts 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 Receipt certificate executed as provided above and delivered as hereinafter provided. (c) Certificates evidencing Receipts shall be in denominations of any whole number of Preferred Securities. All Receipt certificates shall be dated the date of their execution or countersignature. (d) Certificates evidencing Receipts 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 6 Receipts may be listed or to conform with any usage with respect thereto. (e) Title to any Receipt 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 Receipts. In connection with the Exchange, 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 the Exchange Agent certificates evidencing the Receipts for distribution to the former holders of Depositary Shares who shall thereupon be Holders of Receipts. SECTION 3.03. Registration, Transfer and Exchange of Receipts. The Trustee shall cause 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 Receipt certificates and of transfers and exchanges of Receipt certificates as herein provided. The Grantor hereby appoints First Chicago Trust Company of New York 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 Receipt 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 Receipt 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, Receipt certificates may be exchanged for other Receipt certificates representing the same number of Preferred Securities. Upon surrender of a Receipt certificate at the office of the Registrar or such other office 7 as the Trustee may designate for the purpose of effecting an exchange of Receipt certificates, subject to the terms and conditions of this Trust Agreement, the Trustee shall execute and deliver a new Receipt certificate representing the same number of Preferred Securities as the Receipt certificate surrendered. As a condition precedent to the registration of the transfer or exchange of any Receipt 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 Receipts for any registration of transfer or exchange of Receipt 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 Receipt certificates. Neither the Trustee nor the Registrar shall be required (a) to register the transfer of or exchange any Receipt certificate for a period beginning at the opening of business ten days preceding any selection of Receipts to be redeemed and ending at the close of business on the day of the mailing a notice of redemption of Receipts or (b) to register the transfer of or exchange of Receipts called or being called for redemption in whole or in part, except as provided in Section 4.02. SECTION 3.04. Lost or Stolen Receipts, Etc. In case any Receipt certificate shall be mutilated or destroyed or lost or stolen and in the absence of notice to the Trustee that such Receipt has been acquired by a bona fide purchaser, the Trustee shall execute and deliver a Receipt certificate of like form and tenor in exchange and substitution for such mutilated Receipt certificate or in lieu of and in substitution for such destroyed, lost or stolen Receipt 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 Receipt 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 Receipt certificate issued pursuant to this Section 3.04 shall constitute complete and indefeasible evidence of ownership in the Trust, as if originally issued, whether or not the lost, stolen or destroyed Receipt certificate shall be found at any time. 8 SECTION 3.05. Cancellation and Destruction of Surrendered Receipts. All Receipt 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 Receipt certificate, the Trustee may destroy such cancelled Receipt certificates. SECTION 3.06. Surrender of Receipts and Withdrawal of Preferred Securities. Any Holder of a Receipt or Receipts may withdraw any or all of the Preferred Securities (but only in whole numbers of Preferred Securities) represented by such Receipt or Receipts by surrendering the certificate evidencing such Receipt or Receipts accompanied by a written instrument of transfer and an agreement to be bound by the terms of the Partnership Agreement at the Corporate Office or at such other office as the Trustee may designate for such withdrawals. After such surrender, without unreasonable delay, the Trustee shall transfer to such Holder, or to the Person or Persons designated by such Holder as hereinafter provided, the whole number of Preferred Securities represented by the Receipt or Receipts so surrendered; provided, however, that the Trustee shall not issue any fractional number of Preferred Securities. If the Receipt or Receipts delivered by the Holder to the Trustee in connection with such withdrawal shall evidence a number of Preferred Securities in excess of the number of Preferred Securities to be withdrawn, the Trustee shall at the same time, in addition to such number of Preferred Securities to be withdrawn, execute in accordance with Section 3.01 and deliver to such Holder, a new Receipt or Receipts evidencing such excess number of Preferred Securities. If a Holder withdraws in accordance with this Section 3.06 all of the Preferred Securities represented by its Receipt or Receipts, such Holder shall cease to be a Holder under this Trust Agreement and shall cease to be a beneficial owner in the Trust. Delivery of the Preferred Securities may be made by the delivery of such certificates, documents of title and other instruments as the Trustee may deem appropriate, which, if required by the Holder, shall be properly endorsed or accompanied by proper instruments of transfer. If the Preferred Securities being withdrawn are to be delivered to a Person or Persons other than the Holder of the Receipt or Receipts being surrendered for withdrawal of Preferred Securities, such Holder shall execute and deliver to the Trustee a written order so directing the Trustee and the Trustee may require that the certificate evidencing the Receipt or Receipts surrendered by such Holder for withdrawal of such Preferred Securities be properly endorsed in blank or accompanied by a properly executed instrument of transfer or endorsement in blank. 9 A Holder who surrenders its Receipts in accordance with this Section 3.06, or the Person or Persons designated by such Holder in the immediately preceding paragraph, 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 Holder's or such Person's or Persons' receipt of a certificate evidencing such Preferred Securities registered in such Holder's or such Person's or Persons' name. The Trustee shall deliver the Preferred Securities represented by the Receipts surrendered to the Holder in accordance with this Section 3.06 at the Corporate Office, except that, at the request, risk and expense of the Holder surrendering such Receipt or Receipts and for the account of the Holder thereof, such delivery may be made at such other place as may be designated by such Holder. Notwithstanding anything in this Section 3.06 to the contrary, if the Preferred Securities represented by a Receipt or Receipts have been called for redemption in accordance with the Partnership Agreement, no Holder of such Receipt or Receipts may withdraw any or all of the Preferred Securities represented by such Receipt or Receipts. SECTION 3.07. Redeposit of Preferred Securities; Execution and Delivery of Receipts in Response Thereof. 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 Trust, of a certificate or certificates for the Preferred Securities to be deposited, properly endorsed or accompanied, if required by the Trust, 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 (i) all such certifications as may be required by the Trustee in accordance with the provisions of this Trust Agreement and (ii) a written order directing the Trustee to execute in accordance with Section 3.01 and deliver to or upon the written order of the Person or Persons stated in such order a certificate evidencing a Receipt or Receipts for the number of Preferred Securities so deposited. 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 10 Securities, or in lieu thereof such agreement of indemnity or other agreement as shall be satisfactory to the Trustee. Upon receipt by the Trustee of a certificate or certificates for Preferred Securities to be deposited hereunder, together with the other documents specified above, the Trustee shall, as soon as transfer and registration can be accomplished in accordance with the terms of the Partnership Agreement, present such certificate or certificates to the General Partner of the Grantor for transfer and registration in the name of the Trustee or its nominee of the Preferred Securities being deposited. Deposited Preferred Securities shall be held by the Trustee on behalf of the Trust for the benefit of the Holders. Upon receipt by the Trustee of a certificate or certificates for Preferred Securities to be deposited hereunder, together with the other documents specified above, the Trust, subject to the terms and conditions of this Trust Agreement, shall execute in accordance with Section 3.01 and deliver to or upon the order of the Person or Persons named in the written order delivered to the Trustee referred to in the first or second paragraph of this Section 3.07 a Receipt or Receipts for the number of Preferred Securities so deposited by such Person or Persons. The Trustee shall execute and deliver such Receipt or Receipts at the Corporate Office, except that, at the request, risk and expense of any Person requesting such delivery, such delivery may be made at such other place as may be designated by such Person. In each case, delivery will be made only upon payment by such Person 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. 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 Receipt or Receipts, the transfer, redemption or exchange of any Receipt or Receipts 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. 11 ARTICLE IV DISTRIBUTIONS AND OTHER RIGHTS OF HOLDERS OF RECEIPTS SECTION 4.01. Distributions of Monthly Distributions on Preferred Securities. Whenever the Trustee shall receive any cash distribution representing a monthly distribution on the Preferred Securities (whether or not distributed by the Grantor on the regular monthly 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 Receipts on the record date fixed pursuant to Section 4.04, such amounts in proportion to the respective numbers of Preferred Securities represented by the Receipts 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 Receipts 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 Receipts. Such notice shall be mailed to the Holders of the Receipts 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 Receipts and the Preferred Securities are to be redeemed; that all outstanding Receipts are to be redeemed or, in the case of a redemption of fewer than all outstanding Receipts in connection with a partial redemption of Preferred Securities, the number of such Receipts held by such Holder to be so redeemed; the place or places where Receipts to be redeemed are to be surrendered for redemption; and specifying the CUSIP number assigned to the Receipts. In case fewer than all the outstanding Receipts are to be redeemed, the Receipts 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 Receipts 12 from any national exchange on which the Receipts 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 Trustee the aggregate amount payable upon redemption of the Preferred Securities to be redeemed, the Trustee shall redeem (using the funds so deposited with it) Receipts 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 Receipts called for redemption shall be deemed no longer to be outstanding and all rights of the Holders of Receipts (except the right to receive cash upon surrender of Receipts) shall cease and terminate. Upon surrender in accordance with said notice of the Receipts endorsed or assigned for transfer, if the Trustee shall so require, the Holders of such Receipts shall receive for each such Receipt 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 Receipts of any Holder are called for redemption, the Registrar will deliver to the Holder of such Receipts upon surrender of the certificate evidencing such Receipts a new certificate evidencing the number of Receipts not called for redemption. SECTION 4.03. Distributions in Liquidation of Grantor. Upon 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 Receipts 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 Receipts held by such Holders. SECTION 4.04. Fixing of Record Date for Holders of Receipts. 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 13 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 Receipts 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 monthly distributions on, the redemption price of, and distributions in liquidation on the Receipts. The Grantor hereby appoints First Chicago Trust Company of New York to act as Paying Agent and designates the Jersey City, New Jersey office of the Paying Agent as the place of payment of the redemption price of and to distribution in liquidation on the Receipts. The aforesaid appointment and designation shall remain in effect until changed by the Grantor. Payments of monthly distributions on the Receipts shall be payable by check mailed to the addresses of the Holders thereof on the record date therefor. Payments of the redemption price of Receipts and distributions in liquidation shall be made upon surrender of such Receipts at the office of the Paying Agent. The Trustee is hereby authorized to direct the Grantor to pay monthly distributions on, the redemption price of, and distributions in liquidation on, the Preferred Securities directly to the Paying Agent for distribution 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 Receipts of such right, request direction of each Holder of a Receipt as to the appointment of a Special Representative and vote the Preferred Securities represented by such Receipt 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 Receipts and, if so directed by the Holders of Receipts representing Preferred Securities constituting at least 10% of the aggregated 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 Receipts a notice, which shall be provided by the General Partner 14 and which shall contain (i) such information as is contained in such notice of meeting, (ii) a statement that the Holders of Receipts 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 Receipts, 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 Receipt on such record date, the Trustee shall vote or cause to be voted the number of Preferred Securities represented by the Receipts evidenced by such Receipt 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 Receipt, the Trustee will abstain from voting to the extent of the Preferred Securities represented by such Receipt. 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 Receipts 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 Payment and Guarantee 15 Agreement executed by PECO Energy Company on December 19, 1995 for the benefit of the holders of the Preferred Securities. 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 Receipts 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 Receipts 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 Receipt to Holders of Receipts 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 Receipts that in its opinion may involve it in expense or liability, unless indemnity 16 satisfactory to it against all expense and liability be furnished as often as may be required. 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 10 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 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 Receipt 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 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 Receipts 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 responsibility with respect to the Exchange or as to the validity of the registration statement pursuant to which the Receipts are registered under the Securities Act, the Preferred Securities, the Guarantee or the Receipts (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. 17 The Trustee assumes no responsibility for the correctness of the description that appears in the Receipts, 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 Receipts, the Trustee makes no warranties or representations as to the validity, genuineness or sufficiency of any Preferred Securities or the Guarantee or of the Receipts, as to the validity or sufficiency of this Trust Agreement, as to the value of the Receipts or as to any right, title or interest of the Holders of Receipts, 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 the laws of the State of Delaware, 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 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 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. 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, 18 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 Receipts. Any successor depositary shall promptly mail notice of its appointment to the Holders of Receipts. 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 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 Receipts, 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 Receipts 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 Receipts 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 Receipts. SECTION 6.06. Appointment of Grantor to File on Behalf of Trust. The Grantor and the Trustee hereby authorize and direct the Grantor, as the sponsor of the Trust (i) to file with the Commission and execute, in each case on behalf of the Trust, (a) the Registration Statement on Form S-4 (the "1933 Act 19 Registration Statement"), including any pre-effective or post-effective amendments to such 1933 Act Registration Statement (including the offering circular/prospectus and the exhibits contained therein), relating to the registration under the Securities Act of 1933, as amended, of the Receipts 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 Receipts under Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and (c) any reports or other papers on 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 Receipts to be listed on any of the Exchanges; (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 Receipts under the securities or "Blue Sky" laws of such jurisdictions as the Grantor, on behalf of the Trust, may deem necessary or desirable and (iv) to execute on behalf of the Trust that certain Dealer Manager Agreement relating to the Receipts, among the Trust, the Grantor and the Dealer Managers named therein, substantially in the form included as Exhibit 1 to the 1933 Act Registration Statement. 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 Receipts, except for any liability arising out of 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 Receipts or other Person, such Holder or other Person will be liable for such fees, charges and expenses. 20 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 party 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 21 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 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; 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 22 (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 Receipts. SECTION 7.02. Termination. The Trust Agreement shall terminate on the date that all outstanding Receipts 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 Receipts. 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 Receipts 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 Receipts to be delisted by any national securities exchange or other organization on which the Receipts are then listed, (ii) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Receipts 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 Receipts 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. 23 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 the Trustee's agents and shall be open to inspection during business hours at the Corporate Office and the respective offices of the Trustee's agents, if any, by any Holder of a Receipt. SECTION 9.02. Exclusive Benefits of Parties. This Trust Agreement is for the exclusive benefit of the parties hereto and the Holders of the Receipts and the holders of Series B 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 Receipts 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 Receipts 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 Receipt hereunder or under the Receipts shall be in writing and shall be deemed to 24 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 record 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 the other or from any Holder of a Receipt, 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 Receipts Are Parties. Notwithstanding that Holders of Receipts have not executed and delivered this Trust Agreement or any counterpart thereof, the Holders of Receipts from time to time shall be bound by all of the terms and conditions hereof and of the Receipts by acceptance of delivery of Receipts. SECTION 9.07. Governing Law. This Trust Agreement and the Receipts 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 Receipt 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 Receipts. SECTION 9.09. Receipts Non-Assessable and Fully Paid. The Holders of the Receipts shall not be personally liable for obligations of the Trust, the interests in the Trust represented by the Receipts shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever, and the 25 Receipts 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. 26 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 Authorized Officer PNC BANK, DELAWARE By: /s/ Michael B. McCarthy Authorized Signatory The General Partner joins in this Trust Agreement solely for the purposes of obligating itself under Sections 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 Authorized Officer 27 EXHIBIT A TRUST RECEIPTS OF PECO ENERGY CAPITAL TRUST I, a Delaware Business Trust, each Representing an 8.72% Cumulative Monthly Income Preferred Security, Series B of PECO Energy Capital, L.P. (a Delaware limited partnership) No. _________ ___________ Receipts PNC Bank, Delaware, a Delaware banking corporation, not in its individual capacity, but solely as Trustee (the "Trustee"), hereby certifies that ______________ is the registered owner of __________ Receipts (the "Receipts"), each representing an 8.72% Cumulative Monthly Income Preferred Security, Series B (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 I dated as of December 19, 1995 (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 Receipts 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 Receipts 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 Receipts and the rights and duties of the Trustee, the Grantor and the General Partner. The statements made on the face and the reverse hereof 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 A-1 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 Receipts 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. Any Holder of a Receipt or Receipts may withdraw any or all of the Preferred Securities (but only in whole numbers of Preferred Securities) represented by such Receipt or Receipts by surrendering the certificate evidencing such Receipt or Receipts accompanied by a written instrument of transfer and an agreement to be bound by the terms of the Partnership Agreement at the Corporate Office or at such other office as the Trustee may designate for such withdrawals; provided, however, that the Trustee shall not issue any fractional number of Preferred Securities. If the Receipt or Receipts delivered by the Holder to the Trust in connection with such withdrawal shall evidence a number of Preferred Securities in excess of the number of Preferred Securities to be withdrawn, the Trustee shall at the same time, in addition to such number of Preferred Securities to be withdrawn, deliver to such Holder, a new Receipt or Receipts evidencing such excess number of Preferred Securities. 3. Distributions of Monthly Distributions on Preferred Securities. Whenever the Trustee shall receive any cash distribution representing a monthly distribution on the Preferred Securities (whether or not distributed by the Grantor on the regular monthly distribution date therefor) or payment by PECO Energy Company ("PECO Energy") under the Payment and Guarantee Agreement dated as of December 19, 1995 (the "Guarantee") in respect thereof, the Trustee acting directly or through any Paying Agent shall distribute to record Holders of Receipts on the record date therefor, such amounts in proportion to the respective numbers of Preferred Securities represented by the Receipts 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, first-class postage prepaid, notice of the redemption of Preferred Securities and the proposed simultaneous redemption of the Receipts to be redeemed, not less than 30 and not more than 60 days prior to the date fixed for redemption (the "redemption date") of such Preferred Securities and Receipts. Such notice shall be mailed to the Holders of the Receipts, 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 A-2 proceedings. In case fewer than all the outstanding Receipts are to be redeemed, the Receipts 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 Trustee the aggregate amount payable upon redemption of the Preferred Securities to be redeemed, the Trustee shall redeem (using the funds so deposited with it) Receipts representing the same number of Preferred Securities to be redeemed by the Grantor. 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 record Holders of Receipts on the record date therefor, such amounts in proportion to the respective number of Preferred Securities which were represented by the Receipts held by such Holders. 6. Fixing of Record Date for Holders of Receipts. 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 record holders of Receipts 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 monthly distributions on the Receipts shall be payable by check mailed to the addresses of the Holders thereof on the record date therefor. Payments of the redemption price of Receipts and distributions in liquidation shall be made against surrender of such Receipts at the office of First Chicago Trust Company of New York, 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 Receipts of such right, request direction of each Holder of a Receipt and vote the Preferred Securities represented by such Receipt in accordance with such direction. If the General Partner fails to convene a general A-3 meeting of the Partnership as required in Section 13.02(d) of the Partnership Agreement, the Trustee shall notify the Holders of the Receipts and, if so directed by the Holders of Receipts representing Preferred Securities constituting at least 10% of the aggregated 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 Receipts 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 Receipts 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 Receipts, 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 Receipt on such record date, the Trustee shall vote or cause to be voted the number of Preferred Securities represented by the Receipts in accordance with the instructions set forth in such request. In the absence of specific instructions from the Holder of a Receipt, the Trustee will abstain from voting to the extent of the Preferred Securities represented by such Receipt. 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 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 Receipts 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 Receipts. Subject to the terms and conditions of the Trust Agreement, the Trustee shall register the transfer on its books from time to time of Receipt 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, A-4 the Trustee shall execute a new Receipt representing the same aggregate number of the Receipts surrendered in accordance with the Trust Agreement and deliver the same to or upon the order of the Person entitled thereto. Upon surrender of a Receipt at the Corporate Office or such other office as the Trustee may designate for the purpose of effecting an exchange of Receipt certificates, subject to the terms and conditions of the Trust Agreement, the Trustee shall execute and deliver a new Receipt certificate representing the same number of Preferred Securities as the Receipt certificate surrendered. As a condition precedent to the registration of transfer or exchange of any Receipt 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 of or exchange any Receipt certificate for a period beginning at the opening of business ten days next preceding any selection of Receipts to be redeemed and ending at the close of business on the day of the mailing a notice of redemption of Receipts or (b) to transfer or exchange of Receipts called or being called for redemption in whole or in part. 11. Title to Receipts. It is a condition of the Receipt, and every successive Holder hereof by accepting or holding the same consents and agrees, that title to this Receipt 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 Receipt 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 Receipts 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 and A-5 registration of transfer of Receipts, which books at all reasonable times will be open for inspection by the record Holders of Receipts as and to the extent provided by applicable law. 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; 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 (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 Trust Receipts. 14. Governing Law. The Trust Agreement and this Receipt 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. Receipt Non-Assessable and Fully Paid. Holders of Receipts shall not be personally liable for obligations of the Trust, the interest in the Trust represented by the Receipts shall be non-assessable for any losses or expenses of the Trust or for any reason whatsoever, and the Receipts upon delivery thereof by the Trustee pursuant to the Trust Agreement are and shall be deemed fully paid. 16. Liability of Holders of Receipts. Holders of Receipts 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 A-6 authorized and whether issued for cash or other consideration or by way of distribution. This Receipt certificate shall not be entitled to any benefits under the Trust Agreement or be valid or obligatory for any purpose unless this Receipt certificate shall have been executed manually or, if a Registrar for the Receipts (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 THE RECEIPTS; AS TO THE VALIDITY OR SUFFICIENCY OF THE TRUST AGREEMENT; AS TO THE VALUE OF THE RECEIPTS OR AS TO ANY RIGHT, TITLE OR INTEREST OF THE RECORD HOLDERS OF THE RECEIPTS IN AND TO THE RECEIPTS. Dated: PNC BANK, DELAWARE, as Trustee, By_________________________________ Authorized Officer Countersigned by First Chicago Trust Company of New York, as Transfer Agent and Registrar By_________________________________ Authorized Officer A-7 [FORM OF ASSIGNMENT] FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto ____________________ the within Receipt and all rights and interests represented by the Receipts 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 Receipt in every particular, without alteration or enlargement, or any change whatever. Signature Guarantee: _________________________________ A-8 EX-12.1 9 Exhibit 12-1 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES RATIO OF EARNINGS TO FIXED CHARGES SEC METHOD ($000) 12 Months Ended 12/31/95 NET INCOME $ 609,732 ADD BACK - -INCOME TAXES: OPERATING INCOME 396,897 NON-OPERATING INCOME 34,820 NET TAXES $ 431,717 - -FIXED CHARGES: INTEREST APPLICABLE TO DEBT $ 408,904 ANNUAL RENTALS ESTIMATE 9,981 TOTAL FIXED CHARGES $ 418,885 ADJUSTED EARNINGS INCLUDING AFUDC $1,460,334 RATIO OF EARNINGS TO FIXED CHARGES 3.49 EX-12.2 10 Exhibit 12-2 PECO ENERGY COMPANY AND SUBSIDIARY COMPANIES RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS REQUIREMENTS SEC METHOD ($000) 12 Months Ended 12/31/95 NET INCOME $ 609,732 ADD BACK - -INCOME TAXES: OPERATING INCOME 396,897 NON-OPERATING INCOME 34,820 NET TAXES $ 431,717 - -FIXED CHARGES: TOTAL INTEREST $ 408,904 ANNUAL RENTALS ESTIMATE 9,981 TOTAL FIXED CHARGES $ 418,885 EARNINGS REQUIRED FOR PREFERRED DIVIDENDS: DIVIDENDS ON PREFERRED STOCK $ 23,217 ADJUSTMENT TO PREFERRED DIVIDENDS $ 16,439 $ 39,656 FIXED CHARGES AND PREFERRED DIVIDENDS $ 458,541 EARNINGS BEFORE INCOME TAXES AND FIXED CHARGES $1,460,334 RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND 3.18 EARNINGS REQUIRED FOR PREFERRED DIVIDENDS EX-13 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings and Dividends 1995 Compared to 1994 Earnings per common share in 1995 were $2.64 compared to $1.76 in 1994. The increase in earnings was primarily due to a one-time charge of $0.66 per share in the third quarter of 1994 associated with the Company's Voluntary Retirement Incentive Program (VRIP) and Voluntary Separation Incentive Program (VSIP). Earnings also increased by $0.22 per share due to increased electric sales, by $0.19 per share due to the Company's ongoing emphasis on cost control, by $0.12 per share due to the gain on the sale of Conowingo Power Company (COPCO), and by $0.04 per share due to reduced financing costs. These increases were partially offset by $0.14 per share due to additional costs incurred as a result of the shutdown of Salem Generating Station (Salem), by $0.14 per share due to increased taxes and by $0.07 per share due to revenues recorded in 1994 from the receipt of nuclear fuel from Shoreham Generating Station (Shoreham). The Company increased its annual common stock dividend by 7.4% to $1.74 per share, effective with the dividend paid in December 1995. Operating Revenues Increases/(decreases) in electric sales and operating revenues by class of customer for 1995 compared to 1994 are set forth below: Electric Sales Electric Revenues Millions of kWh Millions of $ Residential 43 $ 31 Small Commercial and Industrial 191 32 Large Commercial and Industrial 129 4 Other 69 1 ----- ------ Service Territory 432 68 Interchange Sales (272) (5) Sales to Other Utilities 4,002 88 ----- ------ Total 4,162 $ 151 ===== ====== Electric revenues increased $151 million in 1995 compared to 1994 primarily due to increased sales to other utilities and higher retail sales due to favorable weather in the third and fourth quarters of 1995. The increase in electric revenues from residential sales was also attributable to higher fuel-clause revenues resulting from yearly changes in the Company's Energy Cost Adjustment (ECA). Gas revenues decreased $5 million in 1995 compared to 1994 primarily due to lower interruptible sales and sales of gas to the Company's electric generating units because of reduced spot market rates. This decrease was partially offset by higher fuel-clause revenues and increased transportation revenues related to higher levels of gas transported for customers purchasing their own gas on the spot market. Fuel and Energy Interchange Expense Fuel and energy interchange expense increased $59 million in 1995 compared to 1994 primarily due to increased output needed to meet service-territory customer demand, higher levels of sales to other utilities and replacement power costs required by the shutdown of Salem. These increases were partially offset by net credits to expense from the retention by the Company of a share of the energy savings resulting from the operation of Limerick Generating Station (Limerick) and from certain energy sales to other utilities. The increases were further offset by lower purchased gas costs resulting from reduced output. Other Operating and Maintenance Expenses Other operating and maintenance expenses decreased by $268 million in 1995 compared to 1994 primarily due to the one-time charge in 1994 associated with VRIP and VSIP. The decrease was also due to other continuing cost-control efforts, including the savings associated with VRIP and VSIP, lower customer expenses as a result of improved collection processes and lower nuclear generating station charges resulting from shorter refueling and maintenance outages at Company-owned nuclear generating units. These decreases were partially offset by increased process reengineering costs and maintenance expenses at Salem. Depreciation Expense Depreciation expense increased in 1995 compared to 1994 primarily due to additions to plant in service. Income Taxes Income taxes charged to operations increased $163 million in 1995 compared to 1994 primarily due to increases in operating income. Allowance for Funds Used During Construction Allowance for Funds Used During Construction (AFUDC) increased in 1995 compared to 1994 primarily due to an increase in the 1995 AFUDC rate. Other Income and Deductions Other income and deductions increased $16 million in 1995 compared to 1994 primarily due to the gain recognized on the sale of COPCO, partially offset by revenues recorded in 1994 from the receipt of nuclear fuel from Shoreham. Total Interest Charges Total interest charges increased primarily due to the July 1994 issuance of Monthly Income Preferred Securities, Series A (recorded in the financial statements as Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company). Preferred Stock Dividends Preferred stock dividends decreased primarily due to redemptions of preferred stock in the third quarter of 1994 with the proceeds from the issuance of Monthly Income Preferred Securities, Series A. 13 1994 Compared to 1993 Earnings per common share in 1994 were $1.76 compared to $2.45 in 1993. The decrease in earnings was primarily due to a one-time charge of $0.66 per share associated with VRIP and VSIP. Also contributing to the decrease in earnings were other strategic and non-recurring operating and maintenance charges which decreased 1994 earnings by $0.13 per share. These decreases were partially offset by savings from the Company's ongoing debt and preferred stock refinancing and redemption program, which increased earnings by $0.14 per share. Operating Revenues Increases/(decreases) in electric sales and operating revenues by class of customer for 1994 compared to 1993 are set forth below: Electric Sales Electric Revenues Millions of kWh Millions of $ Residential 160 $ 15 Small Commercial and Industrial 335 28 Large Commercial and Industrial (88) (21) Other 20 (25) ----- ------ Service Territory 427 (3) Interchange Sales 311 9 Sales to Other Utilities 1,369 13 ----- ------ Total 2,107 $ 19 ===== ====== Electric revenues increased $19 million in 1994 compared to 1993 primarily due to increased sales to other utilities and increased interchange sales. These increases were partially offset by lower revenue margins obtained on these sales. Gas revenues increased $33 million in 1994 compared to 1993 primarily due to higher fuel-clause revenues. Fuel and Energy Interchange Expense Fuel and energy interchange expense increased $44 million in 1994 compared to 1993 primarily due to increased electric output associated with interchange sales and increased sales to other utilities. A portion of this increase was deferred pending regulatory action. The increase was also attributable to an increase in gas fuel costs. Other Operating and Maintenance Expenses Other operating and maintenance expenses increased $304 million in 1994 compared to 1993 primarily due to a one-time, pre-tax charge of $254 million in the third quarter of 1994 for VRIP and VSIP. In addition, other operating and maintenance expenses increased due to higher environmental, customer and employee-related charges, and other strategic and non-recurring operating and maintenance charges. These increases were partially offset by lower generating station charges resulting from fewer and shorter refueling and maintenance outages. Depreciation Expense Depreciation expense increased in 1994 compared to 1993 due to additions to plant in service. Income Taxes Income taxes charged to operations decreased in 1994 compared to 1993 primarily due to the charge for VRIP and VSIP and lower operating income. These decreases were partially offset by lower interest expense allocated to operations. Other Taxes Other taxes increased in 1994 compared to 1993 primarily due to an increase in the real estate tax base and increased Pennsylvania gross receipts tax resulting from higher operating revenues. Allowance for Funds Used During Construction AFUDC decreased in 1994 compared to 1993 primarily due to a decrease in the 1994 AFUDC rate, partially offset by an increase in Construction Work in Progress. Total Interest Charges Total interest charges decreased in 1994 compared to 1993 primarily due to the Company's ongoing program to refinance and redeem higher-cost, long-term debt. Preferred Stock Dividends Preferred stock dividends decreased in 1994 compared to 1993 primarily due to the reduced number of preferred shares outstanding and the refinancing of higher-cost preferred stock. 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 generally used to fund the Company's construction program, to repay outstanding debt and to make preferred and common stock dividend payments. In 1995 and each of the preceding five years, internally generated cash exceeded the Company's capital requirements and dividend payments, thereby improving the Company's financial condition. Contributing to the Company's improved cash position were a reduction in interest expense and dividend requirements associated with the Company's ongoing program to reduce debt and refinance higher-cost, long-term debt and preferred stock, and increased revenues from the sale of capacity and energy to other utilities. Net cash provided by operating activities for 1995 was $1.3 billion. For the period 1996 through 1999, the Company expects that internally generated cash will exceed its capital and dividend requirements. The Company expects its level of capital investment in utility plant to remain relatively stable since it has sufficient electric generating capacity to meet the anticipated needs of its service territory well into the next decade. The Company also expects to fund all new business initiatives through internally generated funds. Construction program expenditures for 1995 were $480 million and are estimated to be $538 million in 1996 and $1.2 billion for the period 1997 to 1999. As a result of its prior investments in scrubbers for Eddystone and Cromby Generating Stations and its investment in nuclear generating capacity, the Company believes that com- 14 pliance with the Clean Air Act will have significantly less impact on the Company's capital requirements than on other Pennsylvania utilities which are more dependent on coal-fired generation. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. During 1995, the Company utilized cash from operations, proceeds from the sale of COPCO and $100 million from the sale of an undivided interest in trade receivables to reduce the Company's debt by $401 million. Also during 1995, $349 million of long-term debt and Company obligated mandatorily redeemable preferred securities of a partnership were sold or exchanged to refund debt and preferred stock carrying less-favorable after-tax rates of interest and dividends. These transactions resulted in a reduction of approximately $33 million in annualized interest and preferred stock dividends. The Company meets its short-term liquidity requirements primarily through the issuance of commercial paper, borrowings under a revolving credit agreement and bank lines of credit. The Company did not have any commercial paper or short-term debt outstanding at December 31, 1995. At December 31, 1995, the Company's embedded cost of debt was 7.1% with 14.5% of the Company's long-term debt having floating rates. The coverage ratios under the Company's mortgage indenture and Amended and Restated Articles of Incorporation as of December 31, 1995, were 4.94 and 2.74 times, respectively, compared with minimum issuance requirements of 2.00 and 1.50 times, respectively. The Company believes that its internal sources of funds will be sufficient to cover its fixed charges for 1996. As of December 31, 1995, the Company's capital structure consisted of 46.6% common equity; 6.1% preferred stock and Company obligated mandatorily redeemable preferred securities of a partnership (which comprised 3.1% of the Company's total capitalization structure); and 47.3% long-term debt. The Company's capital structure as of December 31, 1994, consisted of 43.5% common equity; 6.0% preferred stock and Company obligated mandatorily redeemable preferred securities of a partnership (which comprised 2.2% of the Company's total capitalization structure); and 50.5% long-term debt. Outlook The Company's financial condition and its future operating results are dependent on a number of factors affecting the Company and the utility industry in general. Among these factors are increased competition in electric and gas markets, regulation and operation of nuclear generating facilities, sales to other utilities, accounting issues and other factors including weather and compliance with environmental regulations. Due to the Company's substantial investment in Limerick, which represents 54% of the Company's investment in electric plant, any regulatory changes which do not provide for the recovery of the Company's investment in Limerick could result in substantial write-downs of assets. This may adversely affect the Company's financial condition and future results of operations. Competition Over the last few years, legislative and regulatory initiatives and market forces have laid the foundation for the continued development of competition in the electric utility industry. As a result, the electric utility industry is reviewing the potential impacts of a major transition from a traditional rate regulated environment based on cost recovery to some combination of a competitive marketplace and modified regulation of certain market segments. Although a competitive environment may create new opportunities for revenue growth, it may also reduce the margin on certain classes of energy sales and may result in customer and revenue losses. Increased competition may limit high-cost utilities' ability to recover capital investment through rates, resulting in stranded investment and the potential write-down of assets. Potential competition has resulted in increased focus on cost-cutting and consideration of strategic alternatives, including mergers and restructuring of operations. The Energy Policy Act of 1992 (Energy Act) was enacted to promote competition among utility and nonutility generators in the wholesale electric generation market. The Energy Act allows the Federal Energy Regulatory Commission (FERC) to order owners of electric transmission systems to provide third parties with transmission access for wholesale power transactions. During 1995, the FERC issued proposed rules which, if adopted, would require that all public utilities have on file with the FERC nondiscriminatory open-access transmission tariffs for network and point-to-point services, including separate rates for ancillary services. The FERC's proposed rules would also provide for recovery of legitimate and verifiable wholesale stranded investment. These proposals further expressed the FERC's strong expectation that state regulatory commissions provide for similar full recovery of legitimate and verifiable stranded investment that could result if state regulatory commissions ordered retail competition and direct access. The Company filed comments in response to the FERC's proposal. The comments, while generally supportive, suggested several adjustments to ensure full stranded investment recovery. An order from the FERC is expected in the first half of 1996. The Company also filed a tariff for network and point-to-point services and a market-based rate tariff that would allow the Company to sell wholesale energy at market-based rates outside the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM) control area. These tariffs would be available to wholesale buyers and sellers of electricity, although the Company would continue to make sales within the PJM control area under its existing FERC-approved cost-based tariffs. The market-based rate tariff is not expected to affect the applicability of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," to the Company's operations. During 1995, the Company proposed other initiatives to the FERC, including a plan to increase wholesale electric competition in the Mid-Atlantic region served by the PJM. The objectives of the Company's plan are to enable the PJM companies to offer comparable open access to their transmission facilities, to adapt the existing PJM regional wholesale energy market to increased competition, and to preserve those elements of power pooling which are still beneficial. 15 While the Energy Act encourages competition on a wholesale level, the Energy Act prohibits the FERC from ordering wheeling for sales to retail customers. Currently, a number of states, including Pennsylvania, are assessing the issue of retail competition with varying outcomes. For instance, California has aggressively promoted the concept of retail competition while Maryland has stated that it is strongly opposed to such measures. While assessing their position, many issues must be considered which will require significant deliberation and may result in legal challenges. These issues include the recovery of any resulting stranded investment, the impact of interjurisdictional sales and whether such change is enacted by regulatory or legislative action. In August 1995, after seeking input from Pennsylvania utilities and interest groups, the Pennsylvania Public Utility Commission (PUC) staff issued a report recommending against retail electric power competition at this time. The PUC also issued an order inviting further comments and establishing hearings on competition issues with the expectation of submitting a report to the Pennsylvania legislature and the Governor in the second quarter of 1996. In November 1995, the Company submitted testimony which proposes five major initiatives to reduce the costs of electricity while preserving the reliability and universal service that is essential to Pennsylvania citizens. These initiatives are: 1) improvements in the PJM interconnection to incorporate an independent system operator, provide for wholesale energy exchange based on a market bidding mechanism, provide a regional transmission tariff, and expand participation in the wholesale energy market to others, including firms that are not traditional utilities; 2) performance-based regulation to increase utility accountability by linking utility earnings to performance rather than historic costs; 3) flexible pricing to allow utilities to offer customers a variety of service options tailored to individual requests, and to bring certain rates closer to market levels; 4) accelerated depreciation and other cost mitigation measures that challenge the utilities to reduce possible stranded investment associated with existing generation assets; and 5) competitive bidding of new generation to ensure that needs are met as efficiently as possible. The Company believes that these proposed initiatives will allow the PUC to improve the efficiency of the electric industry, while continuing to assure the availability of reliable service for all customers at reasonable rates, without significant adverse consequences on the financial condition of electric utilities. The Company believes that retail competition should not be adopted if it represents a mere shifting of costs from one class of customers to another or to shareholders, and that retail competition does not currently provide a net benefit. Regulatory changes permitting retail competition may also create stranded investment if the FERC's position of allowing full recovery of stranded investment as described in its proposal is not adopted. Investments by the Company in assets which would not be recoverable from customers, including its investment in nuclear facilities, may have to be written down, which would have a material adverse effect on the Company's financial condition and results of operations. The Company is not able to predict whether retail competition will be implemented and, if implemented, what impact it would have on the Company's financial condition or results of operations. The gas industry is also undergoing structural changes in response to FERC policies designed to increase competition in this market. This has included requirements that interstate gas pipelines unbundle their gas sales service from other regulated tariff services, such as transportation and storage. In anticipation of these policies, the Company has modified its gas purchasing arrangements to enable the purchase of gas and transportation at lower cost, and has become more active in the area of gas transportation. In 1995, the Company introduced to regulators and industry analysts its Competitive Breakthrough Strategy, which is an integrated strategy designed to improve the efficiency, financial condition and rate stability of the Company through a broad array of initiatives, including but not limited to, reengineering of processes, expense reduction and containment, development of new revenue opportunities, reduction of exposure to asset write-downs and reduction of existing debt. As part of its Competitive Breakthrough Strategy, in October 1995, the Company filed a petition for a declaratory accounting order with the PUC requesting approval to increase Limerick-related depreciation and amortization by $100 million per year and decrease depreciation and amortization of other Company assets by approximately $10 million per year, effective October 1, 1996. The requested order would not affect rates charged to customers. The Company expects, but cannot be assured, that the net increased depreciation and amortization would be offset by the reduced costs and increased revenues generated by the Company's Competitive Breakthrough Strategy. For further details see note 3 of Notes to Consolidated Financial Statements. The Company has realized wage and benefit savings of approximately $60 million in 1995 as a result of the Company's VRIP and VSIP. The Company expects VRIP and VSIP to provide savings in wages and benefits to the Company of approximately $100 million annually beginning in 1996. To take advantage of emerging opportunities in the telecommunications field, in 1995, the Company's Board of Directors created a new strategic business unit, the Telecommunications Group. The business unit has initiated several joint ventures in newly emerging wireless personal communications services businesses and other competitive telecommunications opportunities. The telecommunications field presents the Company with many opportunities to expand its business, generate additional revenue and provide greater shareholder value. The Company possesses a highly skilled technical staff and a substantial infrastructure which will enable it to successfully participate in the ever-changing telecommunications industry. As a result of competitive pressures, the Company has negotiated long-term contracts with many of its larger-volume industrial customers. Although these agreements have resulted in lower revenues from this class of customers, they have permitted the Company to maintain this segment of its customer base. During 1995, there were an unprecedented number of mergers in the utility industry and this trend is expected to continue. In August 1995, the Company proposed a merger with PP&L Resources, Inc., an electric utility with operations in northeast Pennsylvania. In November, PP&L Resources declined the Company's final offer and the Company withdrew its proposal. The Company will continually evaluate all 16 opportunities to improve its strategic and competitive position but, because of its strong stand-alone position, is not compelled to pursue such opportunities at any cost. 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 approximately 45% of its installed generating capacity. Because of the Company's substantial investment in and 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 1995, Company-operated nuclear plants operated at an 88% weighted-average capacity factor and Company-owned nuclear plants, including Salem, operated at a 72% weighted-average capacity factor and produced 50% of the Company's output including purchased power. Nuclear generation is the most cost-effective way for the Company to meet customer needs and commitments for sales to other utilities. Continued operation of the nuclear plants above 60% of capacity is necessary to avoid penalties under the ECA. In addition, the terms of the 1991 settlement of the Limerick Unit No. 2 rate case afford the Company the opportunity, through sales to other utilities and the efficient operation of Limerick, to increase earnings. See note 3 of Notes to Consolidated Financial Statements for a description of the ECA and the terms of the Limerick Unit No. 2 rate case settlement. Public Service Electric and Gas Company (PSE&G), the operator of Salem Units No. 1 and No. 2, which are 42.59% owned by the Company, removed the units from service on May 16, 1995 and June 7, 1995, respectively. PSE&G informed the NRC at that time that it had determined to keep the Salem units shut down pending review and resolution of certain equipment and management issues, and NRC agreement that each unit is sufficiently prepared to restart. Salem Units No. 1 and No. 2 are expected to be out of service until the second and third quarters of 1996, respectively. The Company expects to incur and expense at least $85 million in 1996 for increased costs related to the shutdown. Under Pennsylvania law, the PUC may investigate outages of electric generating units which exceed 120 days or if the annual capacity factor is less than 50% to determine whether to deny the recovery of replacement power costs. See note 24 of Notes to Consolidated Financial Statements. The Financial Accounting Standards Board is currently reviewing the accounting for closure and removal costs of production facilities including the recognition, measurement and classification of decommissioning costs for nuclear generating stations, and will issue an Exposure Draft in 1996. The Company will review the Exposure Draft to determine the effect on its financial condition and results of operations. See note 4 of Notes to Consolidated Financial Statements. The Company may seek to recover through rates capital costs and any increased operating costs, including those associated with NRC regulation of the Company's nuclear generating stations and environmental compliance and remediation, although such recovery is not assured. To the extent that such amounts are not recovered, they would be charged against income. Sales to Other Utilities At December 31, 1995, the Company had 1,199 megawatts (MW) of installed generating capacity available for sales to other utilities. In the ordinary course of business, the Company enters into commitments to buy and sell power. During 1995, the Company entered into an agreement to purchase energy associated with 300 MW from 1996 through 2000 from an unaffiliated utilitiy. The Company's future results of operations are dependent in part on its ability to successfully market this generation. See note 4 of Notes to Consolidated Financial Statements. In the wholesale market, the Company has increased its sales to other utilities, but increased competition has reduced the Company's margin on these sales. The Company has agreements with other utilities to sell energy and/or capacity. The Company has long-term agreements over the next five years with unaffiliated utilities to sell energy associated with 1,185 MW of capacity. These power sales agreements extend from 1996 to 2023. The Company expects these wholesale sales to generate approximately $300 million of revenue in 1996. Accounting Issues The Company continues to account for its operations in accordance with SFAS No. 71 which is appropriate for companies that meet three criteria in order to account for the economic impacts of rate regulation: 1) third-party regulation of rates; 2) cost-based rates; and 3) a reasonable assumption that costs will be recoverable from customers through rates. Discontinuance of SFAS No. 71 would result in a charge against income from the elimination of regulatory assets created by the regulatory process as well as certain plant costs that may no longer be recoverable. The impact of such events could have a material adverse effect on the Company's financial condition and results of operations. Continued application of SFAS No. 71 is periodically assessed by the Company. At December 31, 1995, the Company had deferred on its balance sheet certain regulatory assets for which recovery has been approved by the PUC. These regulatory assets include $300 million associated with Limerick Units No. 1 and No. 2, $248 million associated with the Company's non-pension postretirement benefits and $2.0 billion associated with recoverable deferred income taxes. For more details on these regulatory assets see notes 3, 7 and 14 of Notes to Consolidated Financial Statements. At December 31, 1995, the Company had deferred on its balance sheet certain regulatory assets for which current recovery has not yet been approved. Any deferred costs that are not ultimately recovered through base rates would be charged against income. These regulatory assets include $107 million for the effect on deferred income taxes of the change in the statutory federal income tax rate from 34% to 35% in 1993, and $91 million of operating and maintenance expenses, depreciation and accrued carrying charges on its investment in Limerick Unit No. 2 and 50% of Limerick common facilities, deferred pursuant to a Declaratory Order of the PUC. See notes 3 and 14 of Notes to Consolidated Financial Statements. These and other regulatory assets are deferred pursuant to PUC action. In October 1995, the Company filed a petition for a declaratory accounting order 17 with the PUC requesting approval to, among other things, amortize $91 million of operating and maintenance expenses, depreciation and accrued carrying charges on its investment in Limerick Unit No. 2 and 50% of Limerick common facilities. The petition requests that these deferred costs be amortized over a nine-year period beginning October 1996. The requested order would not affect customer rates. The Company will adopt SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," in the first quarter of 1996. Upon adoption, the Company does not expect SFAS No. 121 to have an effect upon the Company's financial condition or results of operations. Significant changes in the regulatory environment, abandonment of cost-based rates, or losses of major customers that result in stranded investment are events that may necessitate a review of the Company's assets for impairment. The Company will adopt SFAS No. 123, "Accounting for Stock-Based Compensation," in the first quarter of 1996, but will continue to use the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," supplemented by SFAS No. 123's required footnote disclosures. Adoption of SFAS No. 123 will not have an effect upon the Company's financial condition or results of operations. Other Factors Annual and quarterly operating results can be significantly affected by weather. Inflation affects the Company through increased operating costs and increased capital costs for utility plant. During periods of high inflation, the Company could be adversely affected if it is unable to offset increasing costs with improved productivity or rate increases. In addition, the replacement costs of the Company's utility plant are significantly higher than the historical costs reflected in the financial statements. The Company has agreed not to seek a retail electric base rate increase before April 1, 1999, except under specified circumstances. Therefore, the effects of future inflation and other potential cost increases may not be subject to rate recovery. See note 3 of Notes to Consolidated Financial Statements. 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 23 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. Seven of the sites are currently in the detailed evaluation or remediation stage. As of December 31, 1995 and 1994, the Company had accrued $27 and $24 million, respectively, for environmental investigation and remediation costs that currently can be reasonably estimated. The Company expects to expend $8 million for such activities in 1996. The Company cannot currently 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 all such costs will be recoverable through rates or from third parties. For a discussion of other contingencies, see notes 3 and 4 of Notes to Consolidated Financial Statements. 18 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors PECO Energy Company: We have audited the accompanying consolidated balance sheets of PECO Energy Company and Subsidiary Companies as of December 31, 1995 and 1994, and the related consolidated statements of income, cash flows, and changes in common shareholders' equity and preferred stock for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of PECO Energy Company and Subsidiary Companies as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Coopers & Lybrand LLP 2400 Eleven Penn Center Philadelphia, Pennsylvania February 2,1996 Consolidated Statements of Income
For the Years Ended December 31, 1995 1994 1993 Thousands of Dollars Operating Revenues Electric $ 3,775,326 $ 3,624,797 $ 3,605,425 Gas 410,830 415,835 382,704 ----------- ----------- ----------- Total Operating Revenues 4,186,156 4,040,632 3,988,129 ----------- ----------- ----------- Operating Expenses Fuel and Energy Interchange 762,762 703,590 659,580 Other Operating 943,476 937,849 851,254 Early Retirement and Separation Programs -- 254,106 -- Maintenance 307,797 327,714 364,409 Depreciation 457,254 442,101 424,952 Income Taxes 396,897 234,033 354,391 Other Taxes 314,071 311,689 298,132 ----------- ----------- ----------- Total Operating Expenses 3,182,257 3,211,082 2,952,718 ----------- ----------- ----------- Operating Income 1,003,899 829,550 1,035,411 ----------- ----------- ----------- Other Income and Deductions Allowance for Other Funds Used During Construction 14,371 10,180 11,885 Gain on Sale of Subsidiary 58,745 -- -- Income Taxes (34,820) (15,291) (11,808) Other, net (444) 23,121 11,980 ----------- ----------- ----------- Total Other Income and Deductions 37,852 18,010 12,057 ----------- ----------- ----------- Income Before Interest Charges 1,041,751 847,560 1,047,468 ----------- ----------- ----------- Interest Charges Long-Term Debt 386,205 387,279 432,707 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company 20,987 8,570 -- Short-Term Debt 37,506 36,987 36,002 ----------- ----------- ----------- Total Interest Charges 444,698 432,836 468,709 Allowance for Borrowed Funds Used During Construction (12,679) (11,989) (11,889) ----------- ----------- ----------- Net Interest Charges 432,019 420,847 456,820 ----------- ----------- ----------- Net Income 609,732 426,713 590,648 Preferred Stock Dividends 23,217 37,298 49,058 ----------- ----------- ----------- Earnings Applicable to Common Stock $ 586,515 $ 389,415 $ 541,590 =========== =========== =========== Average Shares of Common Stock Outstanding (Thousands) 221,859 221,554 221,072 =========== =========== =========== Earnings per Average Common Share (Dollars) $ 2.64 $ 1.76 $ 2.45 =========== =========== =========== Dividends per Common Share (Dollars) $ 1.65 $ 1.545 $ 1.43 =========== =========== ===========
See Notes to Consolidated Financial Statements. 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 1994 1993 Thousands of Dollars Cash Flows from Operating Activities Net Income $ 609,732 $ 426,713 $ 590,648 Adjustments to reconcile Net Income to Net Cash provided by Operating Activities: Depreciation and Amortization 531,299 517,681 507,069 Deferred Income Taxes 183,514 (23,306) 139,846 Gain on Sale of Subsidiary (58,745) -- -- Early Retirement and Separation Programs -- 254,106 -- Deferred Energy Costs (71,104) (33,205) (24,308) Amortization of Leased Property 42,900 61,900 58,400 Changes in Working Capital: Accounts Receivable (8,198) 23,508 31,102 Inventories (10,872) 18,210 11,222 Accounts Payable (4,686) 5,342 777 Other Current Assets and Liabilities 9,641 52,940 (34,694) Other Items affecting Operations 40,649 (9,175) (18,287) ----------- ----------- ----------- Net Cash Flows from Operating Activities 1,264,130 1,294,714 1,261,775 ----------- ----------- ----------- Cash Flows from Investing Activities Investment in Plant (577,908) (570,903) (568,076) Proceeds from Sale of Subsidiary 150,000 -- -- Increase in Other Investments (60,541) (17,951) (16,214) ----------- ----------- ----------- Net Cash Flows from Investing Activities (488,449) (588,854) (584,290) ----------- ----------- ----------- Cash Flows from Financing Activities Change in Short-Term Debt (11,499) (107,851) 8,850 Issuance of Common Stock 15,585 2,308 29,346 Issuance of Preferred Stock -- -- 142,700 Retirement of Preferred Stock (78,105) (238,800) (187,330) Issuance of Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership 81,032 221,250 -- Issuance of Long-Term Debt 182,540 245,100 1,994,765 Retirement of Long-Term Debt (575,713) (397,763) (2,148,963) Loss on Reacquired Debt 12,302 22,125 (69,884) Dividends on Preferred and Common Stock (390,340) (377,883) (366,081) Change in Dividends Payable 5,626 (3,249) (1,114) Expenses of Issuing Long-Term Debt and Preferred Stock (577) (9,150) (24,820) Capital Lease Payments (42,900) (61,900) (58,400) ----------- ----------- ----------- Net Cash Flows from Financing Activities (802,049) (705,813) (680,931) ----------- ----------- ----------- (Decrease)/Increase in Cash and Cash Equivalents (26,368) 47 (3,446) Cash and Cash Equivalents at beginning of period 46,970 46,923 50,369 ----------- ----------- ----------- Cash and Cash Equivalents at end of period $ 20,602 $ 46,970 $ 46,923 =========== =========== ===========
21 CONSOLIDATED BALANCE SHEETS
At December 31, 1995 1994 Thousands of Dollars Assets Utility Plant, at Original Cost Electric $ 13,441,880 $ 13,283,888 Gas 954,180 895,946 Common 299,899 234,769 ------------ ------------ 14,695,959 14,414,603 Less Accumulated Provision for Depreciation 4,623,707 4,242,576 ------------ ------------ 10,072,252 10,172,027 Nuclear Fuel, net 191,084 184,161 Construction Work in Progress 494,194 472,512 Leased Property, net 180,425 174,565 ------------ ------------ Net Utility Plant 10,937,955 11,003,265 ------------ ------------ Current Assets Cash and Temporary Cash Investments 20,602 46,970 Accounts Receivable, net Customers 75,220 96,987 Other 71,997 49,854 Inventories, at average cost Fossil Fuel 78,260 72,732 Materials and Supplies 123,387 118,230 Deferred Energy Costs 55,883 (15,486) Other 60,868 58,069 ------------ ------------ Total Current Assets 486,217 427,356 ------------ ------------ Deferred Debits and Other Assets Recoverable Deferred Income Taxes 2,077,426 2,138,079 Deferred Limerick Costs 390,433 413,885 Deferred Non-Pension Postretirement Benefits Costs 248,085 261,912 Investments 296,948 236,587 Loss on Reacquired Debt 308,577 320,879 Other 214,979 263,308 ------------ ------------ Total Deferred Debits and Other Assets 3,536,448 3,634,650 ------------ ------------ Total Assets $ 14,960,620 $ 15,065,271 ============ ============
22 CONSOLIDATED BALANCE SHEETS (CONTINUED)
At December 31, 1995 1994 Thousands of Dollars Capitalization and Liabilities Capitalization Common Shareholders' Equity Common Stock $ 3,506,313 $ 3,490,728 Other Paid-In Capital 1,326 1,271 Retained Earnings 1,023,708 810,507 ------------ ------------ 4,531,347 4,302,506 Preferred and Preference Stock Without Mandatory Redemption 199,367 277,472 With Mandatory Redemption 92,700 92,700 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership, which holds Solely Subordinated Debentures of the Company 302,282 221,250 Long-Term Debt 4,198,283 4,785,631 ------------ ------------ Total Capitalization 9,323,979 9,679,559 ------------ ------------ Current Liabilities Notes Payable, Bank -- 11,499 Long-Term Debt Due Within One Year 401,003 201,213 Capital Lease Obligations Due Within One Year 60,320 60,476 Accounts Payable 299,731 308,832 Taxes Accrued 107,621 87,185 Deferred Income Taxes 17,072 (12,002) Interest Accrued 88,047 93,159 Dividends Payable 20,722 15,096 Other 82,775 85,649 ------------ ------------ Total Current Liabilities 1,077,291 851,107 ------------ ------------ Deferred Credits and Other Liabilities Capital Lease Obligations 120,105 114,089 Deferred Income Taxes 3,312,649 3,225,915 Unamortized Investment Tax Credits 351,569 374,100 Pension Obligation for Early Retirement Plans 216,283 238,250 Non-Pension Postretirement Benefits Obligation 326,251 354,458 Other 232,493 227,793 ------------ ------------ Total Deferred Credits and Other Liabilities 4,559,350 4,534,605 ------------ ------------ Commitments and Contingencies (Notes 3 and 4) Total Capitalization and Liabilities $ 14,960,620 $ 15,065,271 ============ ============
23 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON SHAREHOLDERS' EQUITY AND PREFERRED STOCK
Other Common Stock Paid-In Retained Preferred Stock All Amounts in Thousands Shares Amount Capital Earnings Share Amount Balance at January 1, 1993 220,534 $3,459,131 $1,214 $561,824 6,536 $653,602 Net Income 590,648 Cash Dividends Declared Preferred Stock (at specified annual rates) (49,919) Common Stock ($1.43 per share) (316,162) Expenses of Capital Stock Activity (5,625) Capital Stock Activity Long-Term Incentive Plan Issuances 983 29,346 (7,039) Preferred Stock Issuances 1,427 142,700 Preferred Stock Redemptions (1,873) (187,330) ------- ---------- ------ -------- ----- -------- Balance at December 31, 1993 221,517 3,488,477 1,214 773,727 6,090 608,972 Net Income 426,713 Cash Dividends Declared Preferred Stock (at specified annual rates) (35,706) Common Stock ($1.545 per share) (342,177) Expenses of Capital Stock Activity (11,662) Capital Stock Activity Long-Term Incentive Plan Issuances 92 2,251 (388) Preferred Stock Issuances 57 Preferred Stock Redemptions (2,388) (238,800) ------- ---------- ------ -------- ----- -------- Balance at December 31, 1994 221,609 3,490,728 1,271 810,507 3,702 370,172 Net Income 609,732 Cash Dividends Declared Preferred Stock (at specified annual rates) (24,253) Common Stock ($1.65 per share) (366,087) Expenses of Capital Stock Activity (4,035) Capital Stock Activity Long-Term Incentive Plan Issuances 563 15,585 (2,156) Preferred Stock Issuances 55 Preferred Stock Redemptions (781) (78,105) ------- ---------- ------ -------- ----- -------- Balance at December 31, 1995 222,172 $ 3,506,313 $ 1,326 $ 1,023,708 2,921 $ 292,067 ======= =========== =========== =========== ===== ===========
24 1. Significant Accounting Policies General The consolidated financial statements of PECO Energy Company (Company) include the accounts of its utility subsidiary companies, all of which are wholly owned. Accounting policies are 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 subsidiaries which are not material. The preparation of financial statements in conformity with generally accepted accounting principles 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. Revenues Customers' meters are read and bills are prepared on a cyclical basis. At the end of each month, the Company accrues an estimate for the unbilled amount of energy delivered or services provided to customers. Fuel and Energy Cost Adjustment Clauses The Company's classes of service are subject to fuel adjustment clauses designed to recover or refund the differences between actual costs of fuel, energy interchange, and purchased power and gas, and the amounts of such costs 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 adjustments to rates. Generally, such rates are adjusted every twelve months. In addition to reconciling fuel costs and revenues, the Company's Energy Cost Adjustment (ECA), established by the PUC, incorporates a nuclear performance standard which allows for financial bonuses or penalties depending upon whether the Company's system nuclear capacity factor exceeds or falls below a specified range (see note 3). Nuclear Fuel 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 share of 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. Depreciation and Decommissioning The annual provision for 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 percent of average depreciable utility plant in service, were approximately 2.80% in 1995, 2.77% in 1994 and 2.75% in 1993. See note 3 for information concerning the Company's petition to the PUC for a declaratory accounting order to change the estimated depreciable lives of certain of the Company's electric plant. The Company's share of the 1990 estimated costs for decommissioning nuclear generating stations currently included in electric base rates is being 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 investment earnings thereon, are credited to accumulated depreciation (see note 4). Income Taxes The Company uses an asset and liability approach for financial accounting and reporting of income taxes. The effects of the Alternative Minimum Tax (AMT) are normalized. Investment Tax Credit (ITC) is deferred and amortized to income over the estimated useful life of the related utility plant. ITC related to plant in service, not included in rate base, is accounted for on the flow-through method (see note 14). 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. AFUDC is recorded as a charge to Construction Work in Progress, and the credits are to Interest Charges for the cost of borrowed funds and to Other Income and Deductions for the remainder as the allowance for other funds. The rates used for capitalizing AFUDC, which averaged 9.88% in 1995, 7.74% in 1994 and 9.39% in 1993, 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. 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. Capitalized Software Costs Software projects which exceed $5 million are capitalized. At December 31,1995 and 1994, capitalized software costs totaled $50 million and $51 million (net of $19 million and $10 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. Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are deferred and amortized to interest expense over the stated life of the reacquired debt. Reclassifications Certain prior-year amounts have been reclassified for comparative purposes. These reclassifications had no effect on net income. 25 2. Nature of Operations and Segment Information The Company is an operating utility which provides electric and gas service to the public in southeastern Pennsylvania. The total area served by the Company covers 2,107 square miles. Electric service is supplied to an area of 1,972 square miles with a population of 3.7 million, including 1.6 million in the City of Philadelphia. Approximately 94% of the retail electric service area and 64% of retail kilowatthour sales are in the suburbs around Philadelphia, and 6% of the retail service area and 36% of such sales are in the City of Philadelphia. Natural gas service is supplied to a 1,475-square-mile area of southeastern Pennsylvania adjacent to Philadelphia with a population of 1.9 million.
For the Years Ended December 31, 1995 1994 1993 Thousands of Dollars Electric Operations Operating revenues: Residential $ 1,401,296 $ 1,369,617 $ 1,354,061 Small commercial and industrial 738,910 706,808 678,896 Large commercial and industrial 1,147,190 1,142,903 1,163,997 Other 136,988 136,002 161,290 ----------- ----------- ----------- Service territory 3,424,384 3,355,330 3,358,244 Interchange sales 17,488 23,017 14,269 Sales to other utilities 333,454 246,450 232,912 ----------- ----------- ----------- Total operating revenues 3,775,326 3,624,797 3,605,425 ----------- ----------- ----------- Operating expenses, excluding depreciation 2,405,876 2,429,452 2,228,507 Depreciation 430,993 415,854 400,851 ----------- ----------- ----------- Operating income $ 938,457 $ 779,491 $ 976,067 =========== =========== =========== Utility plant additions $ 435,400 $ 457,728 $ 458,125 =========== =========== =========== Gas Operations Operating revenues: Residential $ 15,482 $ 16,048 $ 15,032 House heating 240,147 235,407 205,483 Commercial and industrial 129,223 133,124 124,224 Other 3,639 13,971 15,172 ----------- ----------- ----------- Subtotal 388,491 398,550 359,911 Other revenues (including transported for customers) 22,339 17,285 22,793 ----------- ----------- ----------- Total operating revenues 410,830 415,835 382,704 ----------- ----------- ----------- Operating expenses, excluding depreciation 319,127 339,529 299,259 Depreciation 26,261 26,247 24,101 ----------- ----------- ----------- Operating income $ 65,442 $ 50,059 $ 59,344 =========== =========== =========== Utility plant additions $ 63,192 $ 67,090 $ 72,481 =========== =========== =========== Identifiable Assets* at December 31, Electric $10,408,105 $10,410,461 $10,395,488 Gas 785,881 768,279 727,690 Nonallocable assets 3,766,634 3,886,531 3,909,149 ----------- ----------- ----------- Total assets $14,960,620 $15,065,271 $15,032,327 =========== =========== ===========
*Includes utility plant less accumulated depreciation, inventories and allocated common utility property. 26 3. Rate Matters Limerick Under its electric tariffs, the Company is recovering $285 million of deferred Limerick costs representing carrying charges and depreciation associated with 50% of Limerick common facilities. These costs are included in base rates and are being recovered over the life of Limerick. The Company is also recovering $137 million of Limerick Unit No. 1 costs over a ten-year period without a return on investment. At December 31, 1995, the unrecovered portion of these balances were $240 million and $59 million, respectively. Under its electric tariffs, the Company is 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. In addition, beginning April 1994, the Company became entitled to share in the benefits which result from the operation of both Limerick Units No. 1 and No. 2 through the retention of 16.5% of the energy savings, subject to certain limits. During 1995, 1994 and 1993, the Company recorded as revenue net of fuel costs $79, $68 and $38 million, respectively, 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. Pursuant to a PUC Declaratory Order, the Company deferred certain operating and maintenance expenses, depreciation and accrued carrying charges on its capital investment in Limerick Unit No. 2 and 50% of Limerick common facilities. At December 31, 1995 and 1994, such costs included in Deferred Limerick Costs totaled $91 million. Petition for Declaratory Accounting Order In October 1995, the Company filed a petition for a declaratory accounting order with the PUC requesting approval to change the estimated depreciable lives of certain of the Company's electric plant. The petition requests the approval to reduce the terminal dates by ten years, for depreciation accrual purposes only, of Limerick Units No. 1 and No. 2 and associated common facilities, to utilize new life spans for various categories of electric production plant, and to change remaining life estimates for transmission, distribution, general and common plant. The petition also requests approval to amortize over a nine-year period $331 million of deferred Limerick costs representing $240 million of carrying charges and depreciation associated with 50% of Limerick common facilities and $91 million of unrecovered Limerick Unit No. 2 Declaratory Order costs. If approved, the proposed changes will increase depreciation and amortization on assets associated with Limerick by approximately $100 million per year and decrease depreciation and amortization on other Company assets by approximately $10 million per year, for a net increase in depreciation and amortization of approximately $90 million per year. The requested order will not affect rates charged to customers. The changes would be effective October 1, 1996. Recovery of Non-Pension Postretirement Benefits Costs Effective January 1995, in accordance with a PUC Joint Petition, the Company increased electric base rates by $25 million per year to recover the increased costs, including the annual amortization of the transition obligation (over 18 years) deferred in 1994 and 1993, associated with the implementation of Statement of Financial Accounting Standards (SFAS) No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," (see note 7). The Joint Petition provides that the Company will not file for an increase in retail electric service rates before April 1, 1999, except under specified circumstances for items such as energy cost adjustments, changes in state taxes, changes in federal taxes, demand side management surcharges, and increases in nuclear plant decommissioning expense or funding requirements and spent nuclear fuel disposal expenses. Subsequent to January 1, 1995, retail electric non-pension postretirement benefits expense in excess of the amount allowed to be recovered under the Joint Petition may not be deferred for future rate recovery. During 1995, the Company deposited $59.6 million in trust accounts to fund its retail electric non-pension postretirement benefits costs. These costs include amounts charged to operating expense or capitalized on and after January 1, 1995. In accordance with the Joint Petition, any of the parties to the Joint Petition may elect to void the settlement in the event current rate recovery of non-pension postretirement benefits expense is ultimately disallowed as a result of the Office of Consumer Advocate's appeal to the Supreme Court of Pennsylvania of cases involving other Pennsylvania utilities. In such event, the Company would refund to customers, with interest, any increased base rate amounts collected. In December 1994, the PUC approved the Company's petition for an accounting order associated with gas utility operations permitting recognition of $2.8 million of non-pension postretirement benefits costs annually and recognition of $1.5 million of environmental costs annually for the remediation of sites of former manufactured gas plant facilities using a cost of removal methodology, in exchange for a reduction in depreciation rates to reflect the results of a current life study. During 1995, the Company deposited $3.8 million in trust accounts to fund its gas non-pension postretirement benefits costs. The accounting order did not result in any increase in rates to customers (see note 7). Energy Cost Adjustment The Company is subject to a PUC-established electric ECA which, in addition to reconciling fuel costs and revenues, incorporates a nuclear performance standard which allows for financial bonuses or penalties depending on whether the Company's system nuclear capacity factor exceeds or falls below a specified range. The bonuses or penalties are based upon average system replacement energy costs. If the capacity factor is within the range of 60-70%, there is no bonus or penalty. If the capacity factor exceeds the specified range, progressive incremental bonuses are earned and, if the capacity factor falls below the specified range, progressive incremental penalties are incurred. For the year ended December 31, 1995, the Company's system nuclear capacity factor was 72%, for which the Company recorded an immaterial bonus in 1995 income. The Company-operated units performed at a capacity factor of 88%, but the overall factor was adversely affected by the Salem shutdown (see note 24). For the years ended December 31, 1994 and 1993, the Company's system nuclear capacity factors were 82% and 78%, respectively, which entitled the Company to bonuses reflected in 1994 and 1993 income of $14 and $10 million, respectively. 27 4. Commitments and Contingencies Construction Expenditures Construction expenditures are estimated to be $538 million for 1996 and $1.2 billion for the period 1997 to 1999. For the period 1996 to 1999, the Company expects that all of its capital needs will be provided through internally generated funds. Construction expenditure estimates are reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts and other appropriate factors. Certain facilities under construction and to be constructed may require permits and licenses which the Company has no assurance will be granted. The Company's operations have in the past and may in the future require substantial capital expenditures in order to comply with environmental laws. Nuclear Insurance The Price-Anderson Act sets the limit of liability of approximately $8.9 billion for claims that could arise from an incident involving any licensed nuclear facility in the nation. The limit is subject to change to reflect the effects of inflation and changes in the number of licensed reactors. All utilities with nuclear generating units, including the Company, have obtained coverage for these potential claims through a combination of private insurances of $200 million and mandatory participation in a financial protection pool. Under the Price-Anderson Act, all nuclear reactor licensees can be assessed up to $79 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, Congress could impose revenue raising measures on the nuclear industry to pay claims. Although the Nuclear Regulatory Commission (NRC) requires the maintenance of property insurance on nuclear power plants in the amount of $1.06 billion or the amount available from private sources, whichever is less, the Company maintains coverage in the amount of its $2.75 billion proportionate share for each station. The Company's insurance policies provide coverage for decontamination liability expense, premature decommissioning and loss or damage to its nuclear facilities. 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 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 $46 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, if not recovered through the ratemaking process, 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 $14 million per year. Nuclear Decommissioning and Spent Fuel Storage As a component of the PUC's April 19, 1990 electric base rate order, the PUC recognized a revised decommissioning cost estimate based upon total cost. The Company's share of this revised cost is $643 million expressed in 1990 dollars to be collected over the life of each generating unit. Under current rates, the Company collects and expenses approximately $20 million annually from customers for decommissioning the Company's nuclear units. The expense is accounted for as a component of depreciation expense and accumulated depreciation. At December 31, 1995, $216 million was included in accumulated depreciation. In order to fund future decommissioning costs, the Company has recorded $223 million in trust accounts which are included as an Investment in the Company's Consolidated Balance Sheet and include both net realized and unrealized gains. At December 31, 1995, net realized gains of $9 million were recognized as Other Income in the Company's Consolidated Statement of Income and net unrealized gains of $19 million were recognized as a Deferred Credit in the Company's Consolidated Balance Sheet. The most recent estimate of the Company's share of the cost to decommission its nuclear units is approximately $1.2 billion in 1995 dollars. Any increase in the 1990 decommissioning cost estimate being recovered in base rates is to be recoverable in the Company's next base rate case. As a result, the Company expects to receive recovery of a higher level of decommissioning expense in its next base rate proceeding. The Financial Accounting Standards Board (FASB) is currently reviewing the accounting for closure and removal costs of production facilities including the recognition, measurement and classification of decommissioning costs for nuclear generating stations, and will issue an Exposure Draft in 1996. The Company will review the Exposure Draft to determine the effect on its financial condition and results of operations. If current electric utility industry accounting practices for decommissioning are changed, annual provisions for decommissioning could increase and the estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation with recognition of an increase in the cost of the related asset. Under the Nuclear Waste Policy Act of 1982 (NWPA), the U.S. Department of Energy (DOE) is required to begin taking possession of all spent nuclear fuel generated by the Company's nuclear units for long-term storage by no later than 1998. Under the NWPA, the DOE is authorized to assess utilities for the cost of nuclear fuel disposal. The current cost of such disposal is one mill ($.001) per kilowatthour of net nuclear generation. The fee may be adjusted prospectively in order to ensure full cost recovery. The DOE has stated that it is under no legal obligation to begin accepting spent fuel absent an operational repository or other facility constructed under the NWPA. The DOE acknowledges, however, that it may have created the expectation of such a commitment on the part of utilities by issuing certain regulations and projected waste acceptance schedules. In June 1994, a number of utilities and state agencies, including the PUC, filed a lawsuit against the DOE seeking a determination of the DOE's legal obligation to accept fuel by 1998. The DOE has stated that it will not be able to open a permanent, high-level nuclear waste storage facility until 2015, at the earliest. The DOE stated that the delay was a result of federal budget cuts, the DOE seeking new data about the suitability of the proposed repository site at Yucca 28 4. Commitments and Contingencies (Continued) Mountain, Nevada, opposition to this location for the repository and the DOE's revision of its civilian nuclear waste program. The DOE stated that it would seek legislation from Congress for the construction of a temporary storage facility which would accept spent nuclear fuel from utilities in 1998 or soon thereafter. Although progress is being made at Yucca Mountain and several communities have expressed interest in providing a temporary storage site, the Company cannot predict when the temporary storage facilities or permanent repository will become available. The DOE is exploring options to address delays in the currently projected waste acceptance schedules which include offsetting a portion of the financial burden associated with the costs of continued on-site storage of spent fuel after 1998 and the issuance by the DOE to utilities of multi-purpose canisters for on-site storage. Peach Bottom and Limerick have on-site facilities with the capacity to store spent nuclear fuel discharged from the units through the early 2000s. Life-of-plant storage capacity could be provided by the construction of on-site dry cask storage facilities. Salem has recently expanded spent fuel storage capacity through 2008 for Unit No. 1 and 2012 for Unit No. 2. Public Service Electric and Gas (PSE&G) is the operator of Salem, which is 42.59% owned by the Company. The Company is currently recovering in rates costs for nuclear decommissioning and decontamination and spent fuel storage. The Company believes that the ultimate costs of decommissioning and decontamination and spent fuel disposal will continue to be recoverable through rates, although such recovery is not assured. Energy Purchases In the ordinary course of business, the Company enters into commitments to buy and sell energy. During 1995, the Company entered into a long-term agreement to purchase 300 MW in 1996 through 2000. At December 31, 1995, these purchases result in commitments of approximately $44 million for 1996, $45 million for 1997, $48 million for 1998, $51 million for 1999 and $52 million for 2000. These purchases will be utilized through a combination of sales to jurisdictional customers, long-term sales to other utilities and spot sales. 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 23 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. Seven of the sites are currently in the detailed evaluation or remediation stage. As of December 31, 1995 and 1994, the Company had accrued $27 and $24 million, respectively, for environmental investigation and remediation costs that currently can be reasonably estimated. The PUC approved the recognition of $1.5 million of environmental costs annually for the remediation of sites of former manufactured gas plant facilities effective January 1, 1995 (see note 3). The Company cannot currently predict whether it will incur other significant liabilities for additional investigation and remediation costs at these or additional sites identified by the Company, environmental agencies or others, or whether all such costs will be recoverable through rates or from third parties. Litigation The Company is involved in litigation, the ultimate outcome of which, while uncertain, is not expected to have a material adverse effect on the Company's financial condition or results of operations. 5. Changes in Accounting In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The new standard is effective for fiscal years beginning after December 15, 1995. The Company will adopt SFAS No. 121 in the first quarter of 1996. Upon adoption, the Company does not expect SFAS No. 121 to have an effect upon the Company's financial condition or results of operations. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages entities to recognize compensation costs for stock-based employee compensation plans using the fair value based method of accounting defined in SFAS No. 123, but allows for the continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to continue with the accounting prescribed by APB Opinion No. 25 are required to disclose pro forma net income and earnings per share as if the fair value based method of accounting had been applied. The new standard is effective for fiscal years beginning after December 15, 1995. The Company will adopt SFAS No. 123 in the first quarter of 1996, but will continue to use the intrinsic value based method of accounting prescribed by APB Opinion No. 25 supplemented by SFAS No. 123's required footnote disclosures. Adoption of SFAS No. 123 will not have an effect upon the Company's financial condition or results of operations. 29 6. Retirement Benefits The Company and its subsidiaries have a non-contributory trusteed retirement plan applicable to all regular employees. The benefits are based primarily upon employees' years of service and average earnings prior to retirement. The Company's funding policy is to contribute, at a minimum, amounts sufficient to meet the Employee Retirement Income Security Act requirements. Approximately 74%, 85% and 71% of pension costs were charged to operations in 1995, 1994 and 1993, respectively, and the remainder, associated with construction labor, to the cost of new utility plant. Pension costs for 1995, 1994 and 1993 included the following components:
1995 1994 1993 Thousands of Dollars Service cost - benefits earned during the period $ 19,710 $ 33,403 $ 33,673 Interest cost on projected benefit obligation 147,261 136,690 134,658 Actual return on plan assets (456,057) 12,946 (226,240) Amortization of transition asset (4,538) (4,538) (4,538) Amortization and deferral 300,214 (161,955) 87,733 --------- --------- --------- Net pension cost $ 6,590 $ 16,546 $ 25,286 ========= ========= =========
The changes in net periodic pension costs in 1995, 1994 and 1993 were as follows:
1995 1994 1993 Thousands of Dollars Change in number, characteristics and salary levels of participants and net actuarial gain $ 1,486 $(6,004) $ (756) Change in plan provisions (8,305) (1,777) -- Change in actuarial assumptions (3,136) (959) -- ------- ------- ------- Net change $(9,955) $(8,740) $ (756) ======= ======= =======
Plan assets consist principally of common stock, U.S. government obligations and other fixed income instruments. In determining pension costs, the assumed long-term rate of return on assets was 9.5% for 1995, 1994 and 1993. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.25% at December 31, 1995, 8.25% at December 31, 1994, and 7% at December 31, 1993. The average rate of increase in future compensation levels ranged from 4% to 6% at December 31, 1995, from 4.25% to 6.25% at December 31, 1994, and from 4% to 6% at December 31, 1993. Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan. The funded status of the plan at December 31, 1995 and 1994 is summarized as follows:
1995 1994 Thousands of Dollars Actuarial present value of accumulated plan benefit obligations: Vested benefit obligation $(1,746,685) $(1,505,552) Accumulated benefit obligation (1,838,661) (1,632,666) Projected benefit obligation for services rendered to date $(2,097,300) $(1,814,209) Plan assets at fair value 2,088,950 1,741,271 ----------- ----------- Funded status (8,350) (72,938) Unrecognized transition asset (44,789) (49,327) Unrecognized prior service costs 68,223 73,338 Unrecognized net gain (265,472) (230,105) ----------- ----------- Pension liability $ (250,388) $ (279,032) =========== ===========
30 7. Non-Pension Postretirement Benefits 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 transition obligation resulting from the adoption of SFAS No. 106 was $505 million at January 1, 1993, which represented the previously unrecognized accumulated non-pension postretirement benefit obligation. The transition obligation is being amortized on a straight-line basis over an allowed 20-year period. As a result of the Voluntary Retirement Incentive Program (VRIP) and the Voluntary Separation Incentive Program (VSIP), the Company accelerated recognition of $177 million of its non-pension postretirement benefits obligation (see note 22). Effective January 1, 1995, the Company was permitted by the PUC to recover non-pension postretirement benefits costs associated with the Company's retail electric and gas operations, including the annual amortization of the transition obligation (over 18 years) deferred in 1994 and 1993 (see note 3). The transition obligation was determined by application of the terms of medical, dental and life insurance plans, including the effects of established maximums on covered costs, together with relevant actuarial assumptions and health care cost trend rates, which are projected to range from 9% in 1996 to 5% in 2002. The effect of a 1% annual increase in these assumed cost trend rates would increase the accumulated postretirement benefit obligation by $63 million and the annual service and interest costs by $7 million. Total costs for all plans amounted to $71, $81 and $83 million in 1995, 1994 and 1993, respectively. The net periodic benefits costs for 1995 and 1994 included the following components:
1995 1994 Thousands of Dollars Service cost - benefits earned during the period $ 8,681 $ 17,056 Interest cost on projected benefit obligation 48,641 41,196 Amortization of the transition obligation 14,882 22,659 Actual return on plan assets (2,075) -- Deferred asset gain 1,359 -- -------- -------- Net periodic postretirement benefits costs $ 71,488 $ 80,911 ======== ========
The funded status of the plan at December 31, 1995 and 1994 is summarized as follows:
1995 1994 Thousands of Dollars Accumulated postretirement benefit obligation: Retirees $ 628,804 $ 566,128 Fully eligible active plan participants 4,199 7,895 Other active plan participants 41,863 16,006 --------- --------- Total 674,866 590,029 Plan assets at fair value (66,735) (1,200) --------- --------- Accumulated postretirement benefit obligation in excess of plan assets 608,131 588,829 Unrecognized transition obligation (252,990) (267,871) Unrecognized net gain (28,890) 33,500 --------- --------- Accrued postretirement benefits cost recognized on the balance sheet $ 326,251 $ 354,458 ========= =========
Measurement of the accumulated postretirement benefits obligation was based on a 7.5% and 8.5% assumed discount rate as of December 31, 1995 and 1994, respectively. 31 8. Accounts Receivable Accounts receivable at December 31, 1995 and 1994 included unbilled operating revenues of $148 and $100 million, respectively. Accounts receivable at December 31, 1995 and 1994 were net of an allowance for uncollectible accounts of $21 and $17 million, respectively. The Company is party to an agreement with a financial institution whereby it can sell on a daily basis and with limited recourse an undivided interest in up to $425 million of designated accounts receivable until November 14, 2000. At December 31, 1995 and 1994, the Company had sold a $425 million and $325 million interest in accounts receivable, respectively. The Company retains the servicing responsibility for these receivables. By terms of this agreement, under certain circumstances, a portion of deferred Limerick costs may be included in the pool of eligible receivables. At December 31, 1995, $30 million of deferred Limerick costs were included in the pool of eligible receivables. 9. Common Stock At December 31, 1995 and 1994, common stock without par value consisted of 500,000,000 shares authorized and 222,172,216 and 221,608,984 shares outstanding, respectively. At December 31, 1995, there were 5,800,841 shares reserved for issuance under the dividend reinvestment and stock purchase plan. 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 may be granted under the LTIP are non-qualified options to purchase shares of the Company's common stock, dividend equivalents and shares of restricted common stock. Pursuant to the LTIP, 2,591,765 shares of stock were authorized for issuance upon exercise of options at December 31, 1995. The following table summarizes option activity during 1995, 1994 and 1993:
1995 1994 1993 Balance at January 1 2,651,397 1,961,882 2,445,833 Options granted 850,700 909,000 533,800 Options exercised (561,232) (90,885) (981,551) Options cancelled (349,100) (128,600) (36,200) --------- --------- --------- Balance at December 31 2,591,765 2,651,397 1,961,882 ========= ========= ========= Exercisable at December 31 1,813,565 1,865,397 1,447,282 ========= ========= =========
Options were exercised at average option prices of $23.91 per share, $22.91 per share and $22.66 per share in 1995, 1994 and 1993, respectively. The average exercise prices of shares under option were $26.16 per share, $26.73 per share and $25.12 per share at December 31, 1995, 1994 and 1993, respectively. 32 10. Preferred and Preference Stock At December 31, 1995 and 1994, Series Preference Stock consisted of 100,000,000 shares authorized, of which no shares were outstanding. At December 31, 1995 and 1994, cumulative Preferred Stock, no par value, consisted of 15,000,000 shares authorized.
Current Shares Amount Redemption Outstanding Thousands of Dollars Price (a) 1995 1994 1995 1994 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 $4.30 102.00 150,000 150,000 15,000 15,000 $3.80 106.00 300,000 300,000 30,000 30,000 $7.96(b) (c) 618,954 1,400,000 61,895 140,000 $7.48 (d) 500,000 500,000 50,000 50,000 --------- --------- ------- ------- 1,993,674 2,774,720 199,367 277,472 Series (with mandatory redemption)(e) $6.12 (f) 927,000 927,000 92,700 92,700 --------- --------- -------- -------- Total preferred stock 2,920,674 3,701,720 $292,067 $370,172 ========= ========= ======== ======== (a) Redeemable, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends. (b) Ownership of this series of preferred stock is evidenced by depositary receipts, each representing one-fourth of a share of preferred stock. On December 19, 1995, the Company issued Series B Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership in exchange for 3,124,183 depositary receipts, which together with the underlying 7.96% cumulative preferred stock, were cancelled (see note 11). (c) None of the shares of this series are subject to redemption prior to October 1,1997. (d) None of the shares of this series are subject to redemption prior to April 1, 2003. (e) There are no annual sinking fund requirements in the period 1996-1998. Annual sinking fund requirements in 1999 are $18,540,000. (f) 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, 1995 and 1994, 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 two series of cumulative COMRPS, each with a liquidation value of $25 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 securities. The interest paid by the Company on the debentures is included in Interest Charges in the Consolidated Statements of Income and is deductible for income tax purposes.
Shares Amount Distribution Outstanding Thousands of Dollars At December 31, Rate 1995 1994 1995 1994 Series A 9.00% 8,850,000 8,850,000 $221,250 $221,250 B (a) 8.72% 3,124,183 -- 81,032 -- ---------- --------- -------- -------- Total 11,974,183 8,850,000 $302,282 $221,250 ========== ========= ======== ======== (a) On December 19, 1995, the Company exchanged Trust Receipts, each representing a 8.72% COMRPS, Series B, representing limited partnership interests, for depositary shares each representing a one-fourth interest in a share of $7.96 Cumulative Preferred Stock of the Company. The premium paid on the exchange is being accreted over the contractual life of the COMRPS. The Trust Receipts were issued by PECO Energy Capital Trust I, the sole assets of which are 8.72% COMRPS, Series B. Each holder of Trust Receipts is entitled to withdraw the corresponding number of 8.72% COMRPS, Series B from the Trust in exchange for the Trust Receipts so held.
33 12. Long-Term Debt
At December 31, Series Due 1995 1994 Thousands of Dollars First and refunding mortgage bonds (a) 6-1/8% 1997 $75,000 $75,000 5-3/8% 1998 225,000 225,000 7-1/2%-9-1/4% 1999 325,000 325,000 10% 2000 -- 30,069 5-5/8%-8% 2001-2005 1,355,000 1,355,000 10-1/4% 2006-2010 48,750 52,813 (b) 2011-2015 154,200 154,200 8-7/8%-10-1/2% 2016-2020 34,000 203,431 6-5/8%-8-3/4% 2021-2024 1,607,130 1,607,130 ---------- ---------- Total first and refunding mortgage bonds 3,824,080 4,027,643 Notes payable - banks (c) 1996-1998 167,000 167,000 Revolving credit and term loan agreements (d) 1996-1997 350,000 525,000 Pollution control notes (e) 1996-2029 169,005 161,465 Medium-term notes (f) 1996-2005 121,800 134,200 Sinking fund debentures - PECO Energy Power Company, a subsidiary 4-1/2% 1995 -- 9,750 Unamortized debt discount and premium, net (32,599) (38,214) ---------- ---------- Total long-term debt 4,599,286 4,986,844 Due within one year (g) 401,003 201,213 ---------- ---------- Long-term debt included in capitalization (h) $4,198,283 $4,785,631 ========== ========== (a) Utility plant is subject to the lien of the Company's mortgage. (b) Floating rates, which were an average annual interest rate of 3.295% at December 31,1995. (c) The Company has entered into interest rate swap agreements to fix the effective interest rates on these notes. At December 31, 1995 and 1994, the Company had two interest rate swap agreements outstanding with commercial banks, for a total notional principal amount of $167 million, respectively. These agreements are subject to performance by the commercial banks, which are counterparties to the interest rate swaps. The Company does not anticipate nonperformance by the counterparties. The average annual interest rate for these notes, giving effect to the interest rate swaps, was 10.51% at December 31,1995. (d) On October 3, 1994, borrowings by the Company under its $525 million revolving credit and term loan agreement with a group of banks converted to a term loan. The loan was due in six semi-annual installments commencing April 3, 1995. During 1995, $175 million was retired; $175 million was refinanced with another group of banks under a new term loan agreement and $175 million was outstanding at December 31, 1995. The average annual rate for the $175 million outstanding under the original revolving credit and term loan agreement was 6.416% and the average rate for the $175 million outstanding under the new term loan was 6.081% at December 31, 1995. The Company also has a $400 million revolving credit and term loan agreement with a group of banks which terminates in 2000. There is an annual commitment fee of 0.125% on the unused amount. At December 31, 1995, no amount was outstanding under this agreement. (e) Floating rates, which were an average annual interest rate of 3.728% at December 31,1995. (f) Medium-term notes collateralized by mortgage bonds. The average annual interest rate was 8.413% at December 31,1995. (g) Long-term debt maturities, including mandatory sinking fund requirements, in the period 1997-2000 are as follows: 1997 - $266,063,000; 1998 - $241,463,000; 1999 - $359,063,000; 2000 - $22,603,000. (h) The annualized interest on long-term debt at December 31, 1995, was $327 million, of which $281 million was associated with mortgage bonds and $46 million was associated with other long-term debt.
34 13. Short-Term Debt
1995 1994 1993 Thousands of Dollars Average borrowings $ 17,560 $ 130,539 $ 113,193 Average interest rates, computed on daily basis 6.25% 4.03% 3.35% Maximum borrowings outstanding $182,000 $ 418,600 $ 368,400 Average interest rates, at December 31 --% 6.73% 3.45%
The Company has a $300 million commercial paper program which is supported by the $400 million revolving credit agreement discussed in note 12; at December 31, 1995, no amounts were outstanding. At December 31, 1995, the Company had formal and informal lines of credit with banks aggregating $221 million. No short-term debt was outstanding against these lines at that date. During 1995, the Company discontinued its compensating balance arrangements for these credit lines. 14. Income Taxes
For the Years Ended December 31, 1995 1994 1993 Thousands of Dollars Included in operating income: Federal Current $ 170,042 $ 164,472 $ 117,535 Deferred 159,970 (2,691) 113,054 Investment tax credit, net (21,679) 28,006 43,344 State Current 72,177 77,754 70,740 Deferred 16,387 (33,508) 9,718 --------- --------- --------- 396,897 234,033 354,391 --------- --------- --------- Included in other income and deductions: Federal Current 20,754 1,989 (3,650) Deferred 7,556 9,722 15,926 State Current 6,909 409 (1,615) Deferred (399) 3,171 1,147 --------- --------- --------- 34,820 15,291 11,808 --------- --------- --------- Total $ 431,717 $ 249,324 $ 366,199 ========= ========= =========
In accordance with SFAS No. 109, "Accounting for Income Taxes," the Company has recorded an accumulated net deferred income tax liability and pursuant to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," a corresponding recoverable deferred income tax asset of $2.1 billion at December 31, 1995 and 1994. The accumulated net deferred income tax liability reflects the tax effect of anticipated revenues and reverses as the related temporary differences reverse over the life of the related depreciable assets concurrent with the recovery of their cost in rates. Also included in the accumulated deferred income tax liability are other accumulated deferred income taxes, principally associated with liberalized tax depreciation, established in accordance with the ratemaking policies of the PUC based on flow-through accounting. The Internal Revenue Service (IRS) has completed and settled its examinations of the Company's federal income tax returns through 1986. The 1987 through 1990 federal income tax returns have been examined and the IRS subsequently issued an assessment that the Company has appealed. The Company does not expect the ultimate resolution of the assessment and its appeal to have a material effect upon the Company's financial condition or results of operations. ITC and other general business credits were fully utilized for tax purposes at December 31, 1994 and reduced federal income taxes currently payable by $43 and $60 million in 1994 and 1993, respectively. At December 31, 1995, the Company had an AMT credit of $76 million available for an indefinite carryforward period against future federal income taxes payable to the extent that regular federal income taxes payable exceeds the AMT payable. 35 The tax effect of temporary differences which gives rise to the Company's net deferred tax liability as of December 31,1995 and 1994 are as follows:
Liability or (Asset) 1995 1994 Millions of Dollars Nature of temporary difference Utility plant Accelerated depreciation $ 1,387 $ 1,377 Deferred ITC 351 374 AMT credits (84) (176) Other plant related temporary differences 1,283 1,305 Taxes recoverable through future rates, net 857 882 Deferred debt refinancing costs 130 132 Other, net (243) (306) ------- ------- Deferred income taxes per the balance sheet $ 3,681 $ 3,588 ======= =======
The net deferred tax liability shown above as of December 31, 1995 and 1994 is comprised of $4.053 and $4.127 billion of deferred tax liabilities, partly offset by $372 and $539 million of deferred tax assets, respectively. Amendments to Pennsylvania tax law changed the corporate income tax rate from 12.25% to 11.99% for 1994 and 9.99% for 1995 and thereafter. This change resulted in a $6 and $2 million decrease in Income Taxes in the Consolidated Statements of Income for the years ended December 31, 1995 and 1994, respectively. These changes also resulted in a $174 million decrease in the Deferred Income Taxes liability on the December 31, 1994 Consolidated Balance Sheet. The decrease in the Deferred Income Taxes liability is returned to customers through the State Tax Adjustment Clause in the year realized. The Omnibus Budget Reconciliation Act of 1993 changed the federal income tax rate for corporations to 35% from 34%, effective January 1, 1993. This change resulted in a $107 million increase in the Deferred Income Taxes liability and regulatory asset in 1993, and is included in the December 31, 1995 and 1994 Consolidated Balance Sheets. The Company expects to receive recovery of all taxes when paid. Provisions for deferred income taxes consist of the tax effects of the following timing differences:
1995 1994 1993 Thousands of Dollars Depreciation and amortization $ 32,287 $ 85,772 $ 78,324 Deferred energy costs 30,073 13,777 19,013 Retirement and separation programs 15,733 (82,008) -- Incremental nuclear maintenance and refueling outage costs 8,079 (2,751) (827) Uncollectible accounts (1,991) (23,096) 625 Reacquired debt (3,266) (12,954) 28,959 Unrecovered revenue (5) (2,239) (806) Environmental clean-up costs 2,433 (3,949) (2,479) Obsolete inventory 6,362 (6,192) (6,887) Limerick plant disallowances and phase-in plan 2,507 12,894 17,073 AMT credits 91,399 -- -- Other (97) (2,560) 6,850 --------- --------- --------- Total $ 183,514 $ (23,306) $ 139,845 ========= ========= =========
36 14. Income Taxes (Continued) The total income tax provisions differed from amounts computed by applying the federal statutory tax rate to income and adjusted income before income taxes as shown below:
1995 1994 1993 Thousands of Dollars Net income $ 609,732 $ 426,713 $ 590,648 Total income tax provisions 431,717 249,324 366,199 ----------- ----------- ----------- Income before income taxes 1,041,449 676,037 956,847 Deduct: allowance for funds used during construction 27,050 22,169 23,774 ----------- ----------- ----------- Adjusted income before income taxes $ 1,014,399 $ 653,868 $ 933,073 =========== =========== =========== Income taxes on above at federal statutory rate of 35% $ 355,040 $ 228,854 $ 326,576 Increase (decrease) due to: Depreciation timing differences not normalized 14,127 12,767 9,721 Limerick plant disallowances and phase-in plan (736) (530) 5,094 State income taxes, net of federal income tax benefits 61,799 31,086 51,994 Amortization of ITC (13,604) (14,570) (13,470) Prior period income taxes 1,791 (14,524) (3,942) Other, net 13,300 6,241 (9,774) ----------- ----------- ----------- Total income tax provisions $ 431,717 $ 249,324 $ 366,199 =========== =========== =========== Provisions for income taxes as a percent of: Income before income taxes 41.5% 36.9% 38.3% Adjusted income before income taxes 42.6% 38.1% 39.2%
15. Taxes, Other Than Income - Operating
For the Years Ended December 31, 1995 1994 1993 Thousands of Dollars Gross receipts $165,172 $160,704 $155,407 Capital stock 42,444 39,957 38,990 Real estate 71,600 77,571 71,445 Payroll 30,109 31,556 31,490 Other 4,746 1,901 800 -------- -------- -------- Total $314,071 $311,689 $298,132 ======== ======== ========
16. Leases Leased property included in Utility Plant at December 31, was as follows:
1995 1994 Thousands of Dollars Nuclear fuel $ 494,051 $ 445,338 Electric plant 2,076 2,110 --------- --------- Gross leased property 496,127 447,448 Accumulated amortization (315,702) (272,883) --------- --------- Net leased property $ 180,425 $ 174,565 ========= =========
The nuclear fuel obligation is amortized as the fuel is consumed. Amortization of leased property totaled $43, $62 and $58 million for the years ended December 31, 1995, 1994 and 1993, respectively. Other operating expenses included interest on capital lease obligations of $10, $7 and $8 million in 1995,1994 and 1993, respectively. 37 16. Leases (Continued) Minimum future lease payments as of December 31, 1995 were:
For the Year Ending December 31, Capital Leases Operating Leases Total Thousands of Dollars 1996 $ 56,403 $ 51,226 $107,629 1997 58,234 50,503 108,737 1998 52,094 46,821 98,915 1999 23,906 44,549 68,455 2000 10,839 43,688 54,527 Remaining years 777 557,441 558,218 --------- -------- -------- Total minimum future lease payments $ 202,253 $794,228 $996,481 --------- ======== ======== Imputed interest (rates ranging from 6.0% to 17.0%) (21,828) --------- Present value of net minimum future lease payments $180,425 ========
Rental expense under operating leases totaled $115, $101 and $99 million in 1995, 1994 and 1993, respectively. 17. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned electric utility plant at December 31, 1995 were as follows:
Transmission and Production Plants Other Plant Peach Bottom Salem Keystone Conemaugh Public Service PECO Energy Electric and Gas Pennsylvania Pennsylvania Various Operator Company Company Electric Company Electric Company Companies Participating interest 42.49% 42.59% 20.99% 20.72% 21% to 43% Company's share (Thousands of Dollars) Utility plant $ 748,790 $ 1,214,381 $ 109,363 $ 164,239 $ 88,272 Accumulated depreciation 299,822 403,384 53,223 57,472 29,602 Construction work in progress 35,218 72,744 5,363 19,388 1,900
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:
1995 1994 1993 Thousands of Dollars Cash paid during the year: Interest (net of amount capitalized) $449,664 $437,096 $474,735 Income taxes (net of refunds) 257,677 205,316 182,751 Noncash investing and financing: Capital lease obligations incurred 112,917 41,710 42,484
38 19. Investments
At December 31, 1995 1994 Thousands of Dollars Trust accounts for decommissioning nuclear plants $ 222,655 $ 175,326 Energy services and other ventures 40,779 42,298 Nonutility property 26,816 19,609 Emission allowances 6,347 -- Gas exploration and development joint ventures 219 (722) Other deposits 132 76 --------- --------- Total $ 296,948 $ 236,587 ========= =========
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, 1995 and 1994 were as follows:
Thousands of Dollars 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value Cash and temporary cash investments $ 20,602 $ 20,602 $ 46,970 $ 46,970 Long-Term debt (including amounts due within one year) 4,599,286 4,773,700 4,986,844 4,730,005 Trust accounts for decommissioning nuclear plants 222,655 222,655 175,326 175,326
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. 21. Nuclear Fuel Agreement with Long Island Power Authority (LIPA) In 1993, the Company entered into an agreement with LIPA and other parties to receive $46 million as compensation for accepting slightly irradiated nuclear fuel from Shoreham Nuclear Power Station. The Company received the payments in installments as the shipments of nuclear fuel were accepted. The Company also earned a $4 million bonus as a result of receiving all shipments prior to the September 5, 1994 target date. The payments from LIPA, net of related costs of $4 million, were recognized in income. The Company recognized $26 and $20 million as Other Income in the Consolidated Statements of Income for the years ended December 31, 1994 and 1993, respectively. 22. Voluntary Retirement and Separation Incentive Programs The Company incurred a one-time, pre-tax charge of $254 million ($145 million net of taxes) in the third quarter of 1994 as a result of voluntary retirement and separation programs approved by the Company's Board of Directors in April 1994. Pursuant to these programs 1,474 employees elected to retire and 1,008 employees elected to voluntarily separate from the Company. The retirements and separations took place in stages through December 31, 1995. As a result of the programs, in 1994 the Company accelerated recognition of $177 million of its non-pension postretirement benefits obligation. The Company recorded a corresponding regulatory asset and is recovering this amount in rates as a component of non-pension postretirement benefits expense. The recognition of the $177 million of non-pension postretirement benefits obligation and corresponding regulatory asset did not impact earnings. 39 23. Sale of Subsidiary On June 19, 1995, the Company completed the sale of Conowingo Power Company (COPCO) to Delmarva Power & Light Company (Delmarva) for $150 million. The transaction also included a ten-year contract for the Company to sell power to Delmarva. The Company's gain on the sale of $59 million ($27 million net of taxes) was recorded in the second quarter of 1995. 24. Shutdown of Salem Generating Station PSE&G removed Salem Units No. 1 and No. 2 from service on May 16, 1995 and June 7, 1995, respectively. PSE&G informed the NRC at that time that it had determined to keep the Salem units shut down pending review and resolution of certain equipment and management issues, and NRC agreement that each unit is sufficiently prepared to restart. PSE&G has informed the Company that Salem Units No. 1 and No. 2 are expected to be out of service until the second and third quarters of 1996, respectively. As of December 31, 1995, the Company had incurred and expensed approximately $50 million of replacement power and operating and maintenance costs. 25. 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 Millions of Dollars 1995 1994 1995 1994 1995 1994 Quarter ended March 31 $1,059 $1,128 $ 257 $ 260 $ 152 $ 159 June 30 959 952 233 203 154 116 September 30 1,125 1,041 292 128 184 22 December 31 1,044 920 222 238 120 129
Earnings Applicable Average Shares Earnings to Common Stock Outstanding Per Average Share Millions of Dollars 1995 1994 1995 1994 1995 1994 Quarter ended March 31 $146 $149 221.7 221.5 $ 0.66 $ 0.67 June 30 148 105 221.8 221.5 0.67 0.48 September 30 178 13 221.9 221.6 0.80 0.06 December 31 115 123 221.9 221.6 0.52 0.55
1994 third quarter results include a pre-tax charge of $254 million ($145 million net of taxes), or $0.66 per share, as a result of VRIP and VSIP (see note 22). 1995 second quarter results include a pre-tax gain of $59 million ($27 million net of taxes), or $0.12 per share, as a result of the sale of COPCO (see note 23). 40 Financial Statistics Summary of Earnings and Financial Condition
For the Years Ended December 31, 1995 1994 1993 1992 1991 1990 Millions of Dollars Income Data Operating Revenues $ 4,186 $ 4,041 $ 3,988 $ 3,963 $ 4,019 $ 3,787 Operating Income 1,004 830 1,035 1,033 1,081 768 Income from Continuing Operations 610 427 591 479 535 106 Net Income 610 427 591 479 535 214 Earnings Applicable to Common Stock 587 389 542 418 469 124 Earnings per Average Common Share from Continuing Operations (Dollars) 2.64 1.76 2.45 1.90 2.15 0.07 Earnings per Average Common Share (Dollars) 2.64 1.76 2.45 1.90 2.15 0.58 Dividends per Common Share (Dollars) 1.65 1.545 1.43 1.325 1.225 1.45 Common Stock Equity (Per Share) 20.40 19.41 19.25 18.24 17.69 16.71 Average Shares of Common Stock Outstanding (Millions) 221.9 221.6 221.1 220.2 218.2 214.4 At December 31, Balance Sheet Data Net Utility Plant, at Original Cost $10,758 $10,829 $10,763 $10,691 $10,599 $10,591 Leased Property, net 181 174 194 210 224 241 Total Current Assets 486 427 515 550 783 745 Total Deferred Debits and Other Assets 3,536 3,635 3,560 1,127 918 939 ------- ------- ------- ------- ------- ------- Total Assets $14,961 $15,065 $15,032 $12,578 $12,524 $12,516 ======= ======= ======= ======= ======= ======= Common Shareholders' Equity $ 4,531 $ 4,303 $ 4,263 $ 4,022 $ 3,892 $ 3,624 Preferred and Preference Stock Without Mandatory Redemption 199 277 423 423 423 423 With Mandatory Redemption 93 93 187 231 315 331 Company Obligated Mandatorily Redeemable Preferred Securities of a Partnership 302 221 -- -- -- -- Long-Term Debt 4,199 4,786 4,884 5,204 5,416 5,831 ------- ------- ------- ------- ------- ------- Total Capitalization 9,324 9,680 9,757 9,880 10,046 10,209 Total Current Liabilities 1,077 850 954 830 824 784 Total Deferred Credits and Other Liabilities 4,560 4,535 4,321 1,868 1,654 1,523 ------- ------- ------- ------- ------- ------- Total Capitalization and Liabilities $14,961 $15,065 $15,032 $12,578 $12,524 $12,516 ======= ======= ======= ======= ======= =======
41 Operating Statistics
For the Years Ended December 31, 1995 1994 1993 1992 1991 1990 Electric Operations Output (Millions of Kilowatthours) Fossil 10,792 11,239 10,352 8,082 7,376 7,913 Nuclear 25,499 28,195 27,026 24,428 25,735 23,715 Hydro 1,425 1,970 1,699 1,803 1,388 2,266 Pumped storage output 1,741 1,596 1,478 1,597 1,653 1,437 Pumped storage input (2,507) (2,256) (2,192) (2,217) (2,355) (2,059) Purchase and interchange 13,945 6,164 6,447 8,675 8,603 5,787 Internal combustion 175 106 56 29 79 152 Other -- -- -- -- -- 180 ----------- ----------- ----------- ----------- ----------- ----------- Total electric output 51,070 47,014 44,866 42,397 42,479 39,391 =========== =========== =========== =========== =========== =========== Sales (Millions of Kilowatthours) Residential 10,859 10,817 10,657 9,894 10,311 9,815 Small commercial and industrial 6,299 6,108 5,773 5,367 5,284 5,066 Large commercial and industrial 15,976 15,847 15,935 15,770 16,177 16,554 Other 860 791 771 962 1,029 1,010 ----------- ----------- ----------- ----------- ----------- ----------- Service territory 33,994 33,563 33,136 31,993 32,801 32,445 Interchange sales 496 768 457 1,231 1,612 2,751 Sales to other utilities 14,041 10,039 8,670 6,699 5,445 1,865 ----------- ----------- ----------- ----------- ----------- ----------- Total electric sales 48,531 44,370 42,263 39,923 39,858 37,061 =========== =========== =========== =========== =========== =========== Number of Customers, December 31, Residential 1,321,379 1,350,210 1,341,873 1,333,926 1,324,795 1,320,126 Small commercial and industrial 141,653 143,605 142,363 141,253 140,901 140,305 Large commercial and industrial 3,394 3,603 3,742 3,972 4,162 4,344 Other 959 944 888 857 840 817 ----------- ----------- ----------- ----------- ----------- ----------- Total electric customers 1,467,385 1,498,362 1,488,866 1,480,008 1,470,698 1,465,592 =========== =========== =========== =========== =========== =========== Operating Revenues (Millions of Dollars) Residential $ 1,401 $ 1,369 $ 1,354 $ 1,305 $ 1,342 $ 1,230 Small commercial and industrial 739 707 679 670 641 595 Large commercial and industrial 1,147 1,143 1,164 1,223 1,279 1,247 Other 137 136 161 168 171 167 ----------- ----------- ----------- ----------- ----------- ----------- Service territory 3,424 3,355 3,358 3,366 3,433 3,239 Interchange sales 17 23 14 32 43 82 Sales to other utilities 334 247 233 199 187 81 ----------- ----------- ----------- ----------- ----------- ----------- Total electric revenues 3,775 3,625 3,605 3,597 3,663 3,402 ----------- ----------- ----------- ----------- ----------- ----------- Operating Expenses Operating expenses, excluding depreciation 2,406 2,430 2,228 2,237 2,253 2,325 Depreciation 431 416 401 391 380 338 ----------- ----------- ----------- ----------- ----------- ----------- Total operating expenses 2,837 2,846 2,629 2,628 2,633 2,663 ----------- ----------- ----------- ----------- ----------- ----------- Electric Operating Income $ 938 $ 779 $ 976 $ 969 $ 1,030 $ 739 =========== =========== =========== =========== =========== =========== Average Use per Residential Customer (Kilowatthours) Without electric heating 6,908 6,736 6,727 6,259 6,707 6,376 With electric heating 17,189 17,527 17,096 16,298 16,201 16,038 Total 8,130 8,041 7,970 7,443 7,801 7,464 Electrical Peak Load, Demand (Thousands of Kilowatts) 7,244 7,227 7,100 6,617 7,096 6,755 Net Electric Generating Capacity - Year-End Summer Rating (Thousands of Kilowatts) 9,078 8,956 8,877 8,836 8,766 8,766 Cost of Fuel per Million Btu $ 0.87 $ 0.89 $ 0.90 $ 0.82 $ 0.92 $ 1.13 Btu per net Kilowatthour Generated 10,705 11,617 10,675 10,657 10,849 10,844
42
For the Years Ended December 31, 1995 1994 1993 1992 1991 1990 Gas Operations Sales (Millions of Cubic Feet) Residential 1,516 1,636 1,637 1,819 1,746 1,778 House heating 31,848 31,974 30,687 29,750 26,423 25,303 Commercial and industrial 19,422 21,520 22,943 21,497 20,492 23,228 Other 1,184 5,079 5,656 2,146 534 1,567 -------- -------- -------- -------- -------- -------- Total gas sales 53,970 60,209 60,923 55,212 49,195 51,876 Gas transported for customers 48,531 29,801 22,946 22,060 21,414 24,413 -------- -------- -------- -------- -------- -------- Total gas sales and gas transported 102,501 90,010 83,869 77,272 70,609 76,289 ======= ====== ====== ====== ====== ====== Number of Customers, December 31, Residential 56,533 57,122 59,573 59,859 62,444 63,267 House heating 295,481 287,481 277,500 269,577 260,473 254,564 Commercial and industrial 33,308 32,292 31,573 30,956 30,204 29,456 -------- -------- -------- -------- -------- -------- Total gas customers 385,322 376,895 368,646 360,392 353,121 347,287 ======= ======= ======= ======= ======= ======= Operating Revenues (Millions of Dollars) Residential $ 15 $ 16 $ 15 $ 16 $ 17 $ 18 House heating 240 236 205 202 192 201 Commercial and industrial 129 133 124 121 124 145 Other 4 14 15 3 2 5 -------- -------- -------- -------- -------- -------- Subtotal 388 399 359 342 335 369 Other revenues (including transported for customers) 22 17 23 23 21 16 -------- -------- -------- -------- -------- -------- Total gas revenues 410 416 382 365 356 385 -------- -------- -------- -------- -------- -------- Operating Expenses Operating expenses, excluding depreciation 319 340 299 278 284 336 Depreciation 26 26 24 23 21 20 -------- -------- -------- -------- -------- -------- Total operating expenses 345 366 323 301 305 356 -------- -------- -------- -------- -------- -------- Gas Operating Income $ 65 $ 50 $ 59 $ 64 $ 51 $ 29 ======== ======== ======== ======== ======== ========
43 EX-21 12 Exhibit 21 PECO Energy Company Subsidiaries and State of Incorporation At December 31, 1995 PECO Energy Power Company - Incorporated in Pennsylvania Susquehanna Power Company - Incorporated in Maryland PECO Energy Capital Corp. - Incorporated in Delaware PECO Gas Supply Company - Incorporated in Pennsylvania PECO Wireless, Inc. - Incorporated in Pennsylvania The Proprietors of the Susquehanna Canal (Inactive)- Incorporated in Maryland Susquehanna Electric Company - Incorporated in Maryland Eastern Pennsylvania Development Company - Incorporated in Pennsylvania Adwin (Schuylkill) Cogeneration, Inc. - Incorporated in Pennsylvania Adwin Equipment Company - Incorporated in Pennsylvania Adwin Realty Company - Incorporated in Pennsylvania Adwin Investment Company - Incorporated in Delaware Buttonwood Associates, Inc. - Incorporated in Delaware Energy Performance Services, Inc. - Incorporated In Pennsylvania Eastern Pennsylvania Exploration Company - Incorporated in Pennsylvania EX-23 13 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. 33-31436, 33-59152, 33-49887, 33-43523, and 33-54935), Form S-4 (File Nos. 33-53785, 33-53785-01, 33-60859, and 33-60859-01), and Form S-8 (File Nos. 33-30317 and 333-451) of our report dated February 2, 1996, on our audits of the consolidated financial statements of PECO Energy Company as of December 31, 1995 and 1994 and for each of the three years in the period ended December 31, 1995, which report is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 2400 Eleven Penn Center Philadelphia, Pennsylvania March 27, 1996 EX-24 14 Exhibit 24 P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Susan W. Catherwood of Bryn Mawr, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 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. DATE: 2/26/96 /s/ Susan W. Catherwood (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, M. Walter D'Alessio of Philadelphia, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ M. Walter D'Alessio (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Richard G. Gilmore of Sarasota, FL, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Richard G. Gilmore (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Richard H. Glanton of Philadelphia, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Richard H. Glanton (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, James A. Hagen of Villanova, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ James A. Hagen (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Nelson G. Harris of Lafayette Hill, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Nelson G. Harris (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Robert Subin of Blue Bell, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Robert Subin (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Joseph C. Ladd of Rosemont, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Joseph C. Ladd (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Edithe J. Levit of Philadelphia, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Edithe J. Levit (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Kinnaird R. McKee of Oxford, MD, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Kinnaird R. McKee (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Joseph J. McLaughlin of Rosemont, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Joseph J. McLaughlin (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Dr. John M. Palms of Columbia, SC, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ John M. Palms (L.S.) P O W E R O F A T T O R N E Y KNOW ALL MEN BY THESE PRESENTS That I, Ronald Rubin of Narberth, PA, do hereby appoint J. F. PAQUETTE, JR., and C. A. MC NEILL, JR., or either of them, 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 1995 of PECO Energy Company (formerly Philadelphia Electric 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. DATE: 2/26/96 /s/ Ronald Rubin (L.S.) EX-27 15
UT 0000078100 PECO ENERGY COMPANY 1,000,000 YEAR DEC-31-1995 DEC-31-1995 PER-BOOK 10,938 297 486 2,716 524 14,961 3,506 1 1,024 4,531 93 199 4,198 0 0 0 401 0 120 60 5,358 14,961 4,186 397 2,785 3,182 1,004 38 1,042 432 610 23 587 366 386 1,264 2.64 2.64
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